CHAPTER ONE INTRODUCTION
1.1 Background to the study
There is scarcely any nation that can develop and grow in isolation. From colonial times to the present, nations and regions of the world have continued to collaborate with each other in the areas of trade, investments, science, technology, agriculture, health, education among others. They have formed and entered into various economic co-operations, collaborations, partnerships, joint venture agreements, which have remained catalysts for economic growth and freedom (Akpan and Effiong, 2012). These co-operations and agreements are results of deliberate policies of various governments to allow free flow of trade (in goods and services) across their national borders.
According to the World Trade Report (2013), world merchandise trade and trade in commercial services were worth in 2011 about USD 18 trillion and USD 4 trillion, respectively, despite global economic adversities, natural disasters, and political upheavals around the world. In the last three decades, world trade has grown dramatically and much faster than global output (Rueben and Arene, 2013). Between 1980 and 2012, world merchandise trade has increased by more than 7% and trade in commercial services, by about 8% per year (WTR, 2013). With such unprecedented growth in global trade, It is becoming increasingly obvious that strength lies in international co-operation amongst countries, particularly those within the same geographical regions, and that the world is experiencing the second age of globalization after the long and deep fall in the global economy that occurred between 1914 and 1945 due to two world wars and the Great Depression.
The dynamics of international economic relations and the complementary nature of development activities at the international level, coupled with scarce resources on a worldwide scale, forced a large number of developing countries to look for ways of participating more effectively in the world economy (Brautigam and Knack, 2004). One way was to set up economic and monetary free-trade areas.The aim of these regional economic grouping among others is to promote cooperation and integration, leading to the establishment of an economic union in order to raise the living standards of the people in the sub-region while maintaining and enhancing economic stability and fostering relations among member states so as to achieve a meaningful human centered development in the sub-region in particular and the continent as a whole (Busari, 2006).
Consequently, the formation and success of the European Economic community in the 1950s spurred developing countries in Africa, Asia and Latin America to establish regional co-operation arrangements of their own, and the first United Nations Conference on Trade and Development
(UNCTAD) saw the promotion of economic co-operation among developing countries as a means to expanding their intra-regional and extra-regional trade and encouraging industrial and Agricultural diversification (Yusuf, Malarvizhi, and Khin, 2013). These activities culminated to the establishment of the Economic Community of West African States (ECOWAS) on 28th May, 1975. ECOWAS is a product of the go-between two distinct political lining that brought about the continental political organization in place. Their fundamental objectives which appears to be perfect the way they are conceived, is such that, the end result of these conceptions, when fully realized will bring not only socio-economic development, but also translate the entire west African community into a ‘near perfect’ community; where lives and properties will not only be safe and secured, but have a guarantee for realizing the full potentialities of life in a safe environment, where poverty will no longer have a place to hibernate and a community that tends to develop its own technological needs from within (Sakyi, 2011). Prior to trade liberalization among ECOWAS, exports within the region was distorted by export taxes, overvalued currencies, export licensing, existence of monopoly marketing boards and high import duties. As Chaudhry (2010) observed, trade liberalization could be said to have moved rapidly in many ECOWAS member countries in the 1990s through the adoption of a combination of unilateral and regional modalities.
Different authors have attempted to define trade liberalization. According toOgunkola and Babatunde (2008) Trade liberalization can be characterized as the shifting of control over imports and foreign exchange towards tariff based protection. The shift in the mode of control can occur in various stages. It can progress through the rationalization of the tariff structure, reduction of tariff dispersion, and reduction/elimination of tariff rates. Orji (2014) definedtrade liberalization as the removal or reduction of restrictions or barriers on the free exchange of goods between nations. This includes the removal or reduction of both tariff (duties) and non-tariff obstacles (licensing rules, quotas). The easing or eradication of these restrictions is often referred to as promoting tree trade (Klasra, 2011). Trade liberalization is therefore expected to reduce the anti-export bias and make export more competitive in the international market through the reduction/elimination of tariff barriers, non-tariff barriers, export duties and exchange rate distortions (Arodoye and Iyoha, 2014). The process of economic development is as a process of structural transformation where countries move from producing “poor-country goods” to “rich-country goods,” a precondition for this transformation is often the existence of an elastic demand for countries’ exports in world markets so that countries are able to leverage global export markets without fearing negative terms of trade effects (Narayan, 2005).
