CHAPTER ONE

INTRODUCTION

1.1         Background of the Study

Sub-Saharan African (SSA) has 48 countries with over 12.3% of world’s population in 2009. More than 67.4% (33 out of 49) of countries grouped as Least Developed Countries (LDCs) are located in SSA. The region contributed as little as 1.41% of world’s total output in 2008 (World Population Reference Bureau, 2009; WTO, 2009; World Bank, 2010). The average per capita income of SSA in 2005 was US$572 with average annual growth rate of 2.1% between 2000 and 2005 (World Bank, 2008; 2009). Also it has the combined Gross Domestic Products (GDP) of the same in value with that of Australia (Yang and Gupta, 2007). Some factors had been noted to account for the poor economic performance of the region, which include: weak political culture, corruption, devastating impacts of sicknesses and diseases especially malaria and HIV/AIDS, weak institutions, inadequate infrastructures, among others (Artadi and Sala-i-Martin, 2003; Ayogu, 2007; Vylder, 2007; Fosu, 2008; Ike, 2009).

In the context of this poor economic performance, Olayiwola and Busari (2008) outlined economic growth episodes of SSA countries. The first was post-independence prosperity where some SSA countries inherited growing economies from the colonial regimes characterised by positive growth rates of real GDP and per capita GDP. Second was the growth episode that started in early 1970s where most SSA countries had poor economic outcomes that were characterised by negative growth in real GDP per capita, less favourable terms of trade, and so on. The last was between late 1970s and late 1990s with

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macroeconomic instabilities in most of the SSA countries. The major reason, inter alia, which can be put forward for the reversal was inefficiency of institutions and mismanagement of the various economies (Collier and Gunning, 1999; Olayiwola and Busari, 2008). The third episode tallies with the period in which most of the countries were operating Import-substitution Industrialisation Strategy (ISI) as well as other forms of trade restrictions (Busari and Omoke, 2005; Aigbokhan and Ailemen, 2006). This poor economic performance also translates to poor performance in terms of international trade.

International trade performance can be defined as the extent to which a country (or region) is able to benefit from trade with the rest of the world. It can be measured using some indicators such as: share of trade in world market, trade balance, percentage of different categories of exports to GDP, real growth in total trade; trade per capita (Goode, 2004; UNCTAD, 2006; 2008a; UNECA, 2010; World Bank, 2010). Commenting on one of the indicators, Ajakaiye and Oyejide (2005) observed that Africa’s share of world’s merchandise exports declined by more than half, from about 6% in 1980 to 2.6% in 2004.

In terms of international trade, SSA countries have performed relatively low. For example, SSA had negative trade balance from 1995 to 2008. The region’s trade balance as a percentage of GDP was -12.95% in 1995 and this deteriorated to -25.19% in 2008. The negative trade balance for SSA was worse than those of other regions as well as the global average (World Bank, 2010). The ratio of imported products to exported products (RMPXP) for SSA was far above those of other regions denoting merchandise trade deficit (World Bank, 2010). In 2007, the RMPXP for SSA was 1.90 compared to world

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average (1.36); Latin America and the Caribbean (1.45); Middle East and North Africa (1.28); and East Asia-Pacific (1.14).

One of the major indicators of international trade performance is the performance of a country’s export. In this study, emphasis is placed on export aspect of international trade. This is because export represents an injection to the exporting country and it is a source for foreign exchange earnings. Thus, an improvement in the exporting ability of a country can translate to a better international trade performance, ceteris paribus. The percentage share of exports in GDP of SSA was far lower than that of other developing regions such as Latin America and the Caribbean (LAC); and Middle East and North Africa (MENA). For instance, the percentage of manufacturing export in GDP in 2008 was 5.85% in SSA compared to the world average of 17.35%. In terms of service export, the percentage of service export in GDP was 7.72% in SSA, which was lower than 11.77% and 18.95% in 2008 for world average and MENA respectively (World Bank, 2008; 2010).

Another contextual issue is that while most developing countries in other regions especially Asia experienced trade diversification, exports from many African countries concentrated on primary products. For instance, the share of manufacturing products in total merchandise exports of developing countries increased from 35.1% in 1985 to 65.8% in 2004 and manufactured export in terms of world export increased from 14.5% in 1985 to 30.3% in 2005. The improvement in international trade outcomes of developing countries resulted from their diversified export markets. On the contrary, Africa's share of manufactured export in terms of total export decreased from 4.3% to 2.9% of total export during the same period. One of the factors attributed to this

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development was Africa's failure to integrate into the world trade with appropriate institutional framework (Bacchatta, 2007).

Institutional framework can be defined as the set of humanly formulated arrangement that is capable of structuring political, economic and social interactions among economic actors. Hence, it is seen to have been crafted by human beings for the reduction of uncertainties in any exchange of economic values (North, 1991; 2005; Williamson, 2000; Grief, 2006). Available evidences have shown that most countries in SSA have weak institutional framework. For example, using rule of law with values which ranged from -2.5 (worst) to 2.5 (best), SSA had average values between -0.76 and -0.70 from 1996 to 2008. The values for SSA were lower than the global average that ranged from -0.09 to -0.03 within the same period (Kaufmann, Kraay, and Mastruzzi, 2008; 2009).

