IMPACT OF REGIONAL INTEGRATION ON TRADE AND FIRM

PERFORMANCE IN WEST AFRICA: THE CASE OF BENIN*

by

Dr. Toussaint Houeninvo National School of Applied Economics and Management

University of Abomey Calavi Republic of Benin

and

Dr. Sylvain H. Boko Department of Economics Wake Forest University Winston-Salem, NC, USA

* Published, in Mina Baliamoune-Lutz, Alojzy Z.Nowak and Jeff Steagall, ed, (2007), Global Economy Challenges in Developing and Transition Economics, University of Varsaw and Coggin College of Business, University of North Florida, Warsaw and Jacksonville

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1. Introduction:

Since the mid-1950s, regional integration has intensified on every continent, with

the European Union (then known as European Community) in the lead. An important

motivation behind regional trading arrangements has involved the prospect of enhanced

economic growth and increased welfare. Integration facilitates the expansion of the

regional market, which allows member countries to exploit the resulting economies of

scale. Integration also fosters specialization, learning by doing, and can help attract

foreign investment. It also allows the achievement of non-economic objectives such as

promoting regional security, facilitating immigration flows and solidifying domestic

economic reforms.

As is made clear in standard international economics textbooks (Carbaugh 2000,

Yarborough and Yarborough 2000), there are five types (or stages) of economic

integration: preferential trading arrangements (PTA), free-trade area (FTA), customs

union, common market and economic union. Members of a PTA agree to lower trade

barriers for member countries, while maintaining those barriers for non-members. A free

trade area is an association of trading nations whose members agree to remove all tariff

and non-tariff barriers among themselves. However, each member maintains the ability to

set its own trade restrictions against countries outside the agreement zone. An example of

such an arrangement is the North American Free Trade Agreement (NAFTA), which

consists of Canada, Mexico and United States.

Members of a customs union agree to remove all tariff and non-tariff barriers

among themselves. In addition, they maintain a common external tariff (CET) on trade

with nonmembers. A common market is a more complete stage of integration in that it

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allows for free movement of goods and services among member nations, free movement

of the factors of production across borders within the bloc. In addition, members of a

common market maintain common external trade restrictions against nonmembers. The

European Union is an example of a common market. Beyond this stage economic

integration could evolve into an economic union. At this stage, member nations agree to

harmonize their national, social, taxation and fiscal policies and let these be administered

by a supranational institution. The economic union could also involve a monetary union

dimension (the ultimate degree of economic union), at which point members agree to

unify their national monetary policies and to accept a common currency administered by

a supranational monetary authority. The European Economic and Monetary Union and

the West African Economic and Monetary Union (WAEMU) are examples of such a

union.

As the case of the European Union has demonstrated, economic union and

particularly monetary union are difficult to achieve because at these stages, countries

have to agree to give up sovereignty over their fiscal and especially monetary policies to

a supranational institution. Given this traditional reluctance on the part of nations to give

up economic sovereignty, the West African Economic and Monetary Union presents a

particular and interesting case in that its members actually have achieved a monetary

union (with France) since 1962, and have adopted a common currency, the CFA Franc

(pegged to the French Franc), before engaging in the process of economic integration.

Another particularity of the WAEMU is that in the past, member countries have

attempted economic integration through processes that are separate and distinct from the

West African Monetary Union (WAMU). In particular, in 1973, the WAMU countries

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created the West African Economic Community (WAEC) with the intention of

integrating economic policy and promoting free trade in the area. However due to many

factors, including the design of the WAEC institutions and its compensation scheme, by

1991, it became clear that the union has failed to reach its objectives. This led member

countries to the integration of their economic union into the framework of the already

existing and well-functioning monetary union.

The aim of this study is to evaluate the impact of the relatively newly formed

West African Monetary and Economic Union on one of its members: the country of

Benin. The analysis is conducted first at the level of aggregate trade activities. We then

use disaggregated data to assess the effect of the union on Benin’s economy. Finally,

using results of an industrial survey conducted by the authors, we attempt to measure the

impact of Benin membership in the Union on its domestic firms. The next section

presents an overview of the Union. In section 3, we have a brief description of the

Beninese economy and its global position relative to other countries in the Union. The

results of the analysis of Union membership on the country’s economy are presented in

section 4; and the examination of the performance of domestic firms in the aftermath of

Union formation is conducted in section 5. Concluding remarks are in section 6.

