Impact of intra-African trade: a case study of the preferential trade area (PTA) for eastern and southern Africa

Abstract

The study uses the residual and gravity models, and graphical analyses to estimate the impact of the creation of a Preferential Trade Area (PTA) for Eastern and Southern Africa, on the economies of the countries belonging to the trade arrangement. The models and graphical analyses, use adjusted data from a variety of sources, covering the period between 1982 and 1996 and uses 1983 as the cut-off point for the post and pre-PTA periods. By computing the domestic share (Ds), share of imports from partners (ps) and non-partners (Ns) from the apparent consumption equation, the residual model uses the changes which occur in the three factors were used to indicate gross trade creation, net trade creation and trade diversion. The changes are used directly or indirectly to assess the impact of the formation of the PTA on trade effects, growth, industrialization and transfer of technology. The graphical analyses are however, used to indicate the trend in the changes that occur over the period. The gravity model on the other hand, uses the two-tailed t-test to assess the impact of the PTA creation on the four hypotheses being tested in the study. This is achieved by assessing the significance oft-values on th.evarious variables that affect the imports from country i to country i. and by measuring the correlation between the various variables using R2 , which should be greater than 0.5. The results obtained through regression analysis are then used to estimate the direct or indirect effects of the different variables on trade effects, growth, industrialization and transfer of technology. The models and the data used in the study reveal that only countries with relatively more diversified production structures tend to benefit and to claim bigger shares of intra-PTA trade than those with less diversified economies. Surprisingly enough, countries with a weak manufacturing base and productive structures also experienced trade creation as a result of this weakness. The study further revealed that countries with strong trade links with third countries increased the level of their intra-PTA trade, and that income, population as well as exchange rates played significant roles in the expansion of trade. The complimentarity between trade creation and diversion would be crucial in generation industrialization Within the PTA arrangement by promoting greater trade in manufactures through increased trade diversion. The key policy emphasis which the study makes is in the creation of critical and strategic pre-requisites within each economy, through the building of human capacity and capabilities; addition of value to products by the countries of the region before their exportation; and rigorous promotion of trade links with both industrialized and other countries. Even though the results derived from this study could not yield conclusive evidence as to the impact of the PTA formation, the study indicated areas where further research could be directed, such as the minimum level of development required before benefits could be reaped from integration, as well as the type of model that would be most appropriate in the light of the data difficulties. Tnis Study spells out areas for policy considerations and indicates that the limitations of the study do not invalidate any conclusions reached in the analysis.