Abstract
Financial Development (FD) in both exporting and importing countries would be required to fund production and consumption, respectively. However, the extent to which this affects Economic Community of West African States-ECOWAS intra-regional trade, has not been empirically investigated, which motivates this study. It examines the pattern of trade, provides the level of FD and influence of FD in ECOWAS. It utilises the augmented gravity model of trade to empirically examine the effects of FD on bilateral trade flows in ECOWAS. To achieve the objectives, descriptive and econometric methods of analysis were engaged. Among the findings is that the FD of both exporting and importing countries are significant determinants of bilateral trade flows in ECOWAS. This suggests, among others, that more credit available to the private sector will significantly boost bilateral trade flows.
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- 1.
The choice of gravity model is mainly due to the need to capture bilateral trade flows within ECOWAS member countries in the light of their financial development. Hence, other econometric modeling approach will be applicable when examining trade flows among ECOWAS and the rest of the world, which can be taken up in further studies.
- 2.
The fixed effect (FE) model considers the relationship between the predictor and outcome variables within an entity, where each sample has its own individual characteristics that may or may not be caused by the predictor. The FE model expunges all time invariant features in order to observe the net effect of the predictor on the outcome variable. In essence, the FE model controls for all time-invariant differences between the individuals. An important assumption of the FE model is that the time invariant feature of the model is unique to the individuals and independent of themselves. The random effect model (RE) does not control for time invariant features of the samples. The main assumption of the RE model is that the error terms of the samples are not correlated with the predictors and this allows for the allowance of time-invariant variables as explanatory variables.
- 3.
Endogeneity and reverse causality are the two fundamental issues that confront panel data analysis. Endogeneity problems occur when the explanatory variables are deterministic. This can be said as the explanatory variables are correlated with the error term. In such a case, the estimates of the regression analysis will be biased in some form. Reverse causality imply that the dependent explained variable also plays the role of an explanatory variable in the same model.
- 4.
The variables (except those that are dummies, namely: common coloniser, comlang_off and contiguity) are presented in their logarithmic form to bring them in a more comparable unit of measurement and also to reduce the issue of heteroscedasticity (Olokoyo et al. 2009).
- 5.
However, the descriptive analysis spans 2000–2013; since a number of them dealt with average values.
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Acknowledgements
This paper draws from the research project supported by United Nations Conference on Trade and Development Virtual Institute (UNCTAD Vi) on ‘Localization of Teaching Material on Regional Trade Agreements for ECOWAS’. The comments and suggestions from Julia Seiermann, Vlasta Macku and Alessandro Nicita of UNCTAD, are appreciated. The initial draft of this paper was presented at the Sixth Annual Conference on Regional Integration in Africa (ACRIA 6), 1st–3rd July, 2015 at West African Institute for Financial and Economic Management (WAIFEM), Lagos, Nigeria. The full support from the organisers to participate, helpful comments from the discussant (Prof. Oladele Omosegbon of Indiana Wesleyan University, USA), and other participants, are acknowledged. Evans Osabuohien also acknowledges the supports from the Alexander von Humboldt Foundation (AvH) under its ‘Return Fellowship Award’ during which period the paper was written. The views expressed are authors’.
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Osabuohien, E.S., Odebiyi, J.T., Efobi, U.R., Fayomi, O.O. (2017). Financial Development, Trade Costs and Bilateral Trade Flows: Connecting the Nexus in ECOWAS. In: Seck, D. (eds) Investment and Competitiveness in Africa. Advances in African Economic, Social and Political Development. Springer, Cham. https://doi.org/10.1007/978-3-319-44787-2_8
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