2. An Overview of the Union:

The treaty of the West African Economic and Monetary Union (WAEMU) was

signed on January 10th 1994. Member countries include Benin, Burkina Faso, Côte

d’Ivoire, Mali, Niger, Togo, Senegal and Guinea-Bissau (which joined in 1997). Table 1

(see appendix) presents the geographic and economic characteristics of Union members.

The WAEMU draws its strength from the long experience of its members in terms of

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abandoning sovereignty over economic policy for the sake of a regional integration, and

from the lessons learned from the failed WAEC.

Many of the institutions of the WAEMU are similar to those of the European

Union (Oyejide, Elbadawi and Yeo, 1999). The Conference of the Heads of State is the

supervising body. The Council of Finance Ministers controls the direction of the

integrating scheme. Since this is the same body that controls policy-making in the

WAMU, it facilitates compatibility between union decisions and monetary policy

constraints. Like the European commission, the WAEMU commission (the executive

body) is in charge of the management of the organization. The Commission is an

independent body, which acts solely in the interest of the Union without government

interference.

The Union also has a Court of Justice to settle legal disputes among members; it

created another court to control all accounting matters. In the absence of a fully-fledged

parliament, which is projected in the future, an inter-parliamentary committee of five

persons per country, acts on behalf of national parliaments. At the financial level, the

Union avoids the problem of arrears in contributions by adopting the principle of

financial autonomy, whereby the financing of the structures and programs of the Union is

assured by generating revenues through levies that are independent of individual member

states. Furthermore, based on the solidarity principle that prevails in the Union, any loss

of fiscal revenue is to be compensated for.

Specific policy and instruments adopted include: a common external tariff policy

(imposed on goods coming from outside the Union); liberalization of the intra-union

trade through the elimination of non-tariff barriers (NTBs) and progressive reduction of

5

tariff rates within the community, through the framework of Preferential Community Tax

(PCT)1. Further, convergence criteria were set within the Union with respect to several

economic and policy indicators including, inflation (maximum rate 3%), the ratio of

government payroll to government revenues (maximum 40%), the ratio of internally

financed investment to fiscal revenues (minimum 20%), primary budget deficit/surplus2

as a percentage of fiscal revenues (minimum 15%). In addition, the institutional

frameworks, including public finance, statistical record-keeping, fiscal legislation,

accounting practices, which have hitherto been different according to each country, will

gradually become common throughout the Union. In the next section we briefly present

general characteristics of the economy of Benin, including the global performance of the

country in the post-integration era.

3. Recent Developments in the Beninese Economy in the Post-Integration Period

3.1. The Country at a Glance

Benin is a small West African country with a population of about five million. In

1998, its estimated per capita GDP is $867 in purchasing power parity term3 . The

economy is highly open, but it is considerably dependent upon primary and tertiary

activities. The primary sector accounts for about 33 per cent of GDP and provides the

main export commodity: cotton. Re-export activities provide about 45 per cent of export

revenues. The economy is dominated by the tertiary sector (mostly commerce) however,

with the latter accounting for 53 percent of GDP. The secondary sector contributes just

14 per cent to the GDP.

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The annual growth rate of real GDP has fluctuated (becoming negative at times)

since the country gained independence from France in 1960. But, since 1992, GDP

growth has averaged about 4 percent annually, making the country one of the fastest

growing nations on the continent. This turnaround in growth performance is in part, the

outcome of the massive reform program that was launched by the country since 1989,

under the auspices of the World Bank and the IMF. With respect to the government, the

immediate post-independence years were tumultuous for the country. However, a relative

political stability was observed from 1972 to 1989, a period during which a Marxist

military regime governed the country.

3.2. The Country’s Macroeconomic Performance in the Post-Integration Era

From 1995 to 1997, the GDP growth rate climbed from 4.6% to 5.7%. However,

in 1998, the country experienced a slow-down in economic activities due to the energy

crisis experienced throughout the sub-region in the year. Indeed in 1998 GDP growth rate

returned to 4.4%, its lowest level since 1994. The country experienced an increase in the

rate of inflation from 3.3% in 1997 to 5.8% in 1998. Investment rate during the same

period remained steady at about 18.5%, whereas the savings rate declined by about 1

percentage point from 10.1% in 1997 to 9.2% in 1998.

