Effects of regional trade agreements on strategic agricultural trade in Africa and its - PowerPoint Presentation

Slide1

Effects of regional trade agreements on strategic agricultural trade in Africa and its implications for food security: Evidence from gravity model estimation

Fredu

Nega

Edris

Hussein

African Economic Conference

Dec 5 – 7, 2016

Abuja, Nigeria

Slide2

IntroductionAgriculture isdominant sector in most African countries

important vehicle for economic growth

The sector is characterized by:

Low level of productivity due to inadequate capital formation and low level of technology

Extremely fragmented agricultural markets.

Food security is recognized as one of the major challenges facing African continent

Undernourishment in SSA is 23.8%, the highest proportion of all developing regions (FAO, 2014)

Slide3

IntroductionSince the Lagos Plan of Action (1963), the problems of African agriculture has been at the forefront of debate

A practical solution to the problem evolved

2004 AU Meeting in Sirte, Libya

2006 AU/NEPAD Summit in Food Security

Slide4

IntroductionThe solution:

Create common African Agricultural Market

Focus on strategic agricultural commodities without prejudice to ongoing efforts at sector wide development

Slide5

Beef

Poultry

Dairy Products

Legumes

Cassava

Maize

Rice

Sorghum

GroundnutOil palmSugarCotton

Introduction

Strategic commodities were selected based on:

Weight in the African food basket

Weight in the trade balance

Unexploited potential

12 strategic agri. commodities were selected

Slide6

Regional Trade Agreements (RTAs)Regional integration is embraced as the key to improve trade performance

Eight RTAs (RECs) are recognized by AU as building blocks of the African Economic Community

AMU

CENSAD

COMESA

ECCAS

ECOWAS

EAC

IGADSADC

Slide7

Are RTAs building blocks of regional integration?Two views about RTAs

Building Blocks

RTAs promote free trade

Stumbling Blocks

RTAs lower global welfare and divert import flows from lower cost suppliers

Slide8

Empirical investigation

Empirical investigations failed to solve the puzzle.

Optimistic Conclusion

(

Elbadawi

, 1997; Evans 1998; Flores, 1997)

South-south economic integration could generate the threshold scales necessary to trigger the much-needed strategic complementarities

Pessimistic conclusion

(World Bank, 2000; Yeats, 1998; Schiffs, 1997)The smaller the intra-regional shares in total trade, the more likely the trading blocs would become trade diverting

Slide9

Objective of the studyObjective:Analyse trade creation and trade diversion effects of RTAs in Africa on trade in selected

agrifood

commodities

All selected strategic agricultural commodities except Maize, Cassava and Cotton are used in the analysis

Slide10

Methodology – Gravity model

Gravity model is used for analysis

The basic premise of the model is that, trade is

associated with economic size (GDP)

inhibited by distance

Other variables included are:

Other standard variables, regional trade dummies, time dummies

The full form of the model in log linear form:

Slide11

Methodology – Gravity modelTo control for

Endogeniety

of the RTA, we follow

Baier

and

Bergstand

(2007) and estimate the following gravity model

Slide12

Methodology – Gravity model

Two Problems in

linearized

gravity model:

How to treat zero trade flows?

Drop zero values – loss of useful information

Retain zeros

By adding small values such as 1

Estimating the model in levelsHetroskedasticity problem – inconsistent estimatesPseudo Poisson Maximum Likelihood (PPML) is used (Santo Silva and Tenreyro, 2006):Robust in the presence of hetroskedasticityEstimated in levels

Slide13

Data SourceData for the period 1998 – 2010 was obtained from:

CEPII

Bilateral trade data for nine commodities

Distance and other dummy variables (language, colonial history, landlocked, contiguity)

World Development Indicators data base

GDP and PC income

Slide14

Results and discussionTen different regression results – one for each of the nine strategic commodities and one for all agrifood commodities

Effects are analysed for

Standard gravity model variables

Regional integration dummies

Slide15

Standard gravity model variables

Sorghum

1.667***

1.395***

-1.381***

Beef

0.789***

2.074***

-2.583***Poultry0.659***2.682***-1.040***Dairy0.162***2.402***-1.785***Oilpalm0.0980.835***-2.225***Groundnut1.034***0.564***-1.349***Legumes1.258***1.353***-1.506***Rice2.132***6.938***-2.851***Sugar2.168***4.302***-1.324***Total1.645***3.253***-1.654***

Slide16

Standard gravity model variables

Sorghum

+

-

+

+

Beef

-

++++Poultry--++Dairy--++Oilpalm-+Groundnut-++Legumes-++Rice-+Sugar

-

+

+

+

Tot. Agri.

-

+

+

Slide17

Trade Creation

 

(1)

Sorghum

(2)

Sugar

(3)

Rice

(4)Poultry(5)Oil palm(6)Legumes(7)Dairy(8)Beef(9) Ground Nut(10)TotalAMU0.04570.5430.323-1.256***0.07960.481

0.493

0.125

-0.285

0.216

(0.85)

(1.71)

(1.13)

(-5.67)

(0.38)

(1.41)

(1.59)

(0.70)

(-1.06)

(0.53)

CEN-SAD

-1.323

***

-3.662

***-2.417***-0.211-1.121-4.587***-5.242***0.049

-1.927

**

-3.556

**

(-4.64)

(-3.67)

(-3.37)

(-0.31)

(-1.75)

(-4.94)

(-5.99)

-0.08

(-2.83)

(-3.10)

