REGIONAL INTEGRATION MODELS AND AFRICA’S GROWTH IN THE 21ST CENTURY: A
FITNESS EVALUATION
By
Peter D. GOLIT and Yusuf ADAMU1
Abstract
_____________________________________________________________________________________________
The study explores Africa’s regional integration models with a view to determining their suitability
or otherwise for rapid economic growth. Using annual data spanning 1980-2012, the study
employs the Johansen (1998) and the Johansen and Juselius (1990) method of co-integration
and Vector Error Correction Mechanism (VECM) to test for the presence of long-run equilibrium
relationships among the variables and estimate their static and dynamic coefficients. The study
found a significant positive role for infrastructure financing, and human and physical capital
accumulation both of which significantly influenced Africa’s economic growth. Intra-African
trade, though positive and significant, was found to be less effective in inspiring growth
compared to the above growth fundamentals. Trade openness and government spending were
the only variables discovered to significantly influence Africa’s economic growth in the short-run.
The study concludes that the traditional approach to regional integration may not provide the
best alternative for Africa’s economic growth. It, thus, recommends the adoption of a mixed
policy approach to regional economic integration to foster Africa’s economic growth in the 21st
century. The contribution of the study lies in its ability to subject Africa’s models of regional
integration to practical examination using modern approaches.
Key Words: Regional Integration, Economic Growth, Co-integration, Error Correction
Model.
JEL Classification: I10, C33, C50
Authors’ Email Address: golitson2@yahoo.com; pdgolit@cbn.gov.ng; yadamu@cbn.gov.ng
Prepared for the African Economic Conference (AEC); holding in Johannesburg, South
Africa, October 28-30, 2013.
1
Golit (Senior Economist) and Adamu (Assistant Economist) are staff of the Research Department, Central Bank of
Nigeria. The views expressed in this paper are those of the authors and do not necessarily reflect the opinions of
the Central Bank of Nigeria.
1.
INTRODUCTION
Over the years, Africa has made concrete efforts to propel growth through
advancements in intra-regional cooperation for subsequent integration into the
global economy. Many policy makers and opinion leaders across the continent
seem to be unanimous in their belief in the capacity of regional integration to
promote economic growth. There is, however, no consensus in the literature on
the particular form that the integration should take to optimize the continent’s
growth and development. The proposed integration schemes appeared to
have ignored the countries’ peculiarities, thus jeopardizing their effective
implementation. The gradual changes in the socio-political and policy
environment have also necessitated changes in orientation and approach to
regional integration in Africa.
Several scholars have attempted to provide reasons for the failure of the past
initiatives. These reasons ranged from the structure of the integration schemes to
differences in objectives and approach of rival sub-regional integration
agencies; including overlapping memberships and wrangling between and/or
among the different integration agencies. For instance, with the exception of
North Africa where the Arab Maghreb Union (AMU) remains the single
integration agency, all the other sub-regions of Africa have rival sub-regional
integration agencies, with West Africa witnessing the deepest rivalry from the
uneasy co-existence of the Economic Community of West African States
(ECOWAS) and the Union Economique et Monétaire Ouest Africaine (UEMOA).
The regional integration process envisioned by the Lagos Plan of Action was
actually intended to engineer the emergence and growth of a single unifying
regional integration agency in each sub-region which will together eventually
metamorphose into the African Economic Community (AEC). Infant industries
within the integrated regions were to be subjected to gradual competition in
2|Page
their protected regional markets until they mature for global competition
(Oyejide, 2000).
The above perspective to regional integration has been strongly criticized in the
light of the present wave of globalization which requires a change of strategy to
a more outward-oriented approach to economic integration. The search for
new models of regional integration has refocused the minds of development
thinkers away from the traditional approaches to growth fundamentals like
macroeconomic stability, capital accumulation, transactions costs, and human
and physical capital accumulation. The objective of the paper, therefore, is to
explore Africa’s regional integration models with a view to determining the right
blend of models that is most suited for the continent’s growth in the 21st Century.
The paper is structured into seven sections. Following the above introduction is
section two which reviews some relevant literature on the nexus between
regional economic integration and economic growth. Section three further
expands on the review of related literature but with specific interest on the
rationale and benefits of Africa’s regional integration. Section four explores the
regional integration models in Africa. In section five, the methodology including
the sources of data and estimation techniques are discussed. Section six
provides
the
empirical
analysis
with
the
conclusion
and
policy
recommendations contained in section seven.
