The Impact of Trade on Per Capita Income Growth in Sub-Saharan Africa (Research Paper Sample)

The Impact of Trade on Per Capita Income Growth in Sub-Saharan Africa


The Impact of Trade on per capita Income Growth in Sub-Saharan Africa (SSA)
 
Abstract
The relationship between trade, productivity and economic growth in are very important in any developing nation especially in Sub Saharan Africa. For long this relationship has not been established theoretically. Researchers, scholars and politicians have invested in much in the trade policy and the impact the y have to the economic growth in the sub Saharan Africa.Little or no improvements in development have been achieved through open trade throughout this region. In this paper, I will venture to show theoretically through statistics how the international trade and economic growth are linked and demonstrate the potential that trade does have in realizing development. In this paper, I conclude that exchange rates, custom tailoring trade policies and trade openness in Sub-Saharan Africa can exhibit positive and significant impacts on per capita economic growth and development in Sub-Saharan Africa.
CONTENTSPart One: 1. Introduction2. Background Literature Review SSA TradePart two:3. Methodology and Data4. Result. 5. Conclusion6. References
 
 
 
1. INTRODUCTION Sub-Saharan Africa is faced by numerous challenges such as poverty, poor income distribution, political instability, slow per capita economic growth and stagnation in development. This has made it hard for the SSA to achieve development goals as outlined by Millennium Development Goals (MDGs) and to affect the poverty reduction strategies in the region (Heintz and Pollin, 2008). SSA, in 1980s attempted a course in stabilization, privatization and liberalization through the use of stabilization and structural adjustment programs sponsored by IMF and World Bank in exchange for balance of payments support. This was a multi-lateral support and it required the SSA countries to liberalize their trade regimes. Since the affected regions were primary resource based economies, trade liberalization in this region led to a region developing tighter integration with the global economy as primary product exporters. Since establishment of structural adjustment program in Africa has performed very poorly. The average GNP per capita in SSA has fallen by 43 percent and by the early 2000s debt arising international financial institutions reached 36 percent compared to 16 percent in the 1980s.World Bank has increased the total long-term outstanding debt by 25 percent, compared to 10% in the 1980s. Both labor and land productivity has reduced while population has been rising at an average rate of 3 percent; due primarily to farmers lacking access to improved technologies (Lipumba 1999).In the Figure 1 compares average growth rates  of GDP per capita among sub sub-Saharan African countries with average per capita growth rates among developing nations. The estimates of long–run trend GDP per capital growth two groups of countries are clearly shown in the Figure 1. As shown rate in the figure, the growth rate in Sub Saharan Africa countries have fallen below the average growth of rate of all other developing countries over this same time frame.According to this paper also, the average long-run GDP per capita growth rate in SSA was negative during 1980s and the early 1990s.This means the living standards fell over this time frame.
Figure 1

Source: World Development Indicators, 2007.
In most of the economic theories and multiple empirical analyses, it is argued that openness to trade can be the engine of economic Growth. Economists such as Stiglitz and Charlot (2005) argued that openness of economies to international trade is a very good thing and can lead to faster growth of economies.Contrary to this the already existing theoretical models and previous empirical analyses reflected something different. It is true trade whether international or regional result to economic growth, but it is also a fact that it can lock countries into a slower or no growth paths. Dan Rodrik (2006) observed that the implication is that it’s imperative to tailor trade policy in SSA Circumstances in order to realize any development from trade. That way SSA can compete more advantageously in the international market. When the trade policies are tailored, the SSA will be enabling to engage in export-import activities with developed nations. This way the developed nations will be less likely to engage in trade barriers. A point to note will be that barriers are very important in fostering economic development and per capita income growth in SSA (Rodriguez and Rodrik, 1999). Dani Rodrik in his argument suggested that in order to achieve sustainable growth and be able to absorb the exogenous shocks in the international trade and SSA economy, we ought to change the our trade policies that is from a totally open economy to a tailored one. This would give SSA countries a competitive edge in the global market. This will require the political will and effort from the SSA national as well as governments and also a considerable adjustment through SSA trade policy. Furthermore this trade policy should be skewed towards the themes of debt relief, infrastructural development and assistance which must be in line with the binding constraints of SSA’s economic plan, Dani Rodrik (2011).Economic Interdependence is becoming a key factor among world nations and as the SSA countries purpose to enter the global economy  it is very challenging and it would need numerous nation-level efforts  both at the local government and International trade institutions to be set. Meanwhile, SSA Countries integrated with the global economy in the 1980s with stabilization and structural adjustment program under the auspices of IMF and the World Bank in exchange for balance payment support and also required SSA to liberalize the trade regime. This resulted to tighter integration with the global economy as primary source exporters (World Bank, 2011); this paper therefore tries to learn whether, in the SSA context, an open economy strategy promoted rapid per capita income growth. This paper uses a cross-country empirical analysis methods and theoretical analysis to estimate and summarize the results so as to conclude that tailored trade policy is the best option for SSA to promote per capita income growth.This is the structure of the paper: the next section provides an overview of trade and reviews SSA’s trade performance. The third section is methodology. Next are results and findings. Then lastly is the conclusion.
2. Background and Literature review SSA trade.
Primarily, the reason and motive of trading or participating in trade is to gain profit and acquire monetary gains from the trade markets. A country engages in trading in order to benefit from it through monetary gains or even material profits. It is the central framework of trade theory that gives credence that by engagement in trade, countries are able to raise their level of income per capita. As per the trade theory, the country’s domestic price ratio must differ from that of international trade; that way it is able to make profit from the trade. From the trade theory, it is also believed that trade gives rise to country’s economy, in which the price ratio is affected globally. Taking of material benefits in trade, consumers and countries have an opportunity to buy goods they might not have bought in autarky. It also allows countries to use resource such as labor, technology and capital effectively and efficiently through specialization. According to Weil (2005), trade gives the country the opportunity to maximize their capacity produce and acquire goods. David Ricardo says that apart from the gains attained through trade and free trade prices, a theory on comparative advantage is also drawn. This comparative advantage observation refers to the ability of a party to produce a particular good or service at a lower opportunity cost than another. It is an attempt to agree with the fact that even if one nation is more efficient in the production of all goods; which would it is at a vantage point over all goods than the other nation, the two nations stand to gain from each other as long as they have different relative efficiencies.
According to economic theories, countries may trade to achieve an economy of scale in production. This promotes higher productivity as well as being able to have different tastes and preferences from the variety of goods. Trade openness leads to reduction of cost of production, enhances productivity while doing away with monopoly power. These and other benefits mentioned above are gained from trade (Perkins, Radelet and Lindauer, 2006).In order to detect whether there is per economic growth in a country or region, one is required to consider several factors the lead to or affect the growth. Solow Growth Model is one of the best and classic growth models that are widely used to investigate policies leading promotion of per-capita income growth. In this Model, Solow assumes that growth of per-capita output is a result of capital accumulation and technological progress. When the economy reaches the steady state, the output growth can only be attained through technological progress. Solow started with a production function of the Cobb-Douglas type: Y= A (KaLb). This production function is widely used to represent outputs and inputs. It was suggested by Knut-Wicksell (1825-1926) and was tested in statistics by Charles Cobb and Paul Douglas in 1928.They used it to model the economy of American in years 1899-1922.
In his approach, Solow used this production function of Cobb-Douglas type:
Y= A (KaLb).Where• A: Productivity• a & b: diminishing returns to scale to a single factor• a+b=1: c...