International Trade Can Help Africa Grow

Optimism about Africa’s future is no longer scarce. The continent’s growth has been exemplary in recent years. Yet it is just as easy to find signs of distrust in the global economy. 

Multilateral agencies insist that international integration offers opportunities for accelerating economic growth. Official parlance has become tame since the heyday of structural reforms in the early 1990s, but they have found subtle ways to argue that trade is good. The World Bank recently launched “Defragmenting Africa,” providing an exhaustive and exhausting list of policies to increase international trade within the continent. 

Unsurprisingly the prescriptions can be costly. Removing import taxes might improve economic efficiency and enhance consumer welfare, but revenues can fall in countries with limited public resources. Although Africa harbors some of the highest trade taxes in the world (World Development Report 2009), the point is that there are tradeoffs. The same applies to policies that entail investments in infrastructure for “trade facilitation.” 

What would Africa get in return? 

It is unfortunate, but the truth is that most proposed policies will not be properly evaluated. In some cases, the policies are too broad to be subject to impact evaluations in the tradition of Randomized Control Trials. A recent World Bank book, “Where to Spend the Next Million?” is a call to arms to conduct such evaluations of trade-related policies. The case studies are mostly about export promotion programs for firms. It is difficult to imagine a randomized controlled trial where the treatment on a population is simultaneous doses of tariff reductions, investments in infrastructure, and removal of regulatory non-tariff barriers. 

We must look elsewhere for estimates of the potential effects of increasing trade. International comparisons are unavoidable. So, what do international data say about trade and growth in Africa? The graph shows the correlation between average annual growth rates and the ratio of international trade (imports plus exports) to GDP. (The data come from the 7th version of the Penn World Tables.) The correlation is positive, but, alas, correlation is not causation. Thus the unadulterated data tell us little. 

Click on the graph below to see it larger

A paper coauthored with Markus Bruckner (National University of Singapore) disentangles causation from correlation in two ways. First, we asked: what is the effect of growth on trade? To answer, we used data on rain, which affects growth directly and trade only indirectly. Then we used the portion of trade that is not caused by growth to estimate the impact of trade on growth. Second, we took advantage of African economies being small, which allowed the use of rich-country growth as a driver of African trade; exports through demand and imports through supply. In turn, we estimated the causal effect of that portion of trade on African growth.

With both approaches, we found that the effect is positive and significant:  A one percentage point increase in the trade-to-GDP ratio is associated with an average increase of about 0.5 percent in the growth of GDP per capita, and the effect appears to be amplified over time.

Good news for trade, up to a point. Cross-country analyses provide the average effect, but they do not say that every country will be equally affected. In Africa, institutions, ethnic fractionalization and dependence on natural resources are different across countries. We found that the positive effect of trade on growth varies systematically with ethnic polarization, but we could not reject the possibility that the effect is positive for all.