The currency union effect on intra-regional trade in Economic Community of West African States (ECOWAS)

Purpose - The purpose of this paper is to investigate the currency union (CU) effect on aggregate intra-trade in the Economic Community of West African States (ECOWAS) and on bilateral trade among individual countries using the gravity model. Design/methodology/approach - Using panel dynamic ordinary least square, we examined the short- and long-run CU effect on aggregate intra-ECOWAS trade and bilateral trade among ECOWAS countries from 1995 to 2010. Chow poolability test was conducted for the appropriateness of pooling the cross-section parameters as against individual model. The augmented Dickey-Fuller (ADF) test; the Phillips-Perron (PP) test; and the Kwiatkowski, Phillips, Schmidt and Shin (KPSS) test were conducted on the individual data series, and the Levin, Lin and Chu test; the Im, Pesaran and Shin test; the Breitung test; and the Hadri test were used for testing cross-sectional independent panel unit root tests. Kao panel cointegration test was conducted to identify long-run relationships. Findings - We found evidence of significant positive CU effect on aggregate intra-ECOWAS trade. The estimates also show that Benin, Burkina Faso, Niger, Senegal and Togo trade more with countries they share common currency with than what they would have been in both short and long run. Weagain observed that CU is insignificant in explaining Cote d'Ivoire, Mali and Senegal intra-trade with ECOWAS countries, though their observed intra-trade with ECOWAS is relatively high which is found to be explained by export diversification. Practical implications - The findings reveal that CU is good for aggregate intra-regional trade though some individual members respond negative to CU. The finding of diversification as a necessary tool to increase intra-regional trade imply that as effort of introducing single currency is being pursued rigorously, effort to diversify export or trade complement should not be overlooked. Originality/value - There exist panel studies on CU on aggregate intra-regional trade in ECOWAS. However, there is a need to have country level study to identify CU effect on each country, as it is sensitive to country-specific factors which are unobservable in time series analysis of group of countries. Also, our group estimate differs in methodology in the sense that the dynamic generalised least takes care of endogeneity in trade gravity literature.