Regional Economic Integration in West Africa


Introduction

In the wake of the recent global financial crisis, two favorable developments marked the African economies.  On the one hand, African countries were deemed to have weathered the crisis better and emerged from it faster, than industrialized countries and, on the other hand, they were credited with unusually high rates of economic growth over the last decade.  As a result, there are signs that the continent is the next destination for foreign direct investment and future champion of economic vitality.  West Africa has a sizable share of this seemingly new bonanza with a growth rate of nearly 7% in 2012, and faces two issues of paramount importance.  How to ensure that this high growth episode will not be short-lived?  How to achieve a higher redistributive impact of the newly found greater economic prosperity? Considering that countries in the sub-region of the Economic Community of West African States (ECOWAS) have endured decades of low economic performance and growth-impairing civil unrest if not civil war, it is natural to wonder what has recently changed for the better and what needs to be done to amplify this positive trend.

In many ways, West Africa is a land of contrasts.  For instance it is commonly accepted that its private sector has played a key role in the ongoing economic boom and stands ready to continue its effort.  Yet, it has not been successful at increasing incoming foreign direct investment or securing significantly higher levels of domestic bank credit which, in both cases, may hinder future growth prospects.  A second notable contrast can be found in the sub-region’s inability to foster higher employment, especially for the youth, in the context of more vigorous economic activity.  Consequently, it is not surprising that much of the civil unrest that plagues some West African countries is attributed by observers to the social exclusion that affects large fragments of their population.  Policymakers have clearly identified this challenge as one of the most pressing policy goals to be pursued and are actively seeking remedial solutions.  Finally, ECOWAS is arguably the African Regional Economic Community (REC) with the most ambitious agenda for regional integration and the loftiest stated policy goals backed up by the consensual support of its population and private sector.  Yet, its cross-border transportation system is inadequate and the project of creation of the ECOWAS common currency union is at all but a standstill.

The underlying policy line is that, in order to maintain its current favorable development path, West Africa needs to satisfy three key arguments of its implicit growth function, namely private sector development, sound macroeconomic policy and.  In July 2012, African scholars based on the continent and abroad met in Dakar to present and discuss research output that focused on these three key topics.  These topics feature prominently among the priorities identified by the Summit of ECOWAS Heads of State in its recent meetings.  All the manuscripts analyzed policies through the lens of regional integration or regional coordination, which constitutes a sizable contribution to the policy debate given the role assigned to ECOWAS’s sub-regional institutions and their ambitious development agenda.  While the process of restructuring of these institutions that will enable them to better tackle their new challenges is ongoing, the research output contained in this book will provide an opportunity for research to assist regional policy formulation.

The topic of the private sector is examined in two studies.  Seck and Gaye (chapter 1) conduct a continent-wide analysis of the impact of the recent global financial crisis on African countries in comparison with Arab countries.  They report that African economies were mainly affected through their exports and real sectors with little effect on their financial and monetary indicators while Arab countries were hit faster and more widely with respect to all aspects of their economies.  Arab states’ high degree of openness and absence of anti-cyclical and cross-insurance policies made them acutely vulnerable to external shocks.  However, they could lessen their exposure to shocks by investing more in African countries because their average correlation of export growth with African countries is lower than with other Arab countries.  Deen-Swarray, Adekunle and Odularu (chapter 2) examine the state of transport infrastructure in West Africa focusing on ports, roads, airports and railways with special emphasis on roads, and note the poor linkages among transport modes.  They argue that this situation causes long delays and raises the cost of doing business.  Furthermore, landlocked countries are not well connected to the regional transportation networks and there are inefficiencies in transport services caused by the strong level of protection of national transportation markets. This partly explains why intra-West African trade stands at less than 10 per cent of its regional GDP.