2.
REVIEW OF RELEVANT LITERATURE
Regional economic groupings in Africa have had a long history. The regional
integration initiatives were ab initio intended to boost Africa’s development by
widening opportunities in regional communities for faster economic growth.
Among such opportunities include shared knowledge of technological
innovations which is in turn expected to broaden regional specialization and
3|Page
enhance Africa’s productive efficiency for better competition in the global
environment. Furthermore, Africa needed regional integration to keep pace
with the rest of the world towards her full integration into the world economy to
better exploit the opportunities in the global markets.
As Ouattara (1998) stated, Africa could not afford to leave the shaping of its
future to chance or some special interests, or a few potentates lacking in vision
or warlords with transient alliances. Regional economic cooperation was, thus,
planned to elicit the interest of individual countries in the policies of regional
partners towards ensuring mutual commitment and attainment of convergence
standards. Regional integration was also to allow for greater coordination of
national economic policies thereby enabling African countries to pool together
their small economies into larger markets to benefit from economies of scale.
Ouattara (1998) also observed that member countries in regional organizations
enjoy the benefits of stronger regulatory and judicial systems (as is the case in
the CFA franc zone), rationalized payments facilities and relaxed restrictions on
capital transactions and investment flows (as in the Cross- Border Initiative) and
a shared or common economic infrastructure as in the Southern African
Development Community (SADC).
All the above benefits have the potential to enhance trade links among African
countries and strengthen their ability to participate in trade on a global scale.
What remains uncertain, however, is whether or not the regional initiatives have
really achieved the goal of integrating the sub-regional partners on the one
hand and African countries into the world economy on the other hand.
Although African countries have made considerable efforts in opening their
economies to global trade, there is no substantial evidence to show that the
regional initiatives have delivered on their ultimate goal of sustaining growth
4|Page
and development. Some scholars have described the regional organizations as
mere defensive mechanisms tailored towards the protection of member
countries against the adverse consequences of globalization without necessarily
delivering on the objective of trade facilitation and sustainable growth.
Several studies have attempted to investigate the interactions between regional
economic integration and economic growth, but the literature remains widely
divided on the nature of the relationships existing between them. Yang and
Gupta (2005), in their study of the performance of Regional Trade Arrangements
(RTAs) in Africa, argued that Africa’s RTAs have not been effective in fostering
trade and Foreign Direct Investment (FDI). They noted that external trade
barriers are comparatively high, in addition to low complementarity of member
country resources, thereby constraining both intra and extra-regional trade.
They also blamed the small size of the markets; inefficient transport systems and
high transactions costs for the frustrations confronting African countries in
reaping the potential benefits of RTAs. They finally submitted that African
countries should streamline the existing RTAs and embrace trade liberalization
on a much larger scale, while improving on physical infrastructure and
expanding on their domestic revenue base to lessen the losses accruing from
trade liberalization.
On the other hand, Vamvakidis (1998) provides empirical evidence showing that
countries whose neighboring economies are large, open and relatively more
developed grow faster than those bordering small, closed and relatively less
developed
neighbors.
The
robustness
of
the
results
given
alternative
specifications and separate measures of openness indicates that small
economies are likely to grow faster when involved in regional trade agreements
with larger and more developed economies. But, the growth impact of the five
5|Page
regional trade agreements tested during the 1970s and 1980s were found to be
inconsistent with the above preliminary findings, implying that none of the
regional trade initiatives was found to facilitate economic growth. The author
attributed the divergence in the results to the preponderance of small, closed,
and less developed countries involved in the trade arrangements.
In his investigation of the relationships between regional economic integration
and some macroeconomic variables, Fernandez (1997) discovered that
regional integration creates reciprocal benefits by enthroning a peaceful
environment which in turn works as an insurance against any form of trade war.
Using Global Computable General Equilibrium (GCGE) model to analyze
Indonesia’s current and potential international trade relationships with other
countries, Hartono, et al. (2007) found a significant positive impact of regional
economic integration on Indonesia’s real GDP, output and welfare; with the
exception of the free trade agreement with India. Ezaki and Nguyen (2008) also
used Computable General Equilibrium Model to quantify the impact of
institution-led regional economic integration on economic growth, income
distribution and poverty reduction. The study found that the East Asian FTAs
generally have positive effects on growth, coupled with improvements in
income distribution and poverty reduction. With the exception of the impact on
China, the results indicate a positive and significant impact and positive longrun effects on East Asia, though it recognized that the requirement for structural
adjustment must have accounted for the problems associated with the short-run
effects.
