, Lead Economist Infinite Sum Modeling, USA
, PhD, Professor of Economics, Business School, Executive Business Centre, Bournemouth University, Bournemouth, UK
, PhD, Economist, School of Environment and Forestry Sciences, University of Washington Seattle, USA
This paper summarizes the arguments and counterarguments within the scientific discussion on the weak growth of labor productivity in poor but open economies. The main purpose of the research is to estimate the welfare effects of the reciprocal preferential trade liberalization between Sub-Saharan Africa and the industrialized countries, taking into account the differences in labor productivity be-tween the two trading blocs. Systematization literary sources and approaches for solving the problem of estimating the impacts of trade liberalization indicate that both trading partners shall benefit from trade liberalization assuming that their labor productivity growth rates are the same or remain un-changed. The relevance of the decision of this scientific problem is that the difference in labor productivity growth rates may grow over time and lead to inaccurate estimates of trade impacts on which many poor households’ welfare hangs. Investigation of the topic of trade liberalization and labor productivity nexus in this paper employs a General Equilibrium modeling framework relying on GTAP Data Base with eight aggregated sectors and thirteen aggregated regions. We analyze several scenarios based on different productivity growth paths under reciprocal tariff elimination. Methodo-logical tools of the research methods were the results of seven years of research on modeling, data gathering and projection. The object of research is the impact of the negotiated reciprocal preferential access between the industrialized countries and Sub-Saharan Africa markets, because such preferen-tial access permits the study of how the growing differences in labor productivity growth affect trade between poor and rich countries. The results show that Sub-Saharan Africa would lose about USD 12.6 billion per year if the region continues to trade under its current, low growth rates of labor productivity; the welfare losses occur mainly in Sub-Saharan Africa’s manufacturing sector. Elimina-tion of reciprocal tariff with the European Union would cut the loss but only by USD 1.2 billion. The loss would be further cut by USD 2 billion if Sub-Saharan Africa agreed to a reciprocal tariff with not just the European Union, but all the industrialized countries. These gains, albeit significant, remain largely insufficient to cover the USD 12.6 billion loss. Our estimates suggest that Sub-Saharan Africa requires at minimum a sustained 3 per cent growth rate of labor productivity per year in its manufac-turing sector to generate positive allocative efficiency and endowment effects from trade with the industrialized countries. The research empirically confirms and theoretically proves that trade liberal-ization is not a panacea for welfare improvement. If poor countries want to benefit fully from recip-rocal preferential trade liberalization, they need to improve on their labor productivity. The results of the research can be useful for trade negotiation and pacts between poor and rich countries and espe-cially for providing tools to help poor countries measure how much efforts and which sector they need to devote and target in order to achieve greater benefits from trade.
Keywords: labor productivity, reciprocal trade preference, trade policies, Sub-Saharan Africa, welfare.
JEL Classification: F13, F66, O6.
Cite as: Rakotoarisoa, M.A., Khorana, S., Narayanan, B.G. (2019). Trade Liberalization – Labor Productivity Nexus: The Case of Sub Saharan Africa. SocioEconomic Challenges, 3(1), 5-26. http://doi.org/10.21272/sec.3(1).5-26.2019.
- Acalà, F. and A. Ciccone A. (2004). Trade and Productivity. Quarterly Journal of Economics, 119, 613-646.
- Alessandri, P. (2000). European and Euro-Mediterranean Agreements: Some Simulation Analysis on the Effects of the EU Trade Policy, CESPRI Working Paper No. 110, Universita Commerciale Luigi Bocconi, Milan.
- Bagwell, K. and Staiger, R. (1999). An Economic Theory of GATT. American Economic Review, 89(1), 215-248.
- Bhagwati, J., Krishna, P. and Panagariya, A. (1999). Trading Blocs: Alternative Approaches to Analyzing Preferential Trade Agreements. MIT Press, Cambridge, Massachusetts.
- Anderson, J. and van Wincoop, E. (2004). Trade Costs. Journal of Economic Literature, 42(3), 691-751.
- Bora, B., Cernat, L. and Turrini, A. (2002). Duty and Quota-Free Access for LDCs: Further Evidence from CGE Modelling. Policy Issues in International Trade and Commodities, Study Series No. 14 UNCTAD/ITCD/TB/15, UNCTAD, Geneva.
- Brown, D., and Stern, R. (1989). U.S.-Canada Bilateral Tariff Elimination: The Role of Product Differentiation and Market Structure, in Trade policies for International Competitiveness, ed. Robert, C. Feenstra, pp. 217-45. Chicago: University of Chicago Press.
- Brown, D., Deardorff, A. and Stern, R. (1994). Estimates of a North American Free Trade Agreement, unpublished working paper, Federal Reserve Bank of Minneapolis.
- Busse, M., Borrmann, A. and Großmann, H. (2004). The Impact of ACP/EU Economic Partnership Agreements on ECOWAS Countries: An Empirical Analysis of the Trade and Budget Effects’ Technical Report, Hamburg Institute of International Economics. Report Prepared for the Friedrich-Ebert-Stiftung.
- Coe, D., Helpman, E. and Hoffmaister, A. (1997). North-South R&D Spillovers. Economic Journal, 107, 134-149.
- Coe, D., and Helpman, E. (1995). International R&D Spillovers. European Economic Review, 39, 859-887.
- COMESA Secretariat (2003). Status of EPAs Negotiations, Lusaka, Mimeo.