Regional macroeconomic policy is examined in five separate studies. In anticipation of the proposed monetary union of ECOWAS, Akpan and Udoh (chapter 3) report attempts in recent years by some countries to design policies aimed at meeting primary and secondary criteria of nominal convergence set by ECOWAS.  However, these policies are not properly coordinated and remain country specific and focused, thus defeating the essence of moving towards a monetary union.  Their study shows that stability can be achieved through monetary union but at the cost of loss of ability to exploit monetary policy to boost output.  Conversely, effective risk-sharing mechanisms and economic policy coordination within a holistic framework would smooth the process towards a successful monetary union.  A number of preliminary structural reforms would provide the infrastructure for a more fruitful unification and would chiefly include regional fiscal policy coordination.  Seck, Kemegue and Kanda (chapter 4) analyze the co-movement of African economies to assess the justification of monetary arrangements, mainly through the means of a common currency, during various business cycles.  They find that the hypothesis of endogenous benefits of membership in monetary zones is not supported because developing countries’ macroeconomic fluctuations have a weaker bond with those of other members of the currency union than with their respective main trading partners.

Tarawalie, Ahortor and Umo (chapter 5) conduct a number of econometric estimations to investigate the impact of real exchange-rate volatility on export performance in the West African Monetary Zone (WAMZ) countries (The Gambia, Ghana, Guinea, Liberia, Nigeria and Sierra Leone) using quarterly data for the period 1990-2010.  Their empirical findings indicate that real effective exchange rate volatility has a significant negative impact on export performance in Liberia, Nigeria and Sierra Leone, and a significant positive long- and short-run impact in the case of The Gambia.  However, its impacts in Ghana and Guinea are found to be insignificant. It is also found that real effective exchange rate has a negative impact on export performance in the case of The Gambia, Ghana and Nigeria, whereas a positive relationship is established in the case of Guinea and Liberia. While a positive relationship is revealed in the long run in the case of Sierra Leone, its impact is negative in the short run. They conclude that to improve export performance in the WAMZ, policies that will ensure stability of the real exchange rate should be pursued. 

Ndiaye and Korsu (chapter 6) seek to address the difficulty faced by many ECOWAS countries to satisfy the criteria of nominal convergence related to fiscal performance and, indirectly, the level of inflation.  They investigate the determinants of tax revenue and construct an index of tax effort in ECOWAS countries based on stochastic frontier tax functions using annual data from 2000 to 2010. The results show that literacy rate has a positive effect on direct, indirect and trade taxes; financial depth has a positive effect on indirect and trade taxes; agricultural share of GDP has a negative effect on direct and indirect taxes; and openness of the economies to import and GDP per capita have positive effects on trade tax. All the ECOWAS countries are found to be below tax capacity. Moreover, unlike other countries, Guinea Bissau and Nigeria have high tax efforts - more than 75 percent - when natural resource related taxes are included in their respective total tax revenue, but with their exclusion the tax efforts of Nigeria and Guinea Bissau are as low as 25 and 7 percent respectively.  Being below their tax efforts, ECOWAS countries could raise tax revenue with more effort. The potential of raising indirect and trade tax revenue is higher than for direct tax.

Nguena (chapter 7) studies the domestic savings-investment causality in the WAEMU zone. It has been investigated in each country from a methodology based on co-integration.  The existence of causality heterogeneity between savings and investment in the WAEMU zone suggests that one should consider a new model of fiscal coordination incorporating this heterogeneity, including adoption of a new budget rule that is more flexible and based on a structural fiscal balance without public investment.

Olofin et al. (chapter 8) evaluate the determinants of effectiveness of ECOWAS at promoting regional trade in West Africa between 1995 and 2010. By estimating a modified gravity model (GM) that allows for the inclusion of country specific and country-pair characteristics in addition to the traditional GM variables (income and distance). They find that economic size, distance, geographical factors such as common border, landmass, land-lockedness of countries and socioeconomic variables like common language, political stability and availability of infrastructure, significantly influence intra-regional trade within the ECOWAS region. They also find that the Francophone-dominated region (WAEMU) is exports trade creating while the Anglophone-dominated region (WAMZ) is trade diverting. Therefore, they argue that for ECOWAS to successfully facilitate intra-regional trade, current efforts at forming a synergy between WAEMU and ECOWAS should seek to promote trade between members, irrespective of colonial origin.

