EXTRA-ECOWAS TRADE FLOWS AND TRANSMISSION OF INTERNATIONAL BUSINESS CYCLES

Abstract

The real gross domestic product (RGDP) of Economic Community of West African States (ECOWAS) is characterised by inconsistent growth rate, averaging -0.74%, 6.23%, 2.07% and 6.91% in 1978, 1988, 2002, and 2012, respectively. The business cycle (fluctuations of RGDP) is partly traced to trade flows and financial interdependence across countries. Previous empirical studies focused mostly on the effects of trade flows and financial interdependence on transmission of international business cycles among developed countries, with little attention paid to what obtains between developing and developed countries. This study, therefore, investigated the effects of extra-ECOWAS trade flows (trade between ECOWAS and her major trading partners - United States, European Union and China) and financial interdependence on the business cycles of ECOWAS between 1978 and 2012. Stochastic technology shocks model, predicated on trade in intermediate inputs theory (that considered the peculiarity of sampled economies with varied levels of technology) was estimated. The model combined the effects of trade flows and financial interdependence on transmission of business cycles. Annual data used was obtained from the World Bank’s World Development Indicators and World Trade Organisation’s World Integrated Trade Solution covering 1978 - 2012. Trade flows was measured by total trade, intra-industry and inter-industry trade flows and financial interdependence by foreign direct investment (FDI). Pooled Mean Group (PMG) heterogeneous regression technique was employed for the estimations, while robustness of PMG was ascertained using log likelihood chi-square ratio-test. Fixed and Random Effects regression techniques were utilised for the analysis covering the period of slow (1978 - 1994) and rapid growth (1995 - 2012). An F-test was used to confirm country-specific effects, while the consistency of Fixed and Random Effects was ascertained using Hausman-test. All estimations were validated at 5% level of significance. Total trade and FDI significantly affected the transmission of business cycles with elasticities of -0.5 and 0.2, respectively. This implied that a 1.0% increase in total trade reduced transmission of business cycles by 0.5%, while a 1.0% increase in FDI increased it by 0.2%. There were little variations across the major trading partners and other 3 measures of trade flows. Intra-industry and inter-industry trade with China as well as inter-industry trade with the United States had significant impacts of -0.7%, -5.7% and 1.4% on transmission of business cycles, respectively. The impact of FDI from European Union and the United States on transmission of business cycles was 0.2% each. Analysis by slow and rapid growth period indicated that inter-industry trade had significant impact of 0.8% on transmission of business cycles between 1978 and 1994, but no significant impact during 1995 - 2012. Over the same periods, FDI had significant positive effects (0.2% and 0.3%) on transmission of business cycles, respectively. Foreign direct investment from all partners, except China, and inter-industry trade with the United States had the most significant influence on ECOWAS business cycles. Investment and inter-industry trade with the United States as well as investment attraction from the European Union should be sustained, while ECOWAS stand not to benefit from China’s business cycles spillover. Keywords: Extra-ECOWAS trade flows, International business cycles, Stochastic technology shocks, Foreign direct investment Word count: 498