In another development, Frankel and Rose (2002) examined the implications of
common currencies for trade and income of over 200 countries and found that
their involvement in currency union tripled trade with other members of the
6|Page
currency union without any evidence of trade diversion. Furthermore, a one
percent increase in a country’s overall trade was found to raise income per
capita by at least one-third percent. The results support the hypothesis that the
key beneficial effects of currency unions stem from trade facilitation. They
argued that currency union promotes trade by reducing cost of international
transactions and eliminating the possibility of exchange rate changes between
members of the currency union. Combining endogenous growth models and
economic geography to study the impact of regional economic integration on
the member and non-member countries of a regional union, Dion (2004) further
established that regional economic integration impact growth through interregional technology diffusion as knowledge spillovers originating from leading
countries spread to lagging partners. Access to bigger stock of knowledge,
therefore, fosters growth and convergence in the member countries.
In another study of the impact of regional economic integration on economic
growth and welfare in Iran and its northern neighbors, Naveh, Torosyan and
Jalaee (2012) found a positive role for trade links and regional economic
integration in relation to the GDP and welfare of the selected countries.
However, beyond a certain level, the welfare generated for the society
decreases as the share of trade in output increases.
3.
THE RATIONALE FOR AFRICA’S REGIONAL INTEGRATION
Africa remains the most deprived continent in the world with fragmented
component parts, tiny domestic markets and declining shares of world trade.
The combined Gross Domestic product (GDP) of 19 Sub-Saharan African (SSA)
countries stood at less than US$5 billion below the US$281.8 billion recorded by
the smallest European Union (EU) member country (the Republic of Ireland) in
2008. The GDP of the largest African economy (South Africa) was also said to
7|Page
have fallen below that of the smallest EU economy. What is more? The
combined GDP of all SSA countries, excluding South Africa fell short of the total
recorded by Netherland over the same period (McCarthy, 2010). Majority of the
African countries are known to be of small size and population, with low per
capita income, thus limiting their market sizes and the benefits derivable from
economies of scale. Africa’s regional integration was, therefore, primarily aimed
at overcoming the constraints on African countries to achieve sustainable
economic growth via improvements in intra-regional trade and investments. The
quest for regional integration, consequently, led to the reduction of trade
barriers among member countries towards enhancing intra-regional trade,
creating
regional
markets
and
engendering
competition
for
rapid
industrialization.
Regional integration was, also, considered the most appropriate means of
linking the individual countries to create larger markets, a precondition for better
competition, allocation efficiency and economies of scale. It was believed that
the continent would certainly miss out of the new economic order if African
countries failed to cooperate and reposition their development efforts along
regional blocs towards ensuring competition, expanding export capacities and
accessing global markets. However, several decades after the implementation
of regional integration arrangements, Africa is yet to succeed in meaningfully
expanding intra-regional trade or increasing her overall GDP to levels that are
comparable with those of other regions. The above inadequacies may not be
unconnected with the countries’ structural problems that are apparently
incompatible with the integration mechanisms in practice. Oyejide (2000)
pointed to the non-complementarities (no product differentiation) in the goods
and services existing among the regional partners as part of the reasons
accounting for the low level of trade among the member countries.
8|Page
Others include the generally low per capita income and similarities in the
countries’ consumption patterns. The deficiencies in design and implementation
of the various integration schemes made it extremely difficult for Africa to deliver
the kind of growth projected from the outset. The liberalized and enlarged
regional markets still remain largely inadequate to compete in the global
markets and achieve high levels of growth. Furthermore, most of the regions are
not fully integrated given the deviations in individual country policies from the
common goals of the regional blocs. As Oyejide (2000) argued, the design and
implementation of some of the regional integration schemes impede rather
than stimulate intra-regional trade.
The institutions charged with the responsibilities of monitoring and implementing
trade agreements equally lack the capacity to enforce important decisions,
particularly, when countries are become increasingly unwilling to relinquish
powers to regional agencies. Non-compliance and/or delayed compliance
with established benchmarks have, thus, continued to stifle the realization of
regional goals, particularly, the free movement of production factors. “There is
clear, abundant and well-documented evidence that the regional integration
arrangements in Africa have, in general, not significantly improved intra-regional
and intra-African trade.” In virtually all cases, the volume of intra-regional trade
has stagnated or even declined slightly, and there have been no changes in
the composition of trade that would suggest that integration has led to any
significant structural change in the economies concerned” (Fine and Yeo, 1997,
P. 433). The aspirations of the different regional groups (ECOWAS, PTA, COMESA,
CEAO, SACU, UEMOA, UDEAC, etc.) vary widely. The intra-group trade ratios
were also observed to be higher than the intra-African trade ratios.
