Growth by Destination: The Role of Trade in Africa’s Recent Growth Episode

Abstract

Summary Over the period 1990–2009, Africa has experienced a distinct and favorable reversal in its growth fortunes in stark contrast to its performance in the preceding decades, leading to a variety of hypotheses seeking to explain the phenomenon. This paper presents both cross-country and panel-data evidence on the causal factors driving the recent turnaround in Africa’s growth and takes the unique approach of disaggregating the separate growth impacts of Africa’s bilateral trade with: China, Europe, and America. The empirical analysis presented in this paper suggests that the primary and most robust causal factors driving Africa’s recent growth turnaround are private sector and foreign direct investment. Although empirical evidence of the role of bilateral trade openness in Africa’s recent growth emerges within a fixed effect estimation setting, these results are not as robust when endogeneity and other issues are fully accounted for. Among the three major bilateral partners, Africa’s bilateral trade with China has been a relatively important factor spurring growth on the continent and especially so in resource-rich, oil-producing, and non-landlocked countries. The econometric results are not as supportive of growth-inducing effects of foreign aid. These findings emerge after applying a variety of panel data specifications to the data, including the recent fixed effects filtered (FEF) estimator introduced by Pesaran and Zhou (2014) and the dynamic panel generalized method of moments (GMM) estimator, which allows for endogeneity between trade and growth.