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Archives of Business Research – Vol. 8, No. 8

Publication Date: August 25, 2020

DOI: 10.14738/abr.88.8709.

Dossou, B. F. (2020). Impact Of The Instability Of Trade Flows On Economic Growth In Benin. Archives of Business Research, 8(8). 25-

39.

Impact Of The Instability Of Trade Flows On Economic Growth In

Benin

Blanchard Felix Dossou

University of Parakou, Benin

ABSTRACT

This article has discussed the impact of volatile trade flows on

economic growth in Benin. The analysis is conducted by a VAR model

inspired by the neoclassical production function. The study data are

time series covering the period from 1980 to 2016. At the end of the

study, it can be deduced that a shock on the degree of openness is

negatively and significantly reflected on economic growth over two

years. The variance of errors in the GDP growth rate explained by the

degree of openness is 3.17%. The correlation coefficient between

growth rate and openness errors is -0.56. There is a positive and

significant contribution of the capital factor to growth from the 4th

year. As for the labor factor, its positive effects on growth are

statistically zero. In order to mitigate the effect of trade opening shocks

on the level of growth, Benin should process its agricultural products

locally, on the one hand, and diversify its export products, on the other.

Keywords: Trade opening, VAR model, time series, Benin.

INTRODUCTION

Since the advent of colbertism in the 17th century, openness to the outside has been seen as a

source of economic growth. This idea, taken up by classical economists then, neoclassical, in the

following centuries, experienced a spectacular development. This makes trade liberalization a

source of convergence and a key element in the formulation of development strategies. Thus, in the

1980s, under the aegis of the Bretton Woods institutions, several countries, including those of sub- Saharan Africa, subscribed to such policies within the framework of the General Agreements on

Tariffs and Trade (GATT). The results for countries like Brazil, India and Malaysia are very

complimentary, unlike their African counterparts with whom they had practically the same growth

levels (UNDP, 2014).

According to WTO statistics (2012), exports and imports from Brazil increased by 14% and 8.9%

respectively between 2007-2012. In India, the situation is practically the same. Merchandise trade,

as a percentage of GDP, increased from 30.1% to 40.3% between 2005-2011. As for Malaysia, not

to mention China, which ranks first in the world, the ratios of exports and imports to GDP have

greatly improved. They stood at 87.1% and 75.3% respectively in 2012 against 91.4% and 71.1%

in 2009. The situation of these economies is explained by an increase in exports of manufactured

products and a decrease in the weight primary products. In West African countries where exports

are dominated by raw materials, the picture is less complimentary. In general, the ratio of exports

to GDP on the African continent is 42% and that of exports 56%.

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Dossou, B. F. (2020). Impact Of The Instability Of Trade Flows On Economic Growth In Benin. Archives of Business Research, 8(8). 25-39.

URL: http://dx.doi.org/10.14738/abr.88.8709 26

It should be noted that exports are dominated by agricultural products. In Benin, exports fell

gradually from a value of 334.9 billion FCFA in 2008 to a value of 148.2 billion in 2012. A short

recovery in exports in 2013 and 2014 with a respective value of 314 , 8 billion FCFA and 473.5

billion FCFA to end up at 259.9 billion FCFA in 2015. As for imports, they remained almost

increasing over the period 2008-2015. Worth 974.6 billion in 2008, they reached the value of

1868.9 billion FCFA in 2013, before gradually falling to 1472.6 billion FCFA in 2015 (BCEAO, 2015).

This change in foreign trade was not without effect on the rate of economic growth in Benin which

went from 4.9% in 2008 to 2.1% in 2015 (World Bank, 2016).

Reading these data from the Beninese economy seems to support the analysis of the UNDP (2014)

according to which foreign trade has a negative effect on growth if the structure of trade is

dominated by agricultural products. Similar studies have been conducted by Minsky (1920) (cited

by Labaye, 2011); Combes et al. (2000), who tried to explain the different economic and financial

crises through economic and financial openness. UNDP (2014) proposed a comparative analysis

based on the calculation of the external opening aggregates between the so-called emerging

countries and the Ivory Coast which is a WAEMU country, like Benin. This paper differs above all

from that of the UNDP by the adoption of the econometric model VAR, which would make it

possible to appreciate structurally the effect of the instability of the trade flows, and especially,

exports on growth.

