LITERATURE REVIEW AND THEORETICAL FRAMEWORK
This chapter will cover the literature review of this study. It will include relevant scholarly work related to regional integration. It will also encompass the theoretical framework on which this study is based. The review of scholarly literature on the topic currently being researched is done using the following headings as guides:
Region and Regionalism ,Economic Regionalism ,Integration, Regional Integration Origins, Regional Integration and Trade ,Impact of Regional Economic Integration on Trade, Impact of Regional Economic Integration on Growth And Investment, Impact of Regional Economic Integration on Economic Development ,Recipe for Fostering Regional Integration through Infrastructure Development and coordination in West Africa and Theoretical Framework.
2.1.1 Region and Regionalism
The concepts region and regionalization are associated with complexities. The first complexity being faced is the simple fact that the term region, can be related to various scales and can serve to indicate and locate any kind of tangible extension, from a “region” of the human brain to a neighbourhood, a province or a group of countries (Beaujeu-Garnier, 1976).
The term also has a long tradition of interdisciplinary treatment (Claval, 1987), which is very common with other concepts in social science discipline. There exist a common application in biology, anthropology, psychology, sociology, public administration, history and economy, with each of the disciplines proposing their own definitions and meanings that best suites the concept (Contel, 2015).
According to Hettne (2005), the process of regionalization develops in any particular region through five vital stages. To him a region can;
a) Exist in its physical and ecological features. To him, such an entity is a “proto-region” or “pro-regional zone”. A feature he remarked can be detected at this stage in that, there is no society existing at that particular time.
b) Exist in a sociological state. This is seen by the relations that exist between people that make up the region. The people depend on each other for collective security and manage their security affairs together.
c) Exist in the third stage as a collaboration in the fields of culture. Economy, politics and military. At this stage, the existence of the region has now become formal.
d) Be determined by those who are the major constituents of its civil society. Generally, the idea here is to show what type or style of system is adopted to assist in all forms of communication and formalization of the morals, norms and values of the region.
e) Exist in the final stage as a “region-state”. There, they have all come together and serve the functions of an independent state.
The word region as is used in West Africa today actually originates in Europe. According to Jonsson, Sven, and Gunnar (2000), the word was derived from a Latin verb “rego” meaning “to steer to rule”. A region can therefore be said to mean a “border”, “delimited space” or a “province” (Soderbaum, 2004).
A region can be said to be either micro or macro. According to Komla (2007), a micro region can be said to mean the division of a state or country into different parts for local administrative purposes, so that these parts form various regions of the country, while at the same time we have the national level authority E.g. Brazil the macro-region is “an area including territory from a number of different countries or regions associated with one or more common features or challenges (…) geographic, cultural, economic or other” (European Commission, 2009: 1and7). An example of macro region would be China (Stocchiero, 2010).
For peaceful coexistence of any region, there must be a sharing of things in common between members. According to Anderson and Northeim (1993), “while there is no ideal definition of a region, pragmatism would suggest biasing the definition on the major continents and sub-dividing them somewhat according to a combination of cultural, language, religious, and stage of development criteria. A similar view is shared by Cantori and Spiegel (1970) that states which have some common ethnic, linguistic, cultural, social, and historical bonds should be regions.
Region generally leads to regionalization as shown earlier by Hettne (2005). That notwithstanding, “the concept of regionalism which connotes the philosophies and goals that those in a particular region have, which are directed at creating and providing economic development, security, peace and political direction to that region” (Komla, 2007) cannot be over looked.
Regionalism normally involves the drawing of formal plans that guide the implementation of these goals and this often results in the establishment of formal institutions (Horem, 2000). Regionalism to an extent represents governance at different levels (Larner and Walters, 2002).
According to Payne and Gamble (1996), regionalism is a state-led or states-led project designed to reorganize a particular regional space along defined economic and political lines and that regionalism is seen as something that is being constructed, and constantly reconstructed, by collective human action.
2.1.2 Economic Regionalism
According to Aniche (2009), economic regionalism is a result of the need for integration states to enjoy the benefits of common market and custom union in which they erect uniform tariff walls against non-member states, while enjoying duty-free trade relatives between/ among themselves.