In many developing countries, there is often very low domestic demand so exports remain one of the few channels that in the longer run significantly contribute to higher income per capita growth rates of a country. That notwithstanding, the competitiveness and ensuing improvement of a country’s exports as a result of exposure to global competition, suggests that export remains the hallmark of economic growth. To record improvements in country’s export performance, countries’ exports need to be globally competitive to take advantage of leveraging world markets. Import restrictions of any kind, create an anti-export bias by raising the price of importable goods relative to exportable goods (Pernia and Quising, 2003). The removal of this bias through trade liberalization will encourage a shift of resources from the production of import substitutes to the production of export oriented goods. This in turn will generate growth in the short to medium term as the country adjusts to a new allocation of resources more in keeping with its comparative advantage (McCulloch, Winters and Cirera, 2001).
Trade liberalization does not necessarily imply faster export growth, but in practice the two appear to be highly correlated. The impact of trade liberalization on economic growth outlined above probably works mainly through improving efficiency and stimulating exports which have powerful effects on both supply and demand within an economy (Oladipo, 2011). There are several measures of trade liberalization or trade orientation, and most studies seem to show a positive effect of liberalization on export performance. Likewise there are different studies of the relation between exports and growth and the evidence seems overwhelming that the two are highly correlated in a causal sense, but the relative importance of the precise mechanisms by which export growth impacts on economic growth are not always easy to discern or quantify (Yanikkaya, 2003).
The high performance Asian countries are perhaps the most spectacular examples of economic success linked to exports (notwithstanding the recent crisis in East Asia). The economies of Japan, South Korea, Taiwan, Singapore, Hong Kong, Malaysia, Indonesia and Thailand have recorded some of the highest GDP growth rates in the world – averaging approximately 6 percent per annum since 1965 – and also some of the highest rates of export growth, averaging more than 10 percent per annum (Santos-Paulino and Thirlwall, 2004). It should be noted, however, that this success has not always been based on free trade and laissez-faire. Japan and South Korea, for example, have been very interventionist, pursuing relentless export promotion but also import substitution at the same time (Jin, 2006).
ECOWAS trade liberalization scheme has been marked by the unwillingness of many countries to implement its provisions relating to elimination of tariff and non-tariff barriers to trade and the functioning of a compensation mechanism (Arodoye and Iyoha, 2014). This is reflected by: difficulties in standardizing and harmonizing customs documents and tariff schedules; failure to extend total exemption from duties and taxes for unprocessed goods and traditional handicraft products; failure to apply preferential tariffs to approved industrial products; continued existence of non-tariff barriers, especially in the case of food and textiles; absence of certificates of origin for unprocessed goods and for industrial goods, and failure to produce both the certificates of origin and the export declaration; rigid border formalities and customs officials’ intransigence among others (Awokuse, 2008).
As a result, countries within the ECOWAS sub-region also adopted the structural adjustment programme (SAP) aimed at liberalizing their economy including the external sector. These new development options which marked the region’s total departure from the import substitution strategies, sought to redirect growth strategies towards the external market (Amponsah, 2004). Among the countries in the ECOWAS sub-region that adopted this strategy in the early period include Gambia, Ghana, Guinea and Mali. Consequently, foreign trade was liberalized through the reduction of tariffs and non-tariffs barriers as well as the reduction of import duties applied to imports in the ECOWAS sub-region (Chuku, 2014). Currencies were also devalued to encourage exporters with the aim of boosting exports and growth and fostering the integration of the countries into the global economy. As Amponsah (2002) noted, with fiscal and monetary discipline, appropriate financial sector reforms and the decontrol of domestic prices are expected to raise international competitiveness. In the same dimension, regional liberalization schemes within the ECOWAS was established as a result of the small size of the typical African economy and the perceived disadvantages associated with smallness (Oyejide, 2010). The basic objective of such liberalization scheme is to significantly increase trade within each integrated area and as well expand the areas overall trade.To this effect, recently, after a seven-year delay, ECOWAS finance ministers agreed in 2013 to launch a Common External Tariff, with five tariff bands (UNCTAD, 2014). The common tariff aims to discourage the high-level of smuggling and wide price differentials on products across the region. An ECOWAS Monetary Union and central bank are expected to be launched in 2020 (AfDB, 2013), bringing together the six countries of West African Monetary Zone (WAMZ) and the eight countries of the West African Economic and Monetary Union (WAEMU).
However, while the general consensus is on the need to design and implement reforms, it is still not certain if the growth of the ECOWAS sub-region would be enhanced through the adoption of programs that encourage more open economic policies. This is because despite significant trade liberalization and membership of regional trade arrangements over the past two decades, trade flows within the sub-region are distinguished by the shrinking share of the sub-region trade in the share of world trade, high dependence of exports on primary commodities and high dependence of the countries within the region on their European trade partners (Rueben and Arene, 2013).
1.2 Statement of the Problem