Trade and growth in Sub-Saharan Africa : further empirical evidence

A simultaneous equations model is used that includes real income growth, trade share, the growth rate of real investment, changes in the exchange rate, and the inflation rate as endogenous variables. The model accounts for the simultaneity among the key variables and allows for direct and indirect effects between trade and income growth. It also makes possible the investigation of other variables relevant to the trade-growth relationship. The lagged values in the model provide a means of testing for inter-temporal effects and causality. The model is estimated with data from 33 African countries over a period of 29 years (1970 to 1998). The coefficients of the structural equations are derived using a dynamic panel general method of moments (GMM) estimator, which gives consistent estimates in the presence of endogenous regressors, lagged endogenous variables, and regressors correlated with country effects. For comparison purposes, the study also derives three-stage least squares (3SLS) estimates. As a means of linking the results to the existing empirical literature, the fixed effects and ordinary least squares (OLS) estimation results for the growth equation are reported. Results support the view that Africa"s marginalization in the world economy has been rooted in the lack of growth across the continent rather than the lack of trade. The policy implications are immediate. African countries need to focus in a sustained way on policies that promote growth. Since most of these policies will involve the removal of domestic imbalances and distortions, they will also give a boost to trade. Based on study evidence, a focus on trade as a means of promoting growth -- a recommendation central to most donor support to African countries -- does not appear to be a fruitful way of reducing Africa"s marginalization in the world economy. That advice misconstrues the nature of the relationship between trade and growth while leaving intact many of the domestic distortions (such as the biases against agriculture) that have undermined both growth and trade in Africa. For policymakers, the message is clear: a growth-oriented program that explicitly removes the constraints on domestic economic activity will also stimulate trade. (Author abstract, modified)