- Dicaprio, A. and Santos-Paulino, A. (2011).Can Free Trade Agreements Reduce Economic Vulnerability?’ South African Journal of Economics, 79(4), 350-375.
- Dessus, S., and Suwa-Eisenmann, A. (1998). Trade Integration with Europe, Export Diversification and Economic Growth in Egypt. Working Paper No. 135, OECD Development Centre, Paris.
- Eicher, T., and Henn, C. (2011). In Search of WTO Trade Effects: Preferential Trade Agreements Promote Trade Strongly, but Unevenly. Journal of International Economics, 83, 137-156. 11 doi:10.1016/j.jinteco.2010.12.002.
- Fox, A. (1999). Evaluating the Success of a CGE Model of the Canada-U.S. Free Trade Agreement. Unpublished Working Paper, University of Michigan.
- Harrison, G., Rutherford, T. and Tarr, D. (1996). Economic Implications for Turkey of a Customs Union with the European Union. Policy Research Working Paper 1599, World Bank, Washington, DC.
- Hertel, T. (1997). Global Trade Analysis: Modelling and Applications. Cambridge University Press.
- Hertel, T. and Tsigas, M. (1997). Structure of GTAP. Chapter 2 in T. Hertel (ed.). Global Trade Analysis: Modelling and Applications, Cambridge University Press, 1997 Press.
- Ianchovichina E., Mattoo, A., Olarreaga, M. (2001). Unrestricted Market Access for Sub-Saharan Africa: How Much is It Worth and Who Pays? Journal of African Economies, 10(4), 410-32.
- Karingi, S., R. Lang, N. Oulmane, R. Perez, Jallab, M. and Hammouda, H. (2005). Economic and Welfare Impacts of the EU–Africa Economic Partnership Agreements Africa, Trade Policy Centre, United Nations Economic Commission for Africa.
- Kehoe, T.J. (2003). An Evaluation of the Performance of Applied General Equilibrium Models of the Impact of NAFTA. Federal Reserve Bank of Minneapolis Working Paper No. 320.
- Kerkala, L., Niemi, J. and Vaittinen, R. (2000). Renegotiating the Lomé Convention-Trade Policy Schemes and Their Effects for African Regions. Helsinski School of Economics and Business Administration.
- Krueger, A. (1999). Trade Creation and Trade Diversion Under NAFTA. NBER Working Paper No. 7429.
- Lederman, D., Maloney, W.F. and Serven, L. (2005). Lessons from NAFTA for Latin America and the Caribbean, Stanford University Press and the World Bank, Latin American Development Forum Series: Palo Alto, California and Washington, DC.
- Lewis, J., S. Robinson, S., and Thierfelder, K. (1999). After the Negotiations Assessing the Impact of Free Trade Agreements in Southern Africa. World Bank. Washington, DC:.
- McDonald, S., and T. Walmsley (2003). Bilateral free trade agreements and Customs Unions: the impact of the EU Republic of South African free trade agreement on Botswana. GTAP Working Paper No. 29, Centre for Global Trade Analysis, Purdue University, West Lafayette.
- Milner, C., Morrissey, O. and McKay, A. (2005). Some Simple Analytics of the Trade and Welfare Effects of Economic Partnership Agreements. Journal of African Economies, 14(3), 327–358.
- Nayaranan, B., Hertel, T. and Horrige, M. (2009). Disaggregated Data and Trade Policy Analysis: The Value of Linking Partial and General Equilibrium Models. GTAP Working Paper no. 56.
- Narayanan, B. and Walmsley, L. (2008). Global Trade, Assistance, and Production: The GTAP 7 Data Base, Center for Global Trade Analysis, Purdue University.
- Ndlela, D. and Tekere, M. (2003). Impact Assessment of Economic Partnership Agreements on Southern African Development Community and Preliminary Adjustment Scenarios. Harare, Zimbabwe: Trade and Development Studies Centre.
- Nilson L. (2002). Trading Relations: Is the Roadmap from Lomé to Cotonou Correct? Applied Economics, 34, 439-452.
- Rolleigh, M. (2008). Plant Heterogeneity and Applied General Equilibrium Models of Trade. Unpublished Working Paper, Williams College.
- Romalis, J. (2007). NAFTA and CUSTFA’s Impact on International Trade. Review of Economics and Statistics, 89(3), 416-435.
- Rose, A.K. (2004). Do We Really Know that the WTO Increases Trade? American Economic Review 13(4), 682–698.
- Rose, A.K. (2005). Which International Institutions Promote Trade? Review of International Economics 13(4), 682–698.
- Shikher, S. (2011). Capital, Technology, and Specialization in the Neoclassical Model. Journal of International Economics, 83(2), 229-242.
- Subramanian, A. and Wei, S. J. (2007). The WTO Promotes Trade, Strongly but Unevenly. Journal of International Economics, 72(1), 151-75.
- Tomz, M., J. Goldstein and D. Rivers (2007). Do we really know that the WTO increases trade? Comment. American Economic Review, 97 (5), 2005–2018.
- van Dijk M. (2013). Productivity Growth at the Sectoral Level: Measurement and Projections. Selected Paper for the 16th Annual Conference on Global Economic Analysis. GTAP Conference Paper, Resource #4106.
- van Meijl, H. and van Tongeren, F. (1999). Endogenous International Technology Spillovers and Biased Technical Change in Agriculture. Economic Systems Research, 11, 31-48.
- Viner, J. (1950). The Customs Union Issue, New York: Carnegie endowment for International Peace.