9|Page
4.
AFRICA’S REGIONAL INTEGRATION MODELS
We attempt a classification of the regional integration models based on their
focus, orientation and implementation strategy.
4.1
The Traditional Approach
Africa’s traditional approach to regional integration was focused on increasing
intra-regional trade and industrialization to spur growth in various integrated
regions through an import-substitution in the different integration regions. The
growth of the various integrated regions was expected to eventually translate
into the growth of the entire African continent. Africa has experimented with the
trade-focused regional integration model for more than a half century
expecting to motivate member countries towards producing and exporting to
one another, thus replacing non-member countries’ exports with those of
member countries. Such protective mechanisms have since given way to more
proactive and outward-oriented development strategies that offer learning
opportunities against global competitive pressures for quicker access to the
global markets. The failure of the traditional approach to regional integration
has motivated opinion leaders and development thinkers in Africa to call for an
overhaul of Africa’s trade policy or a paradigm shift in search for alternative
approaches.
The new approaches should as a matter of necessity pay attention to the pitfalls
of the earlier experiments, particularly, the design and implementation glitches.
The preferential trade liberalization scheme was, ab initio prone to problems
knowing that African countries export primary products that are common to
most countries, making them to rely on non-African imports. It is, therefore,
counter-productive to rely on such schemes to transform African countries and
enhance growth. It is also argued that African countries would end-up diverting
10 | P a g e
low cost imports (cheap intermediate inputs) from developed countries for high
cost imports from other African countries. Radelet (1997) affirmed that tradefocused regional integration performs best when built on earlier liberalization
efforts. The approach may, therefore, be unsuitable for African countries in view
of their structural characteristics.
The above traditional approach pre-supposes a unidirectional hypothesis
indicating that intra-regional trade promotes economic growth, and that the
magnitude of impact is high. But, as established earlier, Africa’s intra-regional
trade is low and as Oyejide (2000) puts it, it will be a tail that is too small to wag
the much bigger body (Africa’s overall economic growth). Better still, Africa’s
intra-regional trade and growth may be bi-causal in relationships. Ndulu and
Ndung’u (1997. P.21) established that Africa’s trade and trade policies impact
growth with a feedback effect from growth to trade performance, but the latter
(growth performance) was found to be the main driver of the relationships
between export and growth. These other factors which simultaneously influence
trade and growth suggest that Africa’s regional integration needs to be
refocused away from intra-regional trade expansion to the direct factors that
stimulate growth while at the same time facilitate trade.
4.2
The Alternative Approaches
In recognition of the inherent weaknesses of the traditional approach to
regional integration, famous academics and development think-tanks have
envisioned new ideas that significantly depart from the traditional approaches.
The new perspectives proceed from the knowledge of the prevailing conditions
in member countries and the need for individual countries to first engage in
some self-cleansing by refocusing domestic reforms to growth fundamentals,
11 | P a g e
key of which include macroeconomic stability, transactions costs, physical
infrastructure, and human and physical capital accumulation.
4.2.1 Human and Physical Capital Accumulation
Modern
growth
models
have
identified
human
and
physical
capital
accumulation as key in the growth process of developing countries. This is in
view of the low levels of domestic and foreign direct investments in these
countries. The rapid transformation of the Asian Tigers has been attributed to
their ability to accumulate vast human and physical capital. New regional
integration models must necessarily emphasis these key growth factors if they
must deliver growth to the African continent.
4.2.2 Macroeconomic Stability
Contemporary development economists have argued that, what Africa largely
needs to boost economic growth at its present level of industrialization is not
trade facilitation because the member countries still rely on primary exports
which do not command high prices and are subject to frequent price
fluctuations. Rather than dissipating energies on stimulating trade, Africa needs
to enthrone a sound and stable macroeconomic environment for speedy factor
accumulation and efficient use of scarce production resources, including
human and physical capital. The fulcrum on which the above argument is
based is that sustainable macroeconomic stability is a double-edged sword that
on one hand sharpens domestic investments and on the other hand induces
huge foreign direct investment.
