Abstract
Due to the relatively low levels of bilateral trade flows observed within the CEMAC bloc as well as the poor rates of economic growth observed in CEMAC member States, the study aimed to examine the determinants of bilateral trade flows within the CEMAC bloc using the Augmented Gravity model as the main theoretical framework. While secondary data for bilateral trade was obtained from IMF’s Direction of Trade Statistics, secondary data for Gross Domestic Product (GDP), population size and investment in fixed capital were obtained from the World Bank’s World Development Indicators and data for distance and CEMAC dummy were obtained from the Institute for Research on the International Economy (CEPII). Using the Pseudo-Poisson Maximum Likelihood (PPML) technique, the results of the study conclude that while GDP of exporting country, GDP of importing country, the existence of a border between exporting country and importing country, population of exporting country, population of importing country, physical capital of exporting country and physical capital of importing country all have positive and significant impact on bilateral trade flows within the CEMAC bloc, distance between exporting country and importing country and the creation of CEMAC as a trade bloc all have negative and significant impact on bilateral trade flows within the CEMAC bloc. Finally, the study recommends that policy makers of the CEMAC trade bloc design and implement policies and measures that are geared towards boosting the GDP of member States, investing in national and regional infrastructural projects, eradicating barriers at their respective borders, investing in the acquisition and transfer of technical and technological skills, harmonizing regional financial, economic, legal and trade policies and improving the business (investment) climate. Keywords: Bilateral Trade, Economic Growth, Augmented Gravity Model, CEMAC, PPML. DOI: 10.7176/JESD/11-16-09 Publication date: August 31 st 2020
Highlights
Over the years, there has been a general consensus among the various schools of thought in Economics on the stimulating effect of international trade on economic growth irrespective of whether policymakers use import substitution or export oriented trade strategies
Authors such as Krugman (1979) and Bernard et al (2003) amongst others argue that trade promotes the efficient allocation of resources, allows countries to experience the benefits of economies of scale, facilitates the diffusion of knowledge, fosters technological progress and encourages competition both in domestic and international markets that leads to an optimization of the production processed and the development of new products
The new growth school championed by Romer and Lucas argues that international trade could promote economic growth through technological spill over
Summary
There has been a general consensus among the various schools of thought in Economics on the stimulating effect of international trade on economic growth irrespective of whether policymakers use import substitution or export oriented trade strategies. With the use of the gravity model and the fixed effect estimation technique, the results revealed that bilateral trade flows was determined by the economic size of the importing and exporting countries, real bilateral exchange rate, foreign direct investment (FDI) of Ethiopia, weighted distance between Ethiopia and its major trading partners and the role of borders between Ethiopia and its major trading partners. Using the basic gravity model equation and the Ordinary Least Squares technique, they analysed a sample of bilateral trade flows between ninety-two countries in 1999 Their empirical findings reveal that institutional distance has a negative effect on bilateral trade presumably because the transaction costs of trade between partners with dissimilar institutional settings are high. The Hadri LM test is chosen for this study over the other first and second generation unit root tests because it has the inbuilt technical statistical capacity to cater for heteroskedasticity, serial correlated errors and crossdependence
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