The Impact of Global Trade on the Economic Growth of Cameroon

Project Details

Department	ECONOMICS
Project ID	ECO021
Price	5000XAF
Price	International: $20
No of pages	72
Instruments/method	Quantitative
Reference	YES
Analytical tool	Descriptive
Format	MS Word & PDF
Chapters	1-5

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ABSTRACT

The study examines the impact of international trade on the economic growth of Cameroon .The model specified economic growth measured by gross domestic product as dependent on international trade proxy by imports, exports, domestic savings and exchange rate. Annual time series data from 1980-2013 was sourced using secondary data and analyzed using Ordinary Least Square (OLS) estimation technique. It was evidenced that international trade has a significant positive impact on economic growth. Imports and domestic savings have significant effect on the economy where as export and exchange rate have no significant effect on the economic growth of the country. The study demonstrates that increasing participation in the global trade helps Cameroon reap the static and dynamic benefits, stimulating rapid national economic growth. Thus recommendations that government should relax tariffs, embargoes and custom duties as this will encourage trade with the world market and also the government should encourage domestic savings in banks, private institutions and the public so as to raise the growth level in the economy.

CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

With the world having evolved into a global village, it is a precept for a nation to be in alliance with other nation(s). One of the coherent ways to create such an alliance between or among nation is via international trade. International trade allows for the exchange of goods and services cum foster healthy relations among countries irrespective of their level of economic development. A country involved in international trade need not have fear of hegemony or loss of its sovereignty because it is a mutual agreement to engage in trade across their border. A nation not participating in international trade is at risk of a slow pace of economic development due to the cogent fact that a country cannot be fully endowed with all the resources essential to be utilized for sustainable economic development. (Ado-Ekiti, 2014)

International trade can be interchangeably referred to as ‘foreign trade’ or ‘global trade’. It encompasses the inflow (import) and outflow (export) of goods and services in a country. A Country’s imports and exports represent a significant share of her gross domestic product (G.D.P); thus, international trade is correlated to economic growth. In an open economy, development of foreign trade greatly impacts GDP growth (Li, Chen & San, 2010). Countries would be limited to goods and services produced within their territories without international trade. International trade is directly related to globalization because increase in trade activities across border is paramount to the globalization process. (Ado-Ekiti, 2014)

The globalized nature of an economy enhances its direct participation in the world market consequently leading to market expansion. According to Adam Smith, expansion of a country’s market encourages productivity which inevitably leads to economic growth. It can be said that the positive effects of International Trade (IT) on Economic Growth (EG) were first pointed out by Smith (1776). This idea prevailed until World War II (WWII), although with relative hibernation during the ‘marginality revolution’. After WWII, the introverted and protectionist EG experiments had some significance, especially in Latin America. From the 60’s on, owing to the failure of those experiments and to the association of quick EG with the opening of IT and the consequent international specialization in several countries, as well as to the results of many studies based on the neoclassical theories of EG and IT, a new decisive role was given to IT as EG’s driving force. (Afonso,2001)

However, although the dominant theoretical position tended, from the beginning (with the Classics), to indicate a positive relation between IT and EG, many studies linked the gains of IT only with static effects. But Baldwin (1984), for example, concluded, in a survey of empirical studies, that the static effects were of little significance. The debate has widened in the last decades, precisely in the direction of pointing out and stressing dynamic effects of international trade. The theoretical development afforded by the models of endogenous Economic growth (especially after the works of Romer (1986) and Lucas (1988)), which stimulated the creation of empirical studies, moved toward an integrated analysis of the Economic Growth and International Trade theories.

As such, the classical tradition, apparently interrupted by the neoclassical separation of those two areas of the theory, seems to have been recovered, assigning, as a result, a decisive role to International Trade on the countries’ rate of Economic Growth. The recognition of this importance has even led to the ceaseless appearance of proposals from international organizations, such as the World Bank (WB) and the United Nations. International trade is seen to have started in the 15^th century with the emergence of nation states like Britain (1485-1509), Spain (1464), Germany and Italy (1870) and France (1453). Due to the emergence of these nations they were forced with the problem of consolidating their authorities as such, they had to carry out trade which could generate income for them to run their economy. The volume of international has increased as all nations in the world are trading international. They are either exporting to other nations or gaining foreign exchange importing from other nations and spending their currency. For 1990, the volume of trade amongst countries in goods and services measure in dollars has surpassed four trillion dollars. In the year 2000, the growth rate of the world trade merchandise was around 10% and double the rate recorded in 1999 and this was due the resumption of economic activities in Western Europe (WTO, 2007).