Nwanegbo (2005) states that the principal form of economic integration are free trade, customs union, common market, economic union and total unification, depending on the extent of surrender of national sovereignty by member states. According to Goldstein and Pevehouse (2008), “beyond free-trade areas, states may decide to embrace customs union by reducing trade barriers and adopting a common tariff toward states that are not members of the agreement. If members of customs union decide to coordinate other policies such as monetary union or exchange, the custom union becomes a common market (Aniche and Okeke, 2012).
Economic regionalism is the interface between neo-mercantilism and neo functionalism representing a shift from economic nationalism to economic regionalism or from nation-state to region state (Aniche, 2006; 2009). Hettne,(2005) describes a ‘region-state’ as a region that has a distinct identity, in terms of its supranational nature, potentials and authority while a ‘nation-state’ is defined as a state whose primary loyalty is to a cultural self-identity, which we call a nation or nationality (Pick,2011).
According to Nweke (2000), a noticeable trend in the post-cold war functionalist ferment has been the resurgence of new forms mercantilist policies, the most prominent features of which include various forms of restrictions to trade, otherwise known as protectionism not only in the European Union, but also in the dominant regions, especially North America and Pacific.
According to Mutharika (1972), the term integration literally means to bring parts of an object into a complete whole, while in economic terms, it would indicate, in the narrowest sense, the coordination of economic activities within a nation for the purpose of improving the development of that particular nation.
Mutharika further renders the term a wider meaning and indicates that it implies the process of integration of various economies in a given area or region into a single unit for the purpose of regional economic development. In a more precise way, economic integration occurs when two or more nations carry out policies that result in greater mutual economic interdependence. It follows that if such countries emanate from a single region or regional economic integration activities and/or process, these activities will be termed “regional economic integration” (Nagasi, 2009).
Regional integration or more crudely “regionalism” is “any policy designed to reduce trade barriers between a subset of countries regardless of whether those countries are actually contiguous or even close to each other” (Winter, 1996). Integration aims at abolishing discrimination between local and foreign goods, services and factors (Salvatore, 1997).
Economists have defined the term “economic integration” in various ways over time (Negasi, 2009). Economic integration is a process of eliminating restrictions on international trade, payments and factor mobility (Carbaugh, 2004). Economic integration thus results in the uniting of two or more national economies in regional trading agreements (Negasi, 2009). According to Biswaro (2003), regional economic integration involves the process of trade, economic and financial emergence of integrating states.
2.1.4 Regional Integration Origins
According to Negasi (2009), regional integration in sub-Saharan Africa is not a recent phenomenon. At least two union, the Southern African Customs Union and the East African Community have since 1910 and 1919 respectively been in existence. Regional integration agreements initially became fashionable in the 1960s, filling the formation of the European free trade Area in 1960 and European Economic Community in 1987. These were pursued by a large number of regional integration agreements in the developing world as well (Negasi, 2009).
In Africa, at the first two post-colonial meetings in June1960 and April 1988 and, African leaders adopted regionalism as one panacea for economic constraints posed by the smallness and fragmentation of national markets (Negasi, 2009). Nevertheless, history has shown that the first policies, not only failed in individual countries but also in the regional integration groupings. Such arrangements launched to later fall out of fashion in the 1970s, in part because the experiences were not successful (William, Andrew, Nehemiah and Walter, 1997)
However, according to Negasi, 2009), in the late 1980s and early 1990s, regional integration again became an attractive policy option, in both the developed and developing world (WHY?). In this regard, since the end of the cold war and the emergence of powerful trading blocs, there has been a renewed interest in Africa concerning the need to create strong Regional Economic Integration (REI) mechanisms to promote economic growth (Baldwin, 1997).
According to Economic Commission for Africa (ECA), (2006) even though the African union only recognizes eighth RECs (Regional Economic Communities), the continent currently has fourteen inter-governmental organisations (IGOs) working on regional integration issues with numerous treaties and protocols governing relations among them, and between member states.
2.1.5 Regional Integration and Trade
According to Seid (2013), “voluminous empirical works have been carried out on determinants of bilateral trade and the effect of regional trading arrangements (RTAs) since the seminal work of Tinbergen. He posited that “Tinbergen (1962) applied gravity model to analyse the trade flows among 42 countries and found that distance elasticity of trade flow of around -0.89 and the GDP of the exporting and importing countries impact the trade flows positively as expected.