4.2.3 Transactions costs
Reducing transactions costs is crucial to investment drives in Africa. Collier (1998)
attributed Africa’s unimpressive performance in enhancing growth to its high
transactions costs arising from transport difficulties in many landlocked African
12 | P a g e
countries, highly inefficient and uncompetitive telecommunication networks,
poor judicial systems that frustrates contract enforcements, information
asymmetries and poor ancillary services. For Africa to witness any reasonable
growth, it needs to develop schemes that are capable of bringing transactions
costs to international levels to enhance its competitive status and attract huge
capital inflows for investment in labor-intensive industries. Regional cooperation
arrangements that address such underlying problems in addition to facilitating
shared standards and common investment policies would hasten cross-border
investments and are, thus, more fitting for Africa’s growth. Shared facilities
involving high-cost transport and communications infrastructure and regional
power, water and educational projects would go a long way to reduce unit
cost in member countries than when provided on discrete basis.
4.2.4 Infrastructural Services
The availability, efficiency and cost of key infrastructural services like power,
communication and transport determine the speed of integration of African
countries into the swiftly evolving global markets. Apart from enhancing the
factor productivity, it facilitates the access to useful information by economic
agents, thus, enhancing competition. The externalities and spillovers that would
emerge from linking Africa through regional infrastructures like commodity
exchange, stock market and clearing house facilities are capable of assisting
the less resource-endowed African countries in escaping from their present
pathetic development levels. The benefits associated with large market sizes
and economies of scale would transform Africa into an investment destination,
thus, further inducing foreign investment.
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4.2.5 Other Alternative Models
The other alternative models of regional integration suggested in the literature
involve linking a group of African countries with a given industrialized country
under a free trade agreement. The ongoing trade agreements between China
and various African countries constitute a good example. Oyejide (2000) also
cited the post-Lome IV proposed integration between a certain group of
African countries and the EU, and the free trade agreements between the
United States and Africa. Another alternative model suggested by Oyejide
(2000) encompasses multilateral agreements among individual African countries
within a framework that provides for both intra-African linkages and sufficient
linkage with the rest of the world under the platform provided by the World
Trade Organization (WTO).
5. METHODOLOGY
5.1 Data Sources and Variable Definitions
The study uses annual data series of real GDP, Africa’s Intra-Regional Trade (IRT),
Africa’s Trade Openness (TOP), Inflation Rate (INF), Gross Capital formation
(GCF), General Government Expenditure (GGE) and Electricity Consumption
(ELTR) to evaluate the suitability or otherwise of regional integration models for
Africa’s growth in the 21st century. The data which covers 1980-2012 were
sourced from the World Bank and the United Nations Conference on Trade and
Development (UNCTAD) Statistical database. The time frame chosen was
considered to be long enough to capture both the short and long run dynamic
relationships. The estimations were carried out using e-views (version 7)
econometric software. We performed minor interpolations in view of the gaps
observed in some of the series. This, therefore, calls for caution in the
interpretation of our findings bearing in mind that interpolated series have the
tendency to bias the results and create some problems for forecasting. The
14 | P a g e
Augmented Dickey-Fuller and Phillips-Perron tests were used to verify the time
series properties of the individual series. It has been proven that the ADF and PP
tests deliver the same results “asymptotically” (that is, in the hypothetical case of
an infinitely large sample). All the variables entered the model in their logarithm
form with the exception of inflation rate.
5.2 The Estimation Technique
The study employs co-integration and error correction techniques to test for the
existence or otherwise of long-run equilibrium relationships among the variables
and estimate their short- and long-run parameters for the 1980-2012 period. The
approach provides a more powerful tool for testing hypotheses about the
relationships among non-stationary variables where data sets are of limited
length. As stated earlier, the risk of using non-stationary time series in a linear
regression model is the tendency to produce spurious correlations that may bias
the parameter estimates. The presence of unit roots in our series informed our
choice of a superior methodology, the Johansen (1998) and the Johansen and
Juselius (1990) multivariate Maximum Likelihood method within a Vector Autoregressive (VAR) framework to verify the number of co-integrating equations in
the Vector Error Correction Model (VECM). The approach also provides the best
estimation mechanism as the Gauss-Markov theorem indicates that the least
squares technique provides the best linear unbiased estimator (BLUE) through which
straight line trend equations could be estimated.
5.3 Model Specification
The functional form of our econometric model is specified as follows:
= F (GCF, ELTR, INF, GGE, IRT, TOP)…………………………………. ………… (1)
(+) (+)
(-)
(+)
(+) (+)
The signs in parenthesis are the apriori expectations.