Trade liberalization is an important component of Structural Adjustment Programmed (SAP) which aimed at opening up economics to increased international trade (because it a policy that encourage the production of locally made goods and services that will further enhance international trade) by either producing or eliminating protection for domestic industries ( Australia, 2006). In support of this, Ajayi (2003) reports that the removal of barriers to trade has increased the flow of trade by 16 per cent fold in the last 50 years, with the world exports of goods and services almost tripled in real terms between 1970 and year 2000.

Ruoen (1995) and Woo (1998) argue that the official GDP deflators are biased and tend to understate inflation. Using an alternative price deflator series and adjusting alternative labor market participation data, Young (2003) finds that China’s growth rate over the reform period 1978-98 is reduced significantly from Official figures.

Most of the African countries adopted structural adjustment programs during the Bretton Woods era which were made up of rapid and extensive liberalization, deregulation and privatization of economic activity in search of a solution to the stagnation and decline (UNCTAD, 2001).Trade in Africa as a share of GDP increased from 38% to 43% between 1988 to 1989 and 1999 to 2000, respectively.

The marginalization of the African continent is the outcome of the interaction of declining terms of trade with the inability of the region to expand its productive capacity and shift to dynamic products. The region has been resisting open trade regimes. African countries need to focus on growth enhancing policies including promotion of exports of dynamic products. Africa’s economic growth was relatively slow from the mid 1960sright up until the end of 1970. As a result of structural and institutional bottlenecks, adverse external developments and policies in the early 1980s, Africa’s economic situation became progressively worse (UN, 2001).

Africa’s GDP growth trend is closely linked with its exports volumes to other parts of the world. The growth rate was slow during the 1960s to the mid 1970s compared to the global average of 6.1%; this caused the region’s export share in the global market to decline to about 3.1% which is almost half of the original growth rate. But with time, as most African countries began to open up their markets to the rest of the world, the share of exports in GDP has reversed its descent (Anderson et al; 2008).

The United Nation Council for Trade and Development (UNCTAD) which is the only trade agency for the United Nations that deals with trade, investment and development issues is made up of 191 member states help to foster trade in the world. . The World Trade Organization (WTO), which is based in Geneva established in 1995 seek to encourage the reduction in trade restrictions and to settle trade dispute amongst member state, smooth trade and to help to administer trade agreement between nations and act as a forum for trade negotiations. In Central Africa, the Central African Economic and Monetary Community (CEMAC) is the Organization that help to foster trade in Central Africa and Cameroon became a member in 1972. (Njikamp, 2009).

Cameroon is a small developing country whose economy depends heavily on agricultural export commodities, the most important being coffee (Tambi, 1999; Nchare, 2007). Coffee is a typical global good with a highly competitive market. In Cameroon, coffee revenue accounts for some 20% of total export earnings, 10% of agricultural GDP, and 2% of national GDP. However, sustained fluctuations in export earnings have raised concern on the country’s earnings, growth prospects and debt servicing. Cameroon experienced a boom in its renewable and exhaustible natural resource exploitation from the mid-1970s to the end of the 1980s.(World Bank, 2008)

However, since the earnings from natural resource exploitation especially that of crude petroleum were lodged into a stabilization fund, Cameroon escaped the wrath of the Dutch Disease (Coden,1984) by concentrating its efforts on the traditional sectors. Agricultural policies were pursued with sustained efforts as if Cameroon were anarchy typical agrarian economy. The coffee sub-sector received undue attention during this period given its employment and revenue generation potential. Whether these efforts and programs promoted agricultural productivity and profitability at the household and farm gate has been the object of some scholarly investigations (Tambi, 1999; Nchare, 2007).

Agricultural productivity is central to Cameroon’s export industry. Owing to the fertile land, almost 70% of Cameroon’s population is engaged in agriculture. The petroleum sector also owns a major share in the total export volume. Cameroon does not have considerable oil reserves like other sub-Saharan countries. However, it exports a major share of the petroleum production. Based on 2009 estimates, the country has a total export volume in excess of US $4.8 billions. Spain is the major export partner with 19.4% share, followed by Italy, US, France and Netherlands. Apart from petroleum, major export items are lumber, cocoa, aluminum, coffee and cotton. The country ranks 110 in the export of merchandising and 126 in the export of commercial services. (Moula, 2002)