Going further in another analysis, Eirchengreen and Irwin (1995) applied the gravity model in a dynamic framework. Countries with a history of trading with one another whether for reasons related to politics, policies or other factors, tend to continue trading, in line with their expectation and argument, the authors find that lagged bilateral trade stimulate present trade between partners even after controlling for the arguments of the traditional gravity model” (Seid, 2013). Eichengreen and Irwin (1995), therefore stand on the premise that any act of omission, whether deliberately or otherwise of historical factors governing trade between these neighbours overstate the impact of trading blocs.
The gravity model of trade was used exclusively in Africa. Frankel (1997) used the same model when investigating the role that regional integration arrangements played in trade flows. In an analysis involving the European Community, Association of South-East Asian Nations (ASEAN), Mercosur, Australia-New Zealand etc., he found a strong and statistically significant effect of trading blocs on bilateral trade. Interestingly, Frankel’s findings shows that despite the high level of intra-European Community (EC) trade in the 1960s and 70s, most of this trade is explained by country size, level of economic development, proximity, contiguity, and common language (Seid, 2013).
From the preceding position, Seid (2013) therefore says that, “after controlling these variables, there is little intra-trade left to be attributed to the European Community until the 1980’s. According to him, “Frankel found a clear upward trend in the bloc effect of Mercosur. The effect of this regional arrangement is not statistically significant, especially in 1990. Mercosur member states trade among themselves seven times as much as before.
In a different work, Cheng and Wall (2005) compared the different specifications of gravity model of trade. They went further and examined the various impacts of regional integration on trade volumes by taking five regional trading blocs. They found out that the effect of European trade blocs on trade volume was at a modest rate. According to Seid (2013), they used a fixed effect model to analyse these five trading blocs which were comprised of the European trading bloc, Mercosur, the Australian-New Zealand Closer Economic Relations, and the Israel-USA Free trade arrangement.
In another research in Africa, Alemayehu and Haile (2008) reviewed the prospects and challenges of African regional integration with an interest on the testing of the determinants of bilateral trade flows. Their result revealed that the usual gravity model variables which included the GDP of the exporting and importing countries, the bilateral distance and border, all have the expected sign(s). It also confirmed the ‘Linder Hypothesis’ that similar countries trade more. Policy variable like broad money as percentage of GDP has positive impact on bilateral trade. But against the expectation, the regional integration dummy is found to have insignificant negative coefficient implying that regional trading blocs in Africa fail to promote intra-regional trade. (Seid, 2013)
Yeats (1997) examined the determinants of trade flow and intra-regional trade potential in Sub-Saharan Africa and the accompanying concentration of intra-regional trade. The result of their research showed that cross-border trade accounted for the larger share of intra-regional trade. In a related discovery, distance was also found to be the factor behind the concentration of bilateral trade between countries in the continent.
The study of Yeats proved that there existed, already, a high level of Sub-regional concentration of intra-African trade, with countries in various trading blocs, trading less with each other. Again, the structure of the country’s exports match that of the imports of other countries on the continent very poorly. Yeats argues that the actual trade between countries of various trading blocs in Sub-Saharan Africa is more than its potential given the existence of trade barriers, absence of infrastructure, low complimentary of countries tradable goods (Seid, 2013)
De Rosa (2008) investigates determinants of bilateral merchandise trade flow and inward stocks of foreign direct investment applying the gravity model variables. De Rosa (2008) includes according to Seid(2013) ‘dummy variables to control for the impact of regional economic communities on trade and FDI and being landlocked as expected reduce bilateral trade and investment’.
According to Makochekanwa (2012), in an analysis of the impact of regional trade agreements on intra-trade in selected agro-food products, geographic distance impacts the intra-regional trade in these food products negatively. He further shows that aside from the traditional determinants of bilateral trade, there are positive and significant coefficients for the regional trading blocs which imply that these trading blocs promote intra-regional trade in the commodities.
2.1.6 Impact of Regional Economic Integration on Growth and Investment
In a study of East Asian economic integration, in December 2007, two reasons are given about rising incomes in all the newly industrialized components of East Asia. The first was creating an incentive for these countries’ economies to relocate the labour incentive stages of production to lower wage countries, while the second was a reduction in information and transportation costs.
Di Mauro (2000) also covered the theory of Foreign Direct Investment (FDI), expected impact of economic integration. The theory of FDI has received more and more interest from economists and policy makers. Here, FDI are recognised as main channels of economic integration. Heaney (1999) emphasized the concept of regionalism while the second was a cluster analysis of stock market returns.