In terms of the level of regulatory framework SSA region had low values compared to others. For instance, between 1996 and 2008, the average values for SSA lied between -0.70 and -0.54 compared to the global average values that were from -0.11 to -0.02 during the same period. The values for SSA were not only below the world average, it was equally below those of other regions (Kaufmann et al, 2009). As observed for international trade performance, institutional framework in SSA is equally not impressive. This is based on the low values of rule of law and regulatory quality indicators of institutional framework observed for SSA that were lower than the global average and that of other regions of the world.

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1.2         Statement of the Research Problem

In 1970s, the basic philosophy of economic theory had been that the economic growth of a country (and region) depends mainly on the level of investment (Solow, 1957). Other scholars such as Romer (1986) and Lucas (1988) brought the concept of endogenous growth to the argument of economic growth. This was later made popular by the work of Mankiw, Romer and Weil (1992) with respect to the relevance of human capital to economic growth. Both the classical economists and the endogenous growth theorists seem to assume the institutional framework in countries as exogenous. However, the insufficient benefits that accrue to developing countries especially those in SSA region from the global economy suggest that there are other determinants of economic growth as well as trade not considered by the neoclassical theorists (Umo, 2001; Garba, 2003; Durlauf, Johnson and Temple, 2004; Ige, 2007).

One of the determinants of economic growth not considered by the neoclassical is institutional framework. There is ample evidence supporting the fact that no society can exist without some form of institutional framework. Nevertheless, the difference in the level of economic growth would, to some extent, be predicated upon the strength of the institutional framework (Fosu, Bates and Hoeffler 2006; Rodrik, 2008a; Khawaja, 2009; Akitoby and Stratmann, 2009). In other words, the nature of institutional framework in a country can be growth-inducing or growth-inhibiting. For example, the implication of the difference in institutions has been seen to account for the disparity in economic growth between Democratic Republic of Korea (North Korea) and the Republic of Korea (South Korea). The institutions in South Korea were seen to be supportive for rapid economic development through the inducement of investment compared to North Korea (Acemoglu and Robinson, 2008). A similar conclusion has been made between economic growth of

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Botswana and Zambia. The fact that Botswana outperformed Zambia in terms of economic performance was as a result of quality of institutions, among other factors (Parsons and Robinson, 2006).

The nature of institutional framework in many SSA countries has resulted to state failures such as collapse of central administration (e.g. Somalia), insecurity of life and property (e.g. Zimbabwe), uncertainties, low infrastructural facilities and so on. These forms of institutional ‘disfunctionalities’ have worked against the region’s developmental efforts with respect to international trade performance and economic growth (Ajayi, 2002; Iyoha, and Oriakhi, 2002; Artadi and Sala-i-martin, 2003; Garba, 2003; Aluko, 2004; Ike, 2009). This is because, coup plots, violent military take-over as well as ethnic conflicts, which have occurred in most SSA countries, are indications of weak institutional frameworks (Artadi and Sala-i-Martin, 2003; Fosu,2003; Garba, 2003). This tends to point to the fact that the institutional framework in SSA countries may not be very supportive for economic activities when compared to other regions of the world. The above issue is exacerbated by non-resilient financial institutions in most of SSA countries, which are essential for providing financial resources for international trade (Papaioannou, 2009; Ojo, 2010).

Given the low level of international trade performance and institutional framework, the basic question is “can there be possible link between institutional framework and international trade performance in SSA”? Put differently, can the level of international trade performance in SSA countries be attributable to their institutional framework? The above questions were major research problems that motivated this study.

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Furthermore, trade policies in most SSA countries had been characterised by high tariffs, inappropriate use of export and import licenses, indiscriminate use of import bans, and some forms of undue government interventions (Iyoha and Oriakhi, 2002; Aigbokhan and Ailemen, 2006). Most of these policy measures have not worked much in their favour in terms of enhancing international trade performance. For instance, despite the opportunity of access to the world market, most SSA countries still face a great deal of challenges. The membership of World Trade Organisation (WTO) and regional economic communities (RECs) such as Common Market for Eastern and Southern Africa (COMESA), Economic Community of West African States (ECOWAS), among others, has not resulted to substantial benefits.

Another issue worthy of mentioning is heavy reliance on exportation of primary commodities, which exhibits a major weakness in the terms of trade of SSA countries. For example, raw materials and petroleum products account for over 50% of international trade in most SSA countries, and petroleum products alone account for about 95% of Nigeria’s total export, while raw materials comprise over 54% and 50% of international trade revenue in Mauritania and Zambia, respectively (Fongue, 2007). The key problem with this trade structure is essentially the high level of fluctuation that usually characterise prices of primary commodities at the world market (Hansson, 1993; Ndella, 1993; Fosu, 1996; 2003; Olomola, 2007). Some of the prominent factors that have resulted in low international trade performance of most SSA countries include weak institutional framework, limited stock of human capital, poor infrastructural facilities, and so on.

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1.3         Research Questions

In the process of analysing the implication of institutional framework on international trade performance, some pertinent research questions were raised. They include:

i.            What impact do political institutions have in determining the level of international trade performance in selected SSA countries?

ii.             What are the roles of economic institutions in influencing international trade performance in selected SSA countries?

iii.             What roles do financial institutions in selected SSA countries play in determining their international trade performance?

iv.            How relevant are trade policies in selected SSA countries in promoting their international trade performance?

1.4         Objectives of the Study

The main objective of the study is to evaluate how institutional framework influences international trade performance in SSA countries. The specific objectives of the study are:

i.            To assess the impact of political institutions on international trade performance of selected SSA countries.

ii.             To evaluate the role of economic institutions in promoting international trade performance of selected SSA countries.