15 | P a g e
Where: GDP = Real Gross Domestic Product. An increase in GDP is expected to
boost the level of economic activities, while a decline may create a dampening
effect, and undermine trade efficiency within the African sub-regions.
IRT = Intra-Regional Trade proxied by the volume of exports among the subregional groups in Africa, thus reflecting the level of trade among the integrated
regions.
INF = Inflation rate which reflects the presence or absence of macroeconomic
instability within the African continent. The movements in the general price level
affect the returns on investment and thus determine the level of income.
Macroeconomic stability is crucial for effective planning and thus a major
attraction to both domestic and foreign investors.
GCF = Gross Fixed Capital Formation which constitutes accretion to stock of
fixed assets; in this case the additions to the stock of inventories. This variable
proxied the level of physical accumulation and thus useful in modern growth
models that advocate for the accumulation of vast human and physical
capital.
(GGE) = General Governments’ Expenditure which stands for spending of the
general governments on key infrastructure services like communications and
transport, excluding power; and thus expected to boost the level of economic
activities within the continent. But, beyond a certain level, excessive spending
may create distortions that are counter-productive.
ELTR = Consumption of Electricity which together with the spending on other
infrastructure capture the response of growth to changes in government’s
infrastructure spending.
TOP = Trade Openness which measures Africa’s trade with the rest of the world
and thus, reflects Africa’s competitiveness in trade relations with other countries.
The impact of this variable is to be compared with that of intra-regional trade to
16 | P a g e
determine whether or not Africa’s economic growth would be better improved
by trading with the rest of the world as suggested by the alternative models or
by relying on intra-regional trade as implied by the traditional approaches.
The logarithmic transformation of equation (1) yields the following:
+
+
+
+ ………………………………………………………………….…… (2)
The augmented Dickey fuller (ADF) and Phillips-Perron (PP) tests were applied to
test for the time series properties of our data to avoid the problem of spurious
regression. This was done under the null hypothesis that the variables are nonstationary and integrated of order one or I(1). If the time series contain unit roots
but are integrated of the same order, then their combination may suggest the
existence of co-integration among them.
6.0 ANALYSIS OF EMPIRICAL RESULTS
6.1 Result of the Unit Root Tests
Table 1 below presents the results of the ADF and PP unit root tests. From the
results, we do not reject the null hypothesis about the presence of unit roots in all
our series at their level form at the 5 per cent level of significance. However, the
non-stationery series become stationary at their first difference and are thus
integrated of order one or I (1). Since the variables are integrated of the same
order, it suggests that there may be presence of co-integration, implying that
long run equilibrium relationships exist among the variables.
17 | P a g e
Table 1: Unit Root Tests
ADF
PP
Order
of
Integration
Variable
Level
First Diff
Level
First Diff
LGDP
1.979
-3.252*
3.778
-4.238*
I(1)
LGCF
1.689
-5.045*
0.953
-5.059*
I(1)
LELTR
-2.936*
-4.521*
-2.762*
-5.160*
I(1)
INF
-2.791
-7.871*
-2.57
-12.029*
I(1)
LGGE
2.092
-6.589*
2.101
-6.466*
I(1)
LIRT
-2.936*
-4.521*
-2.762*
-5.160*
I(1)
LTOP
-0.631*
-5.142*
-0.796*
-6.031*
I(1)
Notes: ADF 1 and PP 1 represent= Unit root tests with constant, while ADF 2 and PP 2
= Unit root tests with constant and trend. *, ** and *** indicate statistical significance
at the 1%, 5% and 10% level respectively. With constant and trend: McKinnon (1991)
critical values are -4.0496(1%), -3.4540 (5%) and -3.1527 (10%).
6.2 Optimal Lag Length and stability tests
An important requirement for the estimation of this kind of model is a choice of
an appropriate lag length. A maximum lag of 6 was allowed in the selection
given the number of observations and variables. The Schwarz information
criterion (SC), Hannan-Quinn information criterion (HQ), Final Prediction Error
(FPE), Sequential Modified LR test statistic (LR) and Akaike information Criterion
(AIC) all suggest an optimal lag length of 1, thus informing our choice of a lag
length of order 1 (see table 2 below).