Cluster analysis involves searching for ‘natural’ groupings among objects and is a more inductive approach, rather than regressing natural stock markets with the world market portfolio (Goel N and Goel A. 2014)
2.1.7 Impact of Regional Economic Integration on Economic Development
According to Draper (2010), regional economic integration can be divided into four;
a) The African development challenge: Here, he shows that the challenges facing Africa’s development are varied.
b) The politics of regional economic integration: Here, the regional economic integration is looked at in terms of liberal peace. By liberal peace, he invariably tries to compare African political economic scenes.
c) Economic theory concerning regional economic integration amongst poor countries
d) Propositions towards a solution to the African economic integration process.
In another research, Hartzenberg (2011) talks mainly about the role of regional economic integration in Africa. In his words ‘there is much support from African governments for regional integration and it is an important component of their economic strategies. Traditionally, the European union was Africa’s first most import trade, investment and development partner’.
That notwithstanding, there is an ongoing paradigm shift in Africa. The African paradigm shift is that of linear market integration, following stepwise integration of goods, labour and capital markets, and eventually monetary and fiscal integration. The starting point is usually a free trade area, followed by a customs union, a common market and then the integration of monetary and fiscal matters to establish an economic union. Most Africa’s countries have low per capita income levels and small populations which result in small markets but transport costs in Africa are still among the worlds highest. Lack of skills, capital to establish and operate sophisticated modern communication systems. (Goel N. and Goel A., 2014)
2.1.8 Recipe for Fostering Regional Integration through Infrastructural Development and Coordination In West Africa.
According to Odularu (2005), regional integration models in Africa are recording more progress than ever before as the continent experienced unprecedented growth in the last two decades. An OECD report (2005) shows that more than half of total trade worldwide takes place through the regional trade blocks and figures show that trade under this system grew from 43% to 60% between 2001 and 2005.
In the words of Odularu et al (2014), “Africa is a continent that is physically and institutionally challenged in terms of adequate provision of infrastructure”. This unfortunate situation affects growth on this continent because different studies have continued to emphasize the role of infrastructure on economic development (Perkins et al 2005).
Bano (1990) and Jimence (1995) and assert that expenditure on infrastructure raises the marginal product of other capital expenditure within the economy. Investing in infrastructure though vital, can be very costly and this was supported by findings of a study carried out by Rosenstein-Rodan (1943).
Morrison and Schwartz (1996) confirm that a decrease in infrastructure investment reduces the productivity growth impacts of public infrastructure. In constructing a model for the technology and behaviour of firms and applying it to state-level data for the manufacturing sector in the U.S.A, they find that investment in infrastructure results in a significant return to manufacturing firms, increasing their productivity (Odularu et al, 2014).
According to Bongolia et al (2010), infrastructure investment contributes positively to total factor productivity growth, output and cost reduction, with investment in transportation, being most productive. A study by Pereira and Sagales (1999) further supports the need for infrastructure investment, suggesting that public investment has a positive effect on private investment, employment, and output at both aggregate and regional level.
The cost of trading between any two countries can be greatly augmented by the time it takes to search for information to enter into and enforce agreements, transporting the goods or products once they have been acquired and the time it may take for the other party to receive them (Nordas and Piermatini ,2004). They further state that countries that share a common language and have similar cultural characteristics will tend to understand and know more about each other and this is likely to cause such countries to trade with each other. Thus, common language and culture also make the flow of information relatively easy (Odularu et al, 2014).
Rauch and Trinidada (2003) argue that the emergence of the information economy has contributed to the reduction of search costs to a large extent. The ease of flow of electronic communication is however contingent on the trading partners having good access to telecommunication infrastructure.
Although information technology makes transaction and communication easy, there is still a need to physically move commodities from one point to the other and this makes distance an important variable in trade flow analysis. (Odulani et al 2014). Distance from the primary market and high cost of transport as a result of lack of infrastructure affects the competitiveness of most African countries (Ndulu et al, 2005).
Again, some studies show that a relationship exists between the quality of infrastructure in a particular country and the cost it imposes on trade and how adequate infrastructure can boost economic growth. Clark, Dollar and Micco (2004), discovered the quality of infrastructure has a positive and significant impact on trade. According to Nordas and Piermatini (2004), these studies show an overall measure of infrastructure quality or just maritime infrastructure, and express the need for more individual variables.
