Implications of African Continental Free Trade Agreement for export promotion and welfare improvement among the member countries of East African Community

Implications of African Continental Free Trade Agreement for export promotion and welfare improvement among the member countries of East African Community

EXTENDED ABSTRACT
Introduction. Economic integration is seen as one of the key factors promoting the nation's long-term economic growth (Musabanganji et al., 2019). The benefits and costs of Regional Trade Agreements (RTAs) on net trade creation are the main points of attention for proponents of regional integration. The benefits of the RTAs are felt through trade liberalization, with a focus on removing trade obstacles that resulted in wasted resources and lowering the costs of market collapse. They also concentrated on the capital inflow that is anticipated to result in rising net trade gains (Matthews, 2003). Consequently, countries that join a regional economic agreement expect to benefit from the openness through the trade creation.
Countries must fully accept changes in food production, processing, and distribution settings if they are to gain from regional integration and globalization. This is made possible by the opening up of international trade, the lifting of limitations on the output and exchange of goods by local producers, and the decline in tariffs. As a result, domestic markets will improve, foreign direct investment will rise, and advanced technology will be adopted, which will encourage exports because of the cost reduction (Nene, 2012). It's also crucial to remember that preferential trade agreements had both positive and negative effects on commerce in emerging nations (Krugman et al., 2014). In addition, the RTAs facilitated the transfer of revenue from the poor to the rich and cost-maximized trade diversion (Matthews, 2003). A nation is more likely to have both an absolute and a relative advantage in the global market the more effectively and productively it is able to produce a given good (Afzal et al., 2018). This will demonstrate a country's superior ability to produce a good or service (Latruffe, 2017). Given all the benefits of RTAs, AfCFTA was created on March 2018 in Kigali, Rwanda by 44 out of 55 African countries, members of African Union (Songwe et al., 2021). All EAC member countries have so far ratified the AfCFTA agreement.
Objectives. This paper attempts to assess the implications of African Continental Free Trade Area (AfCFTA) for export promotion and welfare improvement among East African Community (EAC) member countries. It aims specifically (1) to identify the drivers and barriers to export promotion among EAC partner countries, and (2) to measure the implication of AfCFTA for welfare improvement among EAC member countries.
Materials and Methods. This paper used data from the World Development Indicators from 1997 to 2020 for 5 EAC member countries (Burundi, Kenya, Rwanda, Tanzania and Uganda). A panel data regression model was specified and estimated. Panel data models are very useful in econometric practice. They allowed us to select subject-specific variables, which account for heterogeneity; they also allowed dealing with more informative data, which led to more variability, less collinearity, a greater degree of degree of freedom, and greater efficiency; they enabled better effect detection and measurement; and they helped to minimize bias (Gujarati & Porter, 2010). A hausman test was conducted to select appropriately a panel data regression model: the estimated chi square is 52.81, while the corresponding p-value > chi square is 0.00. This implies that a fixed-effects estimation method provides more efficient estimates that a random effect estimation method, consequently, a fixed-effects regression model was estimated (Balgati, 2005; Hsiao, 2022). The study variables include export promotion and final consumption (a proxy of welfare improvement) as the dependent variables, while the main independent variable is a dummy variable specifying the initiation of AfCFTA (equals 1 since the staring year of AfCFTA ratification / implementation, and 0 if otherwise). The control variables are gross domestic product, foreign direct investment, exports, imports, openness (ratio of exports to GDP), gross domestic saving, as well as a dummy representing EAC membership for a specific year (equals 1 if country i is EAC member during the year t, 0 if otherwise).
Results. Econometric estimations point to the positive (but not significant) implication of African Continental Free Trade Area for export promotion among EAC member countries. Results also show that household consumption and gross capital formation affect negatively the volume of exports: the increase in in one of the variables leads to the decrease in exports. As for the welfare, research results highlight that the AfCFTA has a positive and significant implication for welfare improvement among EAC member countries since it enables the increase in final consumption. This implies that the household’s final consumption increases as the trade is getting freer progressively. It was also remarked that foreign direct investment, gross domestic product, imports, and gross fixed capital formation affect positively and significantly the welfare as they scale up the level of consumption of households among the EAC member countries.
Conclusion and recommendations. The implication of AfCFTA for export development and welfare improvement among EAC member countries was assessed. A fixed effects regression model was estimated and results point to the positive implication of African Continental Free Trade Area for export promotion as well as a positive and significant implications for welfare improvement among EAC member countries. Based on the results here above presented, it is recommended that all African countries should join AfCFTA and EAC member countries should create an environment conducive to foreign direct investments to attract investors from different regions all over the world. Besides, EAC member countries should multiply efforts to increase their gross domestic products, help the households increase their consumption, and select import items necessary for basic needs and/or producer goods.
Key words: export promotion, welfare, EAC, AfCFTA.
JEL classification codes: F02, F15

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