The Impact of international trade on income in Africa

Abstract

Sub-Saharan African countries have implemented several trade reforms over the past decades, with the aim of boosting global openness and economic growth. Development economists and prominent multilateral institutions have recognized positive contribution of international trade on economic growth in Sub Saharan Africa and their studies show that African countries have strong potential for further economic growth and income development if invested in promoting international trade as its share to global trade remains small, unlike its strong position to supply raw materials to major trading countries around the world. However, their empirical studies do not cease to be questioned due to at least the following three reasons : (1) there are still doubts on how openness to trade is measured to ascertain the role of trade on growth among countries; (2) the estimation methodology and choice of regressors are still open for debate and not unanimously confirmed among researchers and policy making groups, and (3) there are still uncertainties on how policies implemented by the governments effectively contribute to countries’ economic growth. This study aims at understanding the contribution of trade openness to economic growth among Sub Saharan African countries by using pooled regression of panel data econometrics around 50 countries from 1960 to 2015, and empirically testing the introduction of Human Capital and Corruption Indexes as a new regressors to estimate the effects of trade openness on income in sub Saharan Africa. The study findings show that openness to trade (which is measures as ratio of import and export to GDP) has a statistically significant positive impact on per capita income growth across all selected sub-Saharan African countries incomes. Countries with larger share of export are more likely to benefit from trade openness that those with larger share of imports as the latter dampen the countries ‘current account. However, the effect of the import on country’s per capita was not statistically significant. The study has also found that Human Capital Index has a robust and statistically significant positive impact on per capita income and trade openness in Sub-Saharan African, which show the extent to which countries that have invested more in human capital development benefit more from trade openness than those that invested less. Nevertheless, there is a statistically significant negative impact of country’s landlockedness on per capita income. The study suggests that landlocked Sub-Saharan African countries benefit less from trade openness than non-landlocked countries. Based on study findings, this study recommends that that Governments across in Sub-Saharan Africa should increase their investments in human capital development through several that are aimed at improving early learning and the quality of secondary education. Sub-Saharan African countries should also increase investments in export growth promotion initiatives by supporting export diversification policies to boost significant improvements in country export volume. Export diversification in Agro-processing sector should be facilitated by focusing on organic food stuff of which demand continues to increase amid china’s middle-income population growth. The latter would benefit from majority of the African population hence ensuring inclusive growth. Futhermore, governments across Sub-Saharan Africa should embrace intra-regional trade initiatives such as the recently signed African Continental Free Trade Agreement (AfCFTA) and ensure macroeconomic stabilities by undertaking holistic trade diversification policy reforms.