During the 1990s Cameroon consistently ran trade surplus though these varied according to commodity prices. In 1999, for example, exported goods totaled almost US$2 billion, while imported goods amounted to almost US$1.5 billion. A surge in oil prices contributed to a 30 percent rise in the value of Cameroon’s exports during the late 1990s. At the same time, lower revenues from cocoa and rubber were offset by increased revenues from coffee, cotton, and aluminum. In 1999-2000, oil provided nearly half of the country’s export revenues, while agricultural products provided an additional 25 percent, lumber 16 percent, and aluminum 5 percent. The European Union is Cameroon’s biggest trading partner. It supplies most of Cameroon’s imports, while receiving over 80 percent of its exports. All of Cameroon’s principal exports—including oil, coffee, cocoa, bananas, cotton, lumber, and aluminum—travel primarily to European ports.(UNCTAD, 2005)

In 1999-2000, 22 percent of Cameroon’s exports went to Italy and another 16 percent to France. Cameroon also exports a variety of fruits, vegetables, and manufactured goods to neighboring countries. France has historically supplied the largest share of Cameroon’s imports, which include machinery, processed food products, transport equipment, fuel, food and electrical equipment. France is the largest import partner of Cameroon, accounting for more than 21% of the total import volumes, based on 2008 statistics. Nigeria, China and Belgium also have significant share in Cameroon imports. In 2009, Cameroon’s import volume grossed at US $4.3 billion, as against US $3.7 billion in 2008. Thus due to the links created by Cameroon and other countries, it has enhanced both the importation and exportation of products in both countries leading to and increase in economic growth and development in the economy.

1.2 Problem Statement

Since there is no country which is self-sufficient and in a state of autarky, one nation has to trade with many others so as to enjoy goods and services with a comparative disadvantage in its production. This is the case with Cameroon where a majority of her labor force is employed in the agricultural sector while few others are employed in the manufacturing and tertiary sectors. With the large labor force and other favorable natural conditions, it gives her a comparative advantage in the specialization in agricultural products such as cocoa beans; coffee, cotton, and oil which are predominant in Cameroon’s exports sheet. Petroleum accounts for more than 50 per cent of the country’s total exports. Others include: natural gas, aluminum and gold. Cameroon’s main export partner is the European Union (EU) (45 per cent of total exports). Others include: China and the United States. Cameroon for several years has experienced an economic recovery from the exportation of agricultural products (coffee, cocoa, banana, cotton). But this sector was seriously affected by a fall in world prices of primary products which led the country into serious crisis in the late 1980s.

This is fundamentally from the fact that the country depends solely on the proceeds from this sector for the wellbeing of her nationals. After the budgetary year of 1985 to 1986; the Cameroonian economy went into serious recession where all economic indicators experienced a heavy drop in revenue from exportation. This drop affected petroleum as well as other primary products that were exported at the time. This drop was estimated at about 329billion FCFA, this being about 8.2% of the Gross Domestic Product (GDP). The economic sector even further worsened during 1986-1987 due to the persistent drop in the price of the main products exported (Petroleum, coffee, cocoa, banana, cotton).

Given the then structure of the economy, macroeconomic imbalances ensued in the late 1980s and these negatively impacted on demand management, exchange rate, external financing and aggregate output levels. In the early 1990s Cameroon embarked on structural adjustment measures with the purpose of stimulating economic recovery, on the assumption that macroeconomic stability will enshrine economic stability, brought on by reduced internal budget deficits. Since 2000, GDP has grown on average by about 4% a year. The new optimism on the state of Cameroon’s economy is founded on the improved public finances. In 2004, receipts of US$ 2.5 billion accrued over expenses of US$ 2.3 billion.

Despite the cautious optimism that Cameroon is emerging from its long period of economic hardship, the country still has a precarious trade balance with key trading partners such as Spain (recipient of 16% of Cameroon’s exports), Italy (14%), France (10%), UK (10%), USA (11%) and Netherlands (6%). Export revenue of US$2.5 billion was realized in 2005, from an export basket that comprised principally: crude oil and petroleum products, lumber cocoa beans, aluminum, coffee and cotton. Agriculture remains the backbone of the economy, with an average share in GDP and in total exports approximating 25% and 60% respectively.

The economic growth rate was hence forth negative with exchange rate dropping by half between the years 1985 to 1988 (BEAC, 1989). However we would realize that from the time immemorial of most agricultural exports in Cameroon, Cameroon had witnessed a substantial drop in revenue due to fluctuations in world prices. These products became less competitive as compared to manufactured goods bought from other countries, thus leading to an unfavorable terms of trade. This has strongly affected their share contribution to economic growth in the country.

The above issue raised brings us to the focal point of this research work which is to examine the contribution of international trade to economic growth of Cameroon with a case in point being importation and exportation of goods, exchange rate and domestic savings. These problems are transformed into the following research questions;