The currency union effect on intra-regional trade in Economic Community of West African States (ECOWAS)

• Pages: 102-122
• Date: 10 June 2014
• Published date: 10 June 2014
• DOI: https://doi.org/10.1108/JITLP-04-2013-0008
• Author: Anokye M. Adam,Imran Sharif Chaudhry
• Subject Matter: Strategy,International business,International business law

The currency union effect on

intra-regional trade in Economic

Community of West African

States (ECOWAS)

Anokye M. Adam

School of Business, University of Cape Coast, Cape Coast, Ghana and

Accra Institute of Technology Campus, Open University Malaysia, Accra,

Ghana, and

Imran Sharif Chaudhry

Department of Economics, Bahauddin Zakariya University,

Multan, Pakistan

Abstract

Purpose – The purpose of this paper is to investigate the currency union (CU) effect on aggregate

intra-trade in the Economic Community of West African States (ECOWAS) and on bilateral trade

among individual countries using the gravity model.

Design/methodology/approach – Using panel dynamic ordinary least square, we examined the

short- and long-run CU effect on aggregate intra-ECOWAS trade and bilateral trade among ECOWAS

countries from 1995 to 2010. Chow poolability test was conducted for the appropriateness of pooling the

cross-section parameters as against individual model. The augmented Dickey–Fuller (ADF) test; the

Phillips–Perron (PP) test; and the Kwiatkowski, Phillips, Schmidt and Shin (KPSS) test were conducted

on the individual data series, and the Levin, Lin and Chu test; the Im, Pesaran and Shin test; the Breitung

test; and the Hadri test were used for testing cross-sectional independent panel unit root tests. Kao panel

cointegration test was conducted to identify long-run relationships.

Findings – We found evidence of signicant positive CU effect on aggregate intra-ECOWAS trade.

The estimates also show that Benin, Burkina Faso, Niger, Senegal and Togo trade more with countries

they share common currency with than what they would have been in both short and long run. We again

observed that CU is insignicant in explaining Cote d’Ivoire, Mali and Senegal intra-trade with

ECOWAS countries, though their observed intra-trade with ECOWAS is relatively high which is found

to be explained by export diversication.

Practical implications – The ndings reveal that CU is good for aggregate intra-regional trade

though some individual members respond negative to CU. The nding of diversication as a necessary

tool to increase intra-regional trade imply that as effort of introducing single currency is being pursued

rigorously, effort to diversify export or trade complement should not be overlooked.

Originality/value – There exist panel studies on CU on aggregate intra-regional trade in ECOWAS.

However, there is a need to have country level study to identify CU effect on each country, as it is

sensitive to country-specic factors which are unobservable in time series analysis of group of

countries. Also, our group estimate differs in methodology in the sense that the dynamic generalised

least takes care of endogeneity in trade gravity literature.

Keywords Currency union, Dynamic OLS, Intra-regional trade

Paper type Research paper

The current issue and full text archive of this journal is available at

www.emeraldinsight.com/1477-0024.htm

JITLP

13,2

102

Received 8 April 2013

Revised 4 September 2013

Accepted 22 October 2013

Journal of International Trade Law

and Policy

Vol. 13 No. 2, 2014

pp. 102-122

© Emerald Group Publishing Limited

1477-0024

DOI 10.1108/JITLP-04-2013-0008

Introduction

Following the nineteenth century’s network of treaty ports formation by the Western powers

and the treaty of Rome in 1957, which led to the birth of the European Economic Community

(EEC), there has been a renewed wave of proliferation of economic-integration

arrangements. There are apparent reasons for this development. Economic integration

is seen as a rapid, all-inclusive and least-cost way to accelerate economic development.

It is known that unied, regional economies expedite the pooling of risks between

otherwise vulnerable economies, lessen wars, stimulate intra-regional trade and allow

the countries within the region to exploit complementarities and entrench

competitiveness. By so doing, they attract investments needed for the development of

modern industries, while ensuring better access to markets and technology. Besides, the heat

of globalization and its unintended externalities have really shown that no individual

country can walk alone. Finally, the argument for trade-competition effects, market-size

hypothesis and many others reinforce the need for such integration arrangements. Mundell’s

(1961) economic thought about the ability to deal with asymmetric shocks through a regional

economic integration arrangement, as opposed to the micro-nationalistic thinking which

projected national sovereignty, is gaining acceptability.

In West Africa, regional cooperation dates back to the pre-independence era. The

rst attempt at economic integration is the creation of the West African Currency

Board (WACB) in 1912 under the British colonial authority, which comprised

Ghana, Nigeria, The Gambia and Sierra Leone. The WACB collapsed, following the

independence of the participating countries, in spite of trade expansion success and

gave way to a new economic arrangement – theEconomic Community of West African

States (ECOWAS). The ECOWAS was born out of the proposal made by the Economic

Commission for Africa (ECA) in the mid-60s for the formation of regional groupings. The

present-day ECOWAS was formed, from the Treaty of Lagos, on 28 May, 1975, by 15 West

African countries: Benin, Burkina Faso, Cote d’Ivoire, Gambia, Ghana, Guinea,

Guinea-Bissau, Liberia, Mali, Mauritania, Niger, Nigeria, Senegal, Sierra Leone and Togo. In

1976, Cape Verde joined ECOWAS, and in 2001, Mauritania withdrew, having announced its

intention to do so in December, 1999 (ECOWAS Commission, 2011), bringing the current

ECOWAS membership to 15, which includes Benin, Burkina Faso, Cape Verde, Cote

d’Ivoire, Gambia, Ghana, Guinea, Guinea-Bissau, Liberia, Mali, Niger, Nigeria, Senegal,

Sierra Leone and Togo.

At inception, the purpose of creating ECOWAS was to promote cooperation and

development in all areas of economic activity, abolishing trade restrictions, removing

obstacles to the free movement of persons, goods and services and harmonizing regional

sectoral policies. This was afrmed when ECOWAS adopted the ECOWAS Trade

Liberalisation Scheme (ETLS) as the main operational tool for promoting the West

Africa region as a Free Trade Area in 1990 and signed a revised ECOWAS Treaty

designed to accelerate economic integration and to increase political cooperation in 1993

in Cotonou. However, the overriding objective remains the establishment of a Common

Market and the creation of a Monetary Union, characterised by a single currency and a

common central bank. A single monetary zone for the ECOWAS member states was

envisaged by 2003 under which convergence criteria included the following:

• A ceiling on central bank nancing of budget decits of 10 per cent of the previous

year’s tax revenue.

• The maintenance of a single-digit ination rate for all countries.

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The currency

union effect