Foreign Trade and International Financial Flows: Implications for Economic Stability in the Selected ECOWAS Countries

Abstract

T his study investigates the effects of extra-ECOWAS merchandise trade and investment flows on the transmission of business cycles in the selected ECOWAS between 1985 and 2014. The study finds that total trade and foreign direct investment (FDI) significantly influence the transmission of business cycles with elasticities of 1.1 and 0.7, respectively in the long run. There are little variations across the major trading partners and other measures of trade flows. Intra-industry trade flows with all partners, EU and USA influences the cross-country business cycles with elasticities of 1.0, 0.5 and 1.8, respectively. There is a weak evidence of trade and investment relationship with China transmitting business cycles in the long run, except in the case of total trade flows in the short run. Inter-industry trade flows also show weak tendencies of transmitting business cycles. This study recommends greater needs to encourage trade (particularly, intra-industry) and foreign investment with the major trading partners. This, however, requires investment in critical infrastructure and upgrade of domestic technology to be deeply involved in global values chains necessary for the transmission of the desired business cycles. In addition, there is a need to diversify the export base and increase domestic investment to compliment foreign investments in order to minimize undesired business cycles spillovers that can undermine ECOWAS stability.