ESTIMATING THE TRADE EFFECTS OF SUB-REGIONAL FREE TRADE AREAS IN SUB-SAHARAN AFRICA: A PANEL DATA ANALYSIS

ABSTRACT

Sub-Saharan Africa has over the years witnessed the proliferation of Regional Trade Agreements (RTAs) within the sub-region. However, intra-regional trade remains considerably low around 10 percent of its trade with the rest of the world. This has led researchers to investigate whether these RTAs have been trade-creating or trade diverting. Nevertheless, these studies have not extended their analysis to investigate the effect of the membership of some dominant economies in their respective trade blocs.

Thus, this study provides evidence on the sensitivity of the Free Trade Agreements (FTAs) to the membership of some dominant economies using a panel of forty-six (46) countries from the period 1960-2012. The study employed the use of the Hausman-Taylor estimator in order to control for the correlation of individual-specific unobservable effects that could be correlated with other explanatory variables. This method of estimation generates unbiased and consistent parameter estimates.

Results from the estimation suggest that the Economic Community of West African States (ECOWAS), East African Community (EAC) and Southern African Development Corporation (SADC) have been trade-creating whereas Economic Community of Central African States (ECCAS) and Intergovernmental Authority on Development (IGAD) have been trade-diverting. A further sensitivity analysis conforms to expectation about the influence of dominant economies (Cameroon, Kenya, Nigeria and South Africa) on the performance of the trade blocks.

It is therefore recommended based on the significant effect of distance on trade that governments provide improved infrastructure to facilitate trade among member countries across the region. Also domestic industries must be given the support to expand their productive capacities to add value to their manufactures for an enhanced export for their countries which goes a long way to impact on the GDP of their countries and further improves intra-regional trade. In addition, processes at the borders of member countries must be harmonized and made easy to facilitate the movement of goods across borders. Furthermore, member countries of FTAs in SSA must work towards using a common currency in order to reduce costs to importers and exporters through foreign exchange losses.