Thus, this article which questions the link between the instability of trade flows and the growth

rate addresses, in point 2, the literature review and the methodology used, in point 3. Point 4

presents and analyzes the results before the discussion, in its point 5. As for the 6th point, it exposes

the conclusion and some suggestions.

LITERATURE REVIEW

Theoretical literature

Many theoretical developments in international trade have been made by various economic

currents since the 18th century. In this study, we will content ourselves with recalling the classical,

neoclassical theories and then, some new theories of international trade. Smith (1776), through

the theory of absolute advantage, tried to demonstrate the value of openness between countries.

For Smith, a country should not hesitate to import from abroad, which foreign producers can

produce better than domestic producers. Analysis of his theory shows that a country can

participate in trade when it has an absolute advantage in the production of a good. Under these

conditions, exchanges contribute to well-being (Smith, 1776). In 1817, Ricardo advocated the

possibility of countries participating in international trade without having an absolute advantage

in the production of a good through the development of the theory of comparative advantage. He

introduces the idea of the country's specialization in the good for which he has the highest

productivity to justify his ideas.

Around the 1940s, Hecksher-Ohlin and Samuelson perfected Ricardo's (1817) idea of comparative

advantage by suggesting a specialization in the production of the good for which the country has a

relatively abundant endowment in factors of production. They explain the presence of

international trade by the differences in endowments in factors of production in each country.

Assuming two factors of production: capital (K) and labor (L), countries where capital is relatively

abundant must export goods that use capital intensively and import goods whose production

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Archives of Business Research (ABR) Vol.8, Issue 8, August-2020

requires the intensive use of the labor factor. But, in 1947, Leontief arrived at a contrary result on

the basis of American data, which the theory describes as "Leontief paradox". It is important to

note that all these authors have developed their theories under the assumption of a market of pure

and perfect competition and, according to them, the external opening is a source of growth and

well-being.

New theories of international trade explain international trade on the basis of market structure.

For Ohlin (1933), Lerner (1932-1934) and Graham (1923) [all cited by Krugman and obstfeld

(2009)], international trade would result from the existence of economies of scale. Others address

the subject on the assumption of imperfect competition. They demonstrate the effect of

protectionism through customs duties, taxes, state subsidies to local businesses, on the one hand,

and cases of monopoly and oligopoly markets, on the other. Among these are Krugman and

Obstfeld (2009), Rainelli (2002), Aubin and Norel (2000).

Empirical literature

Trade openness naturally exposes an economy to external shocks and potentially increases its

instability. Experience shows that developing economies, in particular, small economies, are the

most unstable (Combes et al. 2000). Trade openness increases the degree of exposure to external

shocks, while trade openness policy mitigates or eliminates its effects. According to the “Dutch

syndrome” model (Corden and Neary, 1982), the sudden increase in export earnings in one sector

of the economy leads to rapid growth in this sector and, in general, to a lesser extent, growth in the

non-tradable goods sector, but also a regression in the internationally tradable goods sectors

which did not benefit from the boom, for example, the manufacturing sector.

This regression results from a transfer of labor and capital resources in favor of expanding sectors,

and above all, from the appreciation of the real exchange rate linked to the increase in export

earnings. When the fall in export earnings occurs, we witness, in part, the opposite phenomenon,

in other words, a depreciation of the real exchange rate allowing the recovery of the tradable goods

sector, while at the same time the sector regresses export subject to falling international prices and

non-tradable goods production activities.

The fluctuation of the overall product resulting from the shock and the counter-shock is all the

greater as these affect a larger part of the economy that is to say that the economy is more open. In

addition, due to the adjustment costs linked to the internal reallocation of resources, trade opening

increases the negative impact of instability on growth. The work on the “Dutch syndrome”

highlights the positive relationship between trade openness and the instability of the growth rate.

Rodriguez and Rodrik (2000) show that openness can push the countries concerned towards

specialization in sluggish sectors with a total negative impact on growth. Bhagwati (1958; 2005)

and Verdier (2004) follow the logic of slower growth for the countries that export primary

products based on the theory of impoverishing specialization.

Bonjean et al. (1999) also make a theoretical analysis of the effect of fluctuations in exports on

growth. For them, insofar as the instability of revenue generates risks, it modifies the overall

behavior of economic agents, hence its influence on savings, investment and economic growth. The

effects of risk on savings vary depending on whether it affects labor or capital income. According

to Hesse (2008), export instability is one of the reasons for the benefits of export diversification.