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Research Roundup on Trade in Sub-Saharan Africa (June 2012)

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Trade causes growth in Sub-Saharan Africa
In the 1990s the mainstream consensus was that trade causes growth. Subsequent research shed doubt on the consensus view, as evidence suggested that the identification of the effect of trade on growth was problematic in the existing literature. This paper contributes to this debate by focusing on growth in Sub-Saharan Africa. It estimates the effect of openness to international trade on economic growth with panel data. Employing instrumental variables techniques that correct for endogeneity bias, the empirical evidence suggests that within-country variations in trade openness cause economic growth: a 1 percentage point increase in the ratio of trade over gross domestic product is associated with a short-run increase in growth of approximately 0.5 percent per year; the long-run effect is larger, reaching about 0.8 percent after ten years. These results are robust to controlling for country and time fixed effects as well as political institutions.

Bruckner, Markus, and Daniel Lederman. 2012. "Trade Causes Growth in Sub-Saharan Africa." World Bank Policy Research Working Paper 6007, March.

Many landlocked countries restrict trade in the very services that connect them with the rest of the world, and it hurts them
On average, telecommunications and air-transport policies are significantly more restrictive in landlocked countries than elsewhere. The phenomenon is most starkly visible in Sub-Saharan Africa and is associated with lower levels of political accountability. This research provides evidence that these policies lead to more concentrated market structures and more limited access to services than these countries would otherwise have, even after taking into account the influence of geography and incomes. Even moderate liberalization in these sectors could lead to an increase of cellular subscriptions by 7 percentage points and a 20-percent increase in the number of airline flights. Policies in other countries, industrial and developing alike, also limit competition in international transport services. Hence, trade-facilitating investments under various aid-for-trade initiatives are likely to earn a low return unless they are accompanied by meaningful reform in these services sectors.

Borchert, Ingo, Batshur Gootiiz, Arti Grover, and Aaditya Mattoo. 2012. “Landlocked or Policy Locked? How Services Trade Protection Deepens Economic Isolation.” World Bank Policy Research Working Paper 5942, January.

Information spillovers may help African exporters survive in foreign markets
Using a novel dataset with transaction-level export data from four African countries (Malawi, Mali, Senegal and Tanzania), this paper explores the determinants of success upon entry into export market, defined as survival beyond the first year at the (firm x product x destination) level. We find that the success probability rises with the number of same-country competitors exporting the same product to the same destination, suggesting the existence of some cross-firm externalities. We explore several conjectures on the determinants underlying these externalities and provide evidence that these may operate through information spillovers.

Cadot, Olivier, Leonardo Iacovone, Denisse Pierola, and Ferdinand Rauch. 2011. “Success and Failure of African Exporters.” World Bank Policy Research Working Paper 5657, May.

Services liberalization can yield significant benefits for Tanzania
Tanzania is one of many African countries contemplating services liberalization—unilaterally, regionally, and multilaterally. Despite the potential importance of liberalizing commitments for foreign investors in services, no applied general equilibrium models are available to assess these impacts in regional arrangements. So a 52-sector general equilibrium model of Tanzania with foreign direct investment (FDI) was developed to assess Tanzania’s regional and multilateral trade options, focusing on services. It includes features of modern international trade theory, which has shown empirically that trade and FDI increases productivity, and that trade and FDI with technologically advanced countries is especially valuable for that purpose. According to the analysis, a 50 percent preferential reduction in the ad valorem equivalents of barriers in all business services by Tanzania with respect to its African regional partners would be slightly beneficial for Tanzania. Much larger gains are possible via wider liberalization with larger partners or multilaterally because of the access to a much wider set of services providers. Finally, the results show that the largest gains in services would be derived from a reduction of regulatory barriers that are faced by all providers, domestic and foreign.

Jensen, Jesper, and David G. Tarr. 2010. “Regional Trade Policy Options for Tanzania: The Importance of Services Commitments.” World Bank Policy Research Working Paper 5481, November.