The country’s debt to GDP ratio decreased from 60% in 1997 to 55.5% in 1998,

and debt service to exports ratio also declined (17.4% to 16%) over the same period. This

demonstrated a better management of the country’s debt by the authorities. As table 2

indicates, Benin posted worse numbers than the average in the WAEMU area in 1998 in

the categories of GDP growth, inflation, investment and savings. However, the country

7

performed considerably better than regional average with respect to its debt and debt

service ratios.

3.3. Evaluation of Benin with respect to the Convergence Criteria Set Within WAEMU

In this section we focus on three key indicators: the ratio of government payroll to

its revenue, the ratio of internally financed investment to fiscal revenue, and the primary

budget deficit/surplus as a ratio of fiscal revenue. The first and third ratios are indicators

of whether authorities’ efforts at improving the macroeconomic environment has

succeeded, and the second is an indicator of the reduction of the country’s dependence on

external financing of investment activities, and the reliability of domestic resources as a

source of investment financing.

As table 3 indicates, Benin not only reduced its government payroll ratio from

1997 to 1998 (39% to 35%), but it has outperformed the Union on average during the

same period. With respect to the budget surplus ratio, the country was well ahead of the

required minimum of 15%, and in both years has outperformed, on average, other

countries in the Union. This is a clear indication that the reforms that begun in the early

1990s with respect to streamlining expenditures and increasing tax revenue are producing

a positive impact on the country’s budgetary position. However, in the area of internally

financed investment, the country lags not just behind other countries on average in the

Union, but far behind the targeted 20% minimum set for the Union. Hence this remains

an area in need of much improvement. In the next section we put forth the analysis of

how Benin’s membership in the WAEMU has affected its economy.

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4. Assessing the Effect of the WAEMU Membership on the Beninese Economy

In this section we analyze the economic effect of WAEMU membership on the

Benin economy in two areas. First, we study the relative strengths of the trade creation

and trade diversion effects of the integration; second, using data from a field survey we

focus the analysis on the impact on firm performance.

The focus on the trade diversion and trade creation effects of a customs union

dates back to Viner (1950). According to this theory, the movement toward freer trade

under a customs union can produce two opposing effects on a member country economy.

The first consists of trade creation, which occurs when some domestic production of one

customs-union member is replaced by another member’s lower cost imports. Trade

creation increases the welfare of the member country because it leads to production

specialization according to the principle of comparative advantage. However, the country

may experience trade diversion at the same time due to the creation of customs union, if

this implies the replacement of imports from a low-cost supplier from outside the Union,

by purchases from a higher-cost supplier within the Union. Trade diversion is welfare

reducing for the member country. The overall impact of a customs union on the welfare

of its members, as well as the whole world, depends on the relative strengths of these two

opposing forces.

4.1 Methodology

Different types of methodologies have been employed to study the effect of

integration on countries’ economies. Generally, authors have either adopted an

econometric approach, an elasticity approach (both ex-post analyses) or have conducted

9

simulations based on computable general equilibrium (CGE) models. Under the elasticity

approach for example, as suggested in Balassa (1967) in order to determine if the creation

of a regional union has led to trade creation or diversion for a country, import demand

elasticities are calculated for the pre-integration and post-integration periods. The author

points out that the impact of regional integration on trade depends on the elasticity of

supply and production costs. Hence his analysis was based upon the import demand

elasticities with respect to revenue in the pre- and post-integration periods. Conclusions

with respect to trade creation or diversion are drawn based on the comparison of the

average import elasticity from the pre-integration period to that in the post-integration

period. This method was utilized by Attin et al. (1990) to assess the impact of Benin’s

membership in the West African Economic Community (WAEC) on its economy.

Camara (1990) uses the same approach to conduct her study of the creation of the West

African Economic Community (WAEC) and its impact on intra-regional trade on the one

hand and on the export sector in Cote d’Ivoire on the other, and, Kabore and Wetta (1990)

use the method to study the impact of the WAEC on Burkina Faso.

