Opportunity costs of trade-related capacity development in Sub-Saharan Africa

Recent studies have documented the impact of institutions and infrastructure development on trade flows. This paper studies these issues in the context 010n90in9 trade-related capacity building initiatives and evaluates the opportunity cost of different trade-related capacity building policy mixes. Trade-related technical assistance and capacity building was recognized in 2001 by the World Trade Organisation Doha Ministerial Declaration as a core element of the development dimension of the multilateral trading system and commitments were set out in those areas. The extentof trade-related technical assistance and capacity building to help developing and least developed countries participate more efficiently in international trade has increased by 50% between 2001 and 2004. The purpose of this thesis is to address the question of whether the weights assigned to different components of trade-related capacity building in existing trade-related capacity building programmes are economically justified. To do this the paper evaluates the opportunity costsof different trade-related capacity building policy mixes with specific reference to Sub-Saharan Africa, excluding South Africa. We use a number of variables from both theoretical and empirical literature to come up with composite indicators for trade-related institutions, infrastructure and human capital. The analysis is also informed by interviews with trade experts in Geneva as well as a review of relevant background documents. In the empirical analysis we use 2005 trade patterns for a data set of 117 countries of which 24 are in sub-Saharan Africa. Making use ofa gravity equation augmented with trade-related capacity building variables we run a series of Heckman's two-step selection regressions and estimate the marginal impacts of these trade-related capacity building indicators on trade as measured by value of total exports. To evaluate opportunity costs. we do policy simulations and estimate how much trade flows will be increased under various policy scenarios with respect to improved trade-related capacity building indicators in Sub-Saharan Africa. We examine scenarios that focus on improved institutions. infrastructure and human capital as they move in the direction of comparability with the rest of the world. The world's average level is used as the baseline for each of these composite indicators in the policy simulations. The results show that trade flows exhibit different levels of sensitivity to different trade-related capacity building policy options with the exporter's infrastructure being the most significant with an average elasticity of approximately 3.0. The findings also suggest that complementing improvements in the quality of human capital and infrastructure will provide the greatest bilateral trade flow benefit to Sub-Saharan Africa; while non-Sub-Saharan Africa countries gain the most from complementing infrastructure and institutions. Such a finding contradicts the current focus of ongoing TReB programmes that put emphasis on human capital development only. Building on both Grossman and Helpman (1991),s trade model and Barro (1990) s' growth model, the paper argues that the theoretical propositions are inadequate to address the dynamics associated with trade-related capacity building policy. The paper further argues that analyzing the impact of rReB using these standard frameworks underestimates the impact since policy dynamics are not addressed in that framework. This could contribute to explaining why there has not been consensus in the trade-growth empirical literature, with some authors finding a positive and significant impact of trade on growth, while others argue that the impact is not significant Hence, the paper proposes improvements in the specification of the standard growth model to take into account policy dynamics, specifically assumptions regarding substitutability among TRee investments.

Grantor dc:publisher.institution

School of Economics

Year dc:date.issued

2010

Author dc:creator

• Mugadza, Tendeukayi

Advisors dc:contributor.advisor

• Ross, Don
• Edwards, Lawrence

Language dc:language.iso

eng

Handle dc:identifier.uri

http://hdl.handle.net/11427/9872

OAI identifier oai:identifier

oai:open.uct.ac.za:11427/9872