Foreign direct investment spurs development in Southern African economies, but unevenly
Data from the World Bank’s investment climate surveys was used to investigate the benefits and determinants of foreign direct investment in 13 Southern African developing countries. Foreign direct investment appears to have facilitated local development in the region. Foreign firms tend to perform better than domestic firms, tend to be larger, are located in richer and better-governed countries and in countries with more competitive financial intermediaries, and are more likely to export than domestic firms. They also exhibit positive spillover effects to domestic firms. A standard empirical model to predict the country-level inflows of foreign direct investment per capita found that Southern African developing countries are attracting the expected level of inflows, at least relative to their income level, human capital, demographic structure, institutions, and economic track record. There are a few differences between countries in this region and the rest of the world in foreign direct investment behavior: namely, that income level is less important and openness more so. But the factors that account for low inflows of foreign direct investment are economic fundamentals like previous growth rates, average income, phone density, and the availability of an adult labor force.

Lederman, Daniel, Taye Mengistae, and Lixin Colin Xu. 2010. “Microeconomic Consequences and Macroeconomic Causes of Foreign Direct Investment in Southern African Economies.” World Bank Policy Research Working Paper 5416, September.

For agriculture, reductions in export taxes as important as reductions in import restrictions
Trade negotiators and policy advisors are keen to know the relative impact of different farm policy instruments on international trade flows and economic welfare. Nominal rates of assistance or producer support estimates are incomplete indicators, especially when some commodities are taxed and others are subsidized (especially in developing countries), and when positive contributions can offset negative contributions. New research uses more satisfactory indicators to examine the relative contribution of different farm policy instruments to reductions in agricultural trade and welfare. These indicators are drawn from the recent literature on trade restrictiveness indices and a recently compiled database on distortions to agricultural prices for 75 developing and high-income countries over the period 1960 to 2004. Results confirm earlier findings—border taxes are the dominant instrument affecting global trade and welfare. Furthermore, declines in export taxes contributed nearly as much as cuts in import protection to global welfare gains from agricultural policy reforms since the 1980s.

Croser, Johanna, and Kym Anderson. 2010. “Changing Contributions of Different Agricultural Policy Instruments to Global Reductions in Trade and Welfare.” World Bank Policy Research Working Paper 5345, June.

The most important force constraining Africa’s exports is inland transit delays
A one-day reduction in inland travel times leads to a 7 percent increase in exports. Put differently, this is equivalent to a 1.5 percentage point decrease in all importing-country tariffs. Moreover, this effect is higher for time-sensitive goods. Long transit times are associated with high uncertainty in road transport, which jeopardizes exporters’ delivery targets. By contrast, longer delays in the other areas have a far smaller impact on trade. The policy implications are twofold. The benefits from any decrease in external tariffs among main trading partners are small (and might even be negative for some because of terms of preference erosion). Reducing transport times will significantly increase exports. Trade facilitation will benefit most from programs that directly affect truck fleets, and the infrastructure and security of Sub-Saharan Africa’s road systems.

Freund, Caroline, and Nadia Rocha. 2010. “What Constrains Africa’s Exports?” World Bank Policy Research Working Paper 5184, January.

Trade facilitation could provide a powerful impetus to African exporters
Trade costs are, on average, higher for African countries than for other developing countries. This is revealed by a review of data and research on trade costs for Sub-Saharan African countries. The review covers: border-related costs, transport costs, costs related to behind-the border issues, and the costs of compliance with rules of origin specific to preferential trade agreements. Using gravity-model estimates, the authors compute ad-valorem equivalents of improvements in trade indicators for a sample of African countries. The evidence suggests that the gains for African exporters from improving the trade logistics half-way to the level in South Africa is more important than a substantive cut in tariff barriers. As an example, improving logistics in Ethiopia half-way to the level in South Africa would be roughly equivalent to a 7.5 percent cut in tariffs faced by Ethiopian exporters.

Portugal-Perez, Alberto, and John S. Wilson. 2008. “Why Trade Facilitation Matters to Africa?” World Bank Policy Research Working Paper 4719, September.

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