In a study by the World Bank (2001), the results show that 168 of the 216 trading partners of the USA had their transport costs much higher than the tariff bankers. This is more pronounced in most countries in Sub-Saharan Africa (SSA), where findings reveal that the transport cost incidence for exports was five times more than the tariff cost incidence (Udulani et al, 2014).
Limad and Venables (2001) carried out a study on a cross section of countries, controlling for the quality of transit-country infrastructure and they show that poor infrastrucy=ture acoounts for about 40% and 60% of predicted transport costs for coastal and landlocked countries respectively.
Other variables that may affect intra-regional trade include common border, languages and colonial histories, which have positive effect on bilateral trade (Nordas and Piermartini, 2004). Carrere (2006) also suggests that SSA and ECOWAS landlocked countries will trade 28% less than their coastal counterparts and Raball (2003) reveals that being landlocked reduces trade by more than 80%.
This was mainly as a result of the way in which the land lock variable was represented in the study, focusing on bilateral trade between two land locked countries. Randelet and Sachs (1999) in their study on 97 developing nations, discover that transport and insurances costs were twice as high for landlocked than for coastal countries.
According to Odulani et al(2014), Africa has in summary various challenges in terms of regional trade integration such as a lack of capacity of staff at border posts, delays at borders, lack of adequate infrastructure, poor condition of roads, under developed telecommunication and energy sectors that cause final prices of products to be inflated.
2.2 THEORETICAL FRAMEWORK
The “effects” of regional economic integration shall be used as a theory for this study.
In theory, any sort of entry into any regional integration arrangement can have the dual effects of static or dynamic conditions. According to Negasi (2009), much of the theoretical literatures belong to the static effects of trade integration, especially in the context of a customs union. He further said that the work he was researching was also biased more towards retrieving the static effects of regional integration effects. However, in the words of Hine (1994), dynamic effects are more significant given that the changes they constitute are cumulative, rather than simply once and for all adjustments. Negasi (2009) further said that although these dynamic factors are identified as potentially important, there is no consensus as to a single adequate model to treat the issue.
Static Effects: In this scenario, we rely on the assumption that productive efficiency is enhanced if states undertake economic production in areas where they have relative advantage to others, thus rationalizing costs and prices. In general, economic theories view existence of tariffs and quotas as hostile to free flow of goods within a region (Negasi, 2009). Going further, he posts that sates form various regional schemes as the ‘second best’ trade policy to minimize distortions in trade and enjoy the fruits of it.
The static impact, Negasi (2009) further posts refers to changes occurred in the equilibrium markets price, and quantity before and after the creation of the economic block. This can be a trade creation or trade diversion. For a given product, trade creation appears when high cost production is substituted by low cost production because of regional integration while economic diversion occurs when low cost production is substituted by high cost of production.
Chine (1978) takes into account only trade-creation and trade diversion effects as traditional gains. On top of these traditional static effects from regional trade integration, which are as follows; labour opportunity effect, economies of scale effect and foreign exchange saving effect.
In related studies, static gains are discovered from regional trade integration, depending on the models used. Following the classification of Balodian and Venables (1995) and that of Lloyd and Maclaren (2004), the models assuming perfect competition and constant returns to scale identify that trade volume, trade cost and terms of trade as beneficial effects of regional trade integration. However, models assuming imperfect competition and increasing returns to scale identified benefits from regional trade integration in the form of output, scale and variety effect (Negasi, 2009).
Dynamic Effects are felt more gradually but exist longer than static effects. There are few reasons for these. First, there is the competition effect, brought about by freeing imports from partner countries. Second, there is the investment effect, which appears when there are new foreign and domestic investments that have not occurred in the absence of regional trade integration. Third, the larger market provides greater possibilities for the exploitation of economies of scale. Fourth, there is an effect on capital formation, possibly through various channels: reduction barriers to diffusion, technological transfer, externalities from export growth, rising marginal product of capital and so on. Fifth, the union members acting as a group may be more able to influence the terms of trade they face. Lastly, there is the structural transformation effect, which is a shift from traditional primary-products exports to new industrial-products export.
In contrast to the static effects of regional trade integration, the dynamic effects are presumed to continue to generate annual benefits, even after the withdrawal of a country from the union. For instance, a rise in the growth rate made possible by integration will have continued effects provided that is sustained (Negasi, 2009).
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