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Table 2 VAR Lag Order Selection Criteria
Lag
LogL
LR
FPE
AIC
SC
HQ
0
117.5689
NA
1.88e-12
-7.13348
-6.80967
-7.02793
1
343.3662
335.0541*
2.28e-17*
-18.53976*
-15.94933*
-17.69534*
2
391.9448
50.14561
3.99e-17
-18.5126
-13.6555
-16.9293
* indicates lag order selected by the criterion
6.3 The Johansen Cointegration Test
Since the order of integration of the variables has been established, we applied
the Johansen (1988) and the Johansen and Juselius (1990) multivariate
maximum likelihood method within the Vector Autoregressive (VAR) framework
to verify the number of co-integrating equations in the Vector Error Correction
Model (VECM). It is important to note that differencing variables to achieve
stationarity leads to loss of long-run properties. Co-integration, therefore,
provides a way out of the problem. After establishing that the deviations from
the long run trend of two or more non-stationary variables have a stationary
long run relationship, the null hypothesis of the Johansen’s method that there
are no more than r co-integrating relations becomes valid. The test begins at r =
0 and accepts as rˆ the first value of r for which the null hypothesis will be
rejected. Johansen and Juselius (1990) provide two test statistics – the Maximum
Eigenvalue Test (λmax) and Trace Test (λtrace) Statistics to determine the number
of co-integrated vectors.
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Table 3 Unrestricted Cointegration Rank Test
Trace
H0
r=0
r<1
r<2
r<3
r<4
r<5
r<6
H1
r=1
r=2
r=3
r=4
r=5
r=6
r=7
Eigenvalue Trace Statistic
0.851291
177.9714
0.775993
118.8927
0.639215
72.51434
0.448551
40.91064
0.388642
22.45926
0.199252
7.204985
0.010158
0.316502
0.05 Critical
Value
125.6154
95.75366
69.81889
47.85613
29.79707
15.49471
3.841466
Prob.**
0.0000
0.0005
0.0300
0.1915
0.2737
0.5540
0.5737
0.05 Critical
Value
46.23142
40.07757
33.87687
27.58434
21.13162
14.26460
3.841466
Prob.**
0.0013
0.0086
0.0912
0.4580
0.2715
0.5024
0.5737
Maximum Eigenvalue
H0
r=0
r<1
r<2
r<3
r<4
r<5
r<6
H1
r>1
r>2
r>3
r>4
r>5
r>6
r>7
Eigenvalue
0.851291
0.775993
0.639215
0.448551
0.388642
0.199252
0.010158
Max-Eigen
Statistic
59.07870
46.37838
31.60371
18.45138
15.25427
6.888483
0.316502
Notes: The asterisk * denotes rejection of the hypothesis at the 0.005 level.
Both the Maximum Eigenvalue and Trace tests confirm the presence of
cointegrating relationships among the variables (see table 3 above).
6.4 Normalized Cointegrating Result
The coefficient of Africa’s growth proxied by its Real Gross Domestic Product
(GDP) was normalized to 1 and the coefficients of the normalized cointegrating
equation are according to apriori expectations. Therefore, the estimated longrun cointegrating equation of the GDP and the selected integration variables is
specified thus:
GDP = 8.291+0.261GCF+ 0.669ELTR – 0.02INF +0.39GGE + 0.11IRT +0.24TOP
(2)
20 | P a g e
The long-run model indicates that all the variables in the model are statistically
significant with the exception of INF, which is a proxy for macroeconomic
stability, at the 5 per cent level of significance. The result also shows that gross
capital formation, electricity consumption, general government spending, intraAfrican trade (export) and trade openness are positively related to growth,
while inflation rate is negatively related with the normalized gross domestic
product. From the estimated long-run equation, a one per cent expansion in
physical capital accumulation, electricity consumption, intra African export,
government expenditure and trade openness leads to 0.26, 0.68, 0.11, 0.39, and
0.24 per cent increase, respectively in Africa’s economic growth. These findings
are in tandem with theory and available empirical evidence from developed
economies. However, a one per cent increase in Africa’s prices (inflation)
depresses growth by 0.02 percent. The expected signs of the coefficients of the
variables were in consonance with apriori expectations.
Table 4. Long-run cointegration vector estimates
GDP
GCF
ELTR
INF
Cointegrating
vectors
1.00
0.26
-0.67
0.02
(3.62)
(-5.79) (1.14)
Error
correction
VECM
-0.03
-0.95
0.151
-0.035 -10.62
((-1.89)
4.63) (1.59) (-1.165) (-0.59)
GGE
-0.39
(-2.34)
0.25
(2.08)
ITE
-0.11
(-2.21)
TOP
-0.24
(-4.66)
0.07 -1.21
(0.19)
(-2.20)
Notes: values in parenthesis are the t-statistics of the parameter estimates.
