Dynamic Effects of the African Regional Economic Integrations: Panel Data Evidence

1. Dynamic Effects of the African Regional Economic Integrations: Panel Data Evidence Jacob W. Musila Faculty of Business Athabasca University, Canada Email: jacobm@athabascau.ca

2. Abstract This paper uses panel data to estimate the impact of AMU, COMESA, ECCAS, ECOWAS and SADC regional economic integrations on the level and rate of growth of economic activity in Africa. The impacts of each integration scheme on the level of investment and the rate of growth of real GDP per capita are estimated. The estimated results show that the impacts of COMESA, ECOWAS, and SADC on the level of investment are positive and significant while that of AMU is negative and significant. Only ECCAS has a negative and significant influence on the rate of growth of real GDP per capita. The impacts of AMU, COMESA, ECOWAS and SADC on rate of growth of real GDP per capita are insignificant. With respect to the marginal impacts, COMESA, ECOWAS and SADC are found to reduce the marginal impact of trade openness on investment, COMESA is also found to reduce the marginal impact of trade openness on economic growth while ECCAS increases the marginal impact of trade openness on growth.

3. Sketch of the presentation • Theoretical framework • Empirical Analysis • Empirical Results • Conclusion

4. Theoretical Framework: New Growth Theory Economic growth occurs when the following occurs: • Growth of labor supply – (pop growth) • Growth of labor productivity – a) physical capital growth – investment; b) human capital growth – accumulation of skills & knowledge; and c) technological progress – discovery & application of new tech)

5. Theoretical Framework: New Growth Theory (cont.)

6. Theoretical Framework: Sources of Economic Growth

7. Theoretical Framework: The Link between Economic Integration & Economic Growth

8. Empirical Analysis: Model specification Investment Regression Equation: where: Investment Ratio = Gross fixed capital formation/GDP FDI Ratio = (Foreign Direct Investment)/GDP INF_CHG = change in inflation rate TRADE = (Exports + Imports)/GDP) IS = Integration Schemes (AMU, COMESA, ECCAS, ECOWAS & SADC); IS = 1 if a country is a member of the IS and 0 otherwise e= white noise α‘s = are coefficients to be estimated

9. Empirical Analysis: Model Specification (cont.) Growth Regression Equation: where: RGDPPC g = rate of growth of real GDP per capita KSTOCK g = rate of growth of capital stock per capita HSTOCK g = rate of growth of human capital per capita (represented by rate of growth in primary school enrolment per capita INF_CHG = change in inflation rate μ = white noise β‘s = are coefficients to be estimated TRADE and IS are as defined earlier

10. Data Sources & Econometric Issues • World Bank’s African Development Indicators (ADI) database for the period 1980-2009. • The author constructed the dummy variables for AMU, COMESA, ECCAS, ECOWAS, and SADC. • The Hausman test for endogeneityrejected the least squares technique. Panel Two-Stage Least Squares (PTSLS) - instrumental variables - technique is used.

11. Empirical Results: Investment EQ.

12. Empirical Results: Investment EQ. (cont.)

13. Empirical Results: The Growth EQ.

14. Empirical Results: The Growth EQ. (cont.)

15. Empirical Results (cont.)

16. Concluding Remarks • This study examines the impact of Africa’s major regional economic integration schemes on the level of investment and rate of economic growth. • The study finds evidence that support the view that African regional economic integration schemes that implemented trade liberalization programs and entrenched the economic integration, have positive and significant impact on the level of investment. The impact on the rate of economic growth however is mixed or insignificant in most cases. • The study also finds macroeconomic instability (measured by the change in inflation) to have adverse significant effect on both investment and growth while trade openness has positive and significant impact. • The study also finds the marginal impact of economic integration on rate of growth to be mixed or insignificant.