COMESA

0.0878

0.455

-0.0275

0.469

0.316

0.596

0.55

1.104

**

0.442

1.168

*

(0.58)

(1.25)

(-0.11)

(1.54)

(1.17)

(1.29)

(1.53)

(2.59)

(1.34)

(2.40)

EAC

0.231

1.903

*

1.802

*

0.624

1.424

*

0.251

0.692

1.132

0.595

2.370

**

(0.41)

(2.18)

(2.35)

(1.42)

(2.29)

(0.27)

(1.24)

(1.70)

(1.08)

(3.20)

ECCAS

0.0531

-1.378

**

-0.0462

-1.799

***

-0.0007

0.397

-0.943

*

0.0298

-0.337

-2.549

***

-0.85

(-3.12)

(-0.10)

(-5.03)

(-0.00)

(1.02)

(-2.14)

(0.12)

(-1.06)

(-4.62)

ECOWAS

0.0169

-0.441

-0.207

-0.313

-0.0235

0.127

-0.533

-0.0186

-0.0042

-0.109

(0.31)

(-1.09)

(-0.48)

(-1.07)

(-0.11)

(0.36)

(-1.10)

(-0.08)

(-0.01)

(-0.23)

IGAD

4.536

***

6.776

***

4.780

***

-0.113

3.971

***

4.314

***

3.457

***

0.531

1.811

**

6.746

***

(15.13)

(9.61)

(8.26)

(-0.22)

(8.46)

(5.46)

(4.91)

(0.91)

(3.02)

(7.67)

SADC

0.149

0.842

0.383

0.428

-0.167

-0.301

-0.0706

-0.0405

0.0443

0.611

(1.00)

(1.47)

(1.27)

(1.66)

(-0.44)

(-0.99)

(-0.20)

(-0.19)

(0.23)

(0.97)

Slide18

Trade Diversion

 

(1)

Sorghum

(2)

Sugar

(3)

Rice

(4)Poultry(5)Oil Palm(6)Legumes(7)Dairy(8)Beef(9)Ground Nut(10)TotalAMU0.102-0.4180.0858-0.6540.07780.664

-0.827

0.251

-0.252

-0.423

(0.81)

(-1.05)

(0.19)

(-1.85)

(0.29)

(1.68)

(-1.92)

(0.95)

(-0.80)

(-0.85)

CEN-SAD

-1.413

***

-4.726

***-2.507***-1.382*-1.132-4.661***-5.674***-0.16

-2.069

**

-5.723

***

(-5.10)

(-4.86)

(-3.58)

(-2.15)

(-1.79)

(-5.08)

(-6.68)

(-0.28)

(-3.11)

(-5.11)

COMESA

0.18

0.349

0.0708

0.456

0.248

0.804

0.624

1.157

**

0.548

1.086

*

(1.16)

(0.99)

(0.29)

(1.45)

(0.92)

(1.77)

(1.72)

(2.71)

(1.63)

(2.42)

EAC

-0.111

-0.102

-0.246

-0.0143

-0.0989

-0.461

-0.455

-0.0965

0.136

-0.423

(-0.91)

(-0.31)

(-0.99)

(-0.08)

(-0.50)

(-1.93)

(-1.78)

(-0.56)

(0.46)

(-1.13)

ECCAS

0.126

-0.417

0.0859

-0.643

*

-0.0415

0.489

-0.598

0.122

-0.333

-0.329

(1.17)

(-0.98)

(0.19)

(-2.02)

(-0.16)

(1.28)

(-1.40)

(0.48)

(-1.08)

(-0.64)

ECOWAS

0.0481

-0.432

-0.145

-0.432

-0.131

0.459

-0.615

0.155

-0.414

-0.4

(0.84)

(-1.20)

(-0.35)

(-1.51)

(-0.57)

(1.28)

(-1.56)

(0.70)

(-1.37)

(-0.87)

IGAD

-1.371

***

-3.359

***

-2.427

***

-0.371

-1.434

**

-4.440

***

-5.578

***

-1.053

***

-2.961

***

-4.512

***

(-5.33)

(-5.33)

(-6.27)

(-1.32)

(-3.07)

(-12.58)

(-13.06)

(-4.09)

(-8.15)

(-6.29)

SADC

0.188

0.355

0.283

0.275

0.242

-0.266

-0.0697

-0.113

0.0835

0.485

(1.10)

(0.83)

(1.02)

(1.23)

(0.85)

(-0.91)

(-0.19)

(-0.49)

(0.47)

(1.00)

Slide19

Implications for food securityTwo effects of trade

Allocation Effect

- seems to have been small

Accumulation Effect

- Dynamic and can have a potentially much larger and positive effect.

However, Small allocation effects likely imply accumulation effects have also been limited

Slide20

Implications for food security

 

Slide21

REC

No. of products

considered

No. of products

regional I exceeds individual countries I

Remark

ECOWAS

10

8These are the countries that reported Net Trade Diversion EffectCENSAD105IGAD103EAC102ECCAS102SADC102AMU101Implications for food security

Countries with lower instability index than the regional index would not gain if integration is enhanced.

This indicates national incentives to cooperate regional can vary widely

Slide22

Conclusion

RTAs in Africa have mixed results

Net trade creation effects – in 4 out of 8 RTAs

Net trade diversion effects – in 3 out of 8 RTAs

The low level of intraregional trade and the signs that the RTAs can lead to net trade creation effect indicates the opportunities to deepen integration and expand agricultural trade

Poor conditions of infrastructure forms the bottleneck

e.g.

DISTANCE

Slide23

Thank you!