6.5 Error Correction Model
After confirming the existence of long-run relationships among the variables, the
Error Correction Mechanism was used to adjust to equilibrium in the event of a
shock to the system. This allows for a distinction between the long-and short-run
21 | P a g e
behaviors in the economy by specifying an error-correction mechanism of real
output toward its desired level. This also tells us the speed or time it takes the
model to adjust for disequilibrium.
For stationary time series, no distinction is
required between the short and the long run. From the lower panel of table 4,
the speed of adjustment which is the coefficient of the vector error correction
model (VECM) is -0.03. This implies that about 1 per cent of the deviation of GDP
from its equilibrium level can be corrected in a year. The VECM is negative and
significant; indicating that GDP has to decline in order to adjust to the long-run
equilibrium level since it is above its long-run average position. However, about 1
per cent coefficient of VECM is an indication of a very low speed of adjustment
to long-run equilibrium. In the short-run, only trade openness and government
expenditure were significant in explaining Africa’s economic growth. All the
other variables were insignificant.
The negative coefficient of trade openness, however, signifies that Africa’s trade
with the rest of the world is not favorable in the short run. However, it pays the
continent to refocus efforts on infrastructure development both in the short and
long run as the coefficient of government spending on infrastructural services is
not only significant but largely positive. The level of impact significantly increases
in the long run from 0.25 to 0.39 per cent.
6.6 Diagnostic Tests
A battery of diagnostic test was performed on the model to confirm the validity
of the system and the predictive ability of the model. Durbin Watson Statistics
was used to test for long-run residual autocorrelation; normality test was applied
to verify the distribution of the error term. We, thus, tested for skewness and
excess kurtosis; the Autoregressive Conditional Heteroskedasticity (ARCH) test
and the Ramsey’s RESET test (Regression Specification Error Test) were also used
22 | P a g e
to
verify
the
correctness
of
the
model
specification.
The
White
Heteroscedasticity test (with no cross terms) was employed to confirm whether
the disturbances truly exhibit the equal variance (homoscedasticity) assumption.
Similarly, Weak exogeneity tests on the individual variables were conducted
under the assumption of one co-integrating vector in view of the limited length
of our data and the risks associated with the possibility of insufficient degrees of
freedom. Given the presence of the lagged dependent variable and other nonstochastic regressors, the Breusch-Godfrey Lagrange Multiplier (LM) test was
used to check for higher order serial correlation in the disturbances of the
estimated short-run dynamic models.
7.0 CONCLUSION AND POLICY RECOMMENDATIONS
The imperative of regional integration is not in doubt especially where there is
serious commitment among the regional partners. It is clear from our empirical
findings that African countries can substantially improve growth if they can
muster the political will to refocus regional trade agreements to growth
fundamentals like infrastructure development, and the accumulation of human
and physical capital. Though intra-regional trade was found to impact on
economic growth, empirical evidence suggests that the long run impact is not
comparable to the substantial effect realizable from the growth fundamentals
like infrastructure spending, and gross capital formation.
The traditional view that African countries should concentrate on trade among
themselves is no longer tenable. Most African countries export the same or
similar commodities and maintain the same pattern of trade. This clearly
demonstrates the lack of absolute and comparative advantage
that
characterized these countries reflecting in the low volume of intra-regional
exports. The findings of this study have serious policy implications for the growth
23 | P a g e
of African countries. Policy makers need to understand that regional integration
dominated by trade plays less crucial role in spurring economic growth. African
governments, thus, need to redefine the goal of regional integration towards
ensuring the provision of critical infrastructure, building human capacities and
stock of physical capital.
Another important finding that may attract the attention of policy makers is the
discovery that infrastructure financing impacts more on Africa’s growth than
trade with the outside world. This implies that Africa can inspire growth by
concentrating on domestic efforts rather than relying on foreign countries.
Empirical evidence clearly indicates that Africa’s trade with the rest of the world
depresses growth in the short run, though the long run effect is positive. The
smaller
magnitude
when
compared
to
the
estimated
coefficient
of
infrastructure spending confirms the superiority of infrastructure spending.
African
countries
should,
therefore,
intensify
efforts
to
build
regional
infrastructures networks and link the entire continent for higher productivity.
24 | P a g e
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