Fall, Vachon and Winkler (chapter 9) review the record of commercial regional integration over the period 1995 to 2010 in two Regional Economic Communities (REC), ECOWAS and SADC. Evolution of intraregional trade, measured by the ratio of intraregional exports over total national exports, as widely recognized, has remained low since 1995. Based on gravity equations and national data, their study disaggregates some determinants of intraregional trade. As expected, bad national infrastructures affect intraregional trade, as well as sectoral economic trends such as industrial and manufacturing growth. The study also examines the influence of regional leaders on intraregional trade and finds that adverse effects seem not to exist as the leading economies' performance appears to be positively correlated with intraregional trade. Conversely, overall economic performance of RECs' does not systematically translate into increased intraregional trade. Decomposition of exports by types of goods reveals more striking, differences between levels of industrialization and development of RECs. SADC appears to be less regionally integrated and more open to global trade while ECOWAS and WAEMU are more integrated regionally but less integrated into global trade.

Elu and Price (chapter 10) use a theory of rational terrorism where a country's membership in a regional currency union conditions the cost of inputs that produce terror, and estimate the parameters of static and dynamic terrorism supply functions with Generalized Estimating Equation count data estimators for Sub-Saharan Africa between1974 and 2006. Their parameter estimates reveal that regional currency integration has counter-terrorism benefits as countries with membership in the CFA Franc Zone had fewer terrorism incidents than other Sub-Saharan African countries.  Their estimates also suggest that the CFA Franc Zone caused a decrease in terrorism. Considering that terrorism constrains important drivers of economic growth, these results suggest that another potential channel by which regional currency integration improves living standards in Sub-Saharan Africa is through reduction of terrorism.

 

One may wonder why, given the abundant literature on Africa’s economic situation, this book is necessary and, more importantly, adds something new.  There are at least three main reasons.  First, since the Oil Crisis that followed the Yom Kippur War in October 1973, between Israel and several Arab states, West Africa has seen the derailment of its growth path that arose from its initial years of independence. Thereafter, it started a downward economic spiral that several remedial donor-supported damage mitigating programs sought to address.  These programs spanned a period of nearly 40 years and included Structural Adjustment Programs (SAPs), the Highly Indebted Poor Countries (HIPC) external debt reduction Initiative, and poverty alleviation measures organized in national Documents for the Strategy of Reduction of Poverty (DSRP).  After all these years of foreign-inspired programs, one can only note that West Africa faces a diverse set of country circumstances with several cases of economic stagnation, and the evidence shows that, as a whole,  West African economies are not converging towards their industrialized or emerging counterparts, but rather diverging. This time it is about giving scientific contribution to economic growth in West Africa and not weathering the hardships of underdevelopment.

The second reason lies in West Africa’s record as one of the most underprivileged areas in the world as reported by UNDP’s Human Development Index –in 2010, 5 of the countries ranked among the last 10 in the word are located in West Africa.  Therefore, economic and social development, in any measure, is needed in this sub-region more than anywhere else in the world.  It is commonly agreed that most of its countries will fail to reach the Millennium Development Goals (MDGs) by the set date of 2015.  But in a longer perspective, economic growth would create the added wealth that could help fund social programs in health and education as well as lay the groundwork for better economic and political governance.  It would also make countries better prepared to tackle the challenges of climate change, social inclusiveness and gender equity, not to mention political stability and social cohesiveness. This book aims to participate in that quest for region-wide growth through regional integration, the collectively chosen strategy of West Africa’s key players.

The third reason draws on the history of economic thought.  Arguably, in order to be successful and enduring, thinking on development needs to be endogenous thus capturing all aspects of a society’s evolution.  This consideration is echoed by the recent increasing demand by West African policymakers for more research-based, homegrown policy recommendations, especially at the sub-regional level.  Indeed, over the last few decades, policy has been almost exclusively focused on national challenges with regional initiatives taking the back seat and being mostly ramifications of the national priorities.  This may partly explain the lack of balance of policy-oriented research between the two and the strong need for books like this one.  One of the intended consequences would be the formulation and application of new theoretical models of growth and development that will inform policy and arouse consensual support of various categories of development stakeholders.

It is hoped that the body of evidence presented in this book and the new insight proposed on various issues related to the challenge of economic growth through regional integration will prove to be useful for scholars, policymakers and institutions whose main mission is to promote economic and social development. It is also expected that the interconnection of policy analytics on West Africa’s development agenda that emerges from this book will promote emergence of a new development paradigm or, at least, help deepen the existing ones.

Diery Seck

May 2013.



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