An alternative approach of studying the effect of integration on trade consists of

estimating a regression model (in log-linear form) in which the dependent variable is the

country’s imports and the regressors are a constant, and total revenue (GDP). The model

is estimated over two sub-periods. A test on the constant determines whether there has

occurred trade creation or diversion as a result of integration. Ngbo et al. (1990) estimate

a similar model but in addition, they conduct a Chow test to determine whether a

structural break has occurred in the model subsequent to the creation of the regional

group.

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Yet, another approach, used by De Melo, Montenegro and Panagariya (1993)

consists of comparing openness measures over the pre-integration and post-integration

periods. Openness toward the Union can be calculated as the ratio of Benin exports to

Union members to its total exports or the ratio of Benin imports from Union members to

its total imports. The advantage of the openness approach is that it can be used to conduct

an analysis at the level of overall trade activities, or the analysis can be carried out further

to the individual product level. One advantage of the product-level analysis is that it may

reveal results that analysis at the aggregate level analysis may otherwise overlook (see

Ngbo et al., 1990).

Of the three approaches outlined above, the ones that suggest themselves to the

present study are the elasticity approach and that based on openness ratios. The

econometric approach assumes that there are enough observations in the data in order to

carry out regression estimation not only over a given period of time but also over its sub-

periods. In our case, although the treaty creating the West African Economic and

Monetary Union (WAEMU) was signed in 1994, implementation did not begin until

1996. The present study covers the period 1993-98, and is not amenable to econometric

analysis due to lack of degree of freedom. We therefore use the elasticity approach and

the openness ratio approach to conduct the study. We will consider the period 1993-95 as

the pre-integration sub-period and 1996-98 as the post-integration sub-period. We first

present the results of the elasticity approach. This is the subject of the next section.

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4.2. The Elasticity Approach

Let e1 and e2 denote the Benin import demand elasticities with respect to GDP

before and after the implementation of the WAEMU, calculated for trade activities both

within (intra) and outside (extra) of the Union. Specifically, we have:

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111

/

/inin

ininin

RR

MMe

∆

∆= ,

22

222

/

/inin

ininin

RR

MMe

∆

∆=

and, (1)

11

111

/

/exex

exexex

RR

MMe

∆

∆= , and

22

222

/

/exex

exexex

RR

MMe

∆

∆=

where,

Mj1=Average intra-union or extra-union imports over 1993-95, j=in (for intra-

union) or j= ex (for extra-union).

∆Mj1=Change in M

j1 over 1993-95, j=in, ex.

Mj2=Average intra-union or extra-union imports over 1996-98, j=in, ex.

∆Mj2=Change in M

j2 over 1996-98, j=in, ex.

Rj1=Mean GDP over 1993-95, j=in, ex.

∆Rj1=Change in Rj1 over 1993-96, j=in, ex.

Rj2=Mean GDP over 1996-98, j=in, ex.

∆Rj2=Change in R2 over 1996-98, j=in, ex.

Decisions with respect to trade creation or diversion are made as follows. For the case of

intra-union trade, if ein2>e

in1 then it is concluded that integration led to the creation of

trade for Benin. Otherwise we say that no additional trade was created with integration.

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In the case of extra-union trade, if eex2<e

ex1 then the conclusion is that integration

produced a diversion of trade for Benin. Otherwise we say that there has been no trade

diversion due to integration.

4.2.1. Data Sources, Results and Analysis

Data on GDP, intra-union and extra-union imports and exports were obtained

from the Benin National Institute of Statistics and Economic Analysis (INSAE). For the

case of intra-union trade, calculated elasticities are: ein

1=2.30, and ein

2=1.23. Since

ein

2<ein

1, the conclusion is that, in the aggregate, regional integration did not create

additional trade for Benin. Recall that for trade creation to occur as a result of integration,

it must be the case that certain goods that were previously produced in the country at

relatively higher cost must, in the post-integration period, be imported from lower-cost

producing countries from within the Union. These results seem to indicate that, with

respect to overall trade balance, Benin did not take advantage of the opportunities

presented by the regional integration. The results do not however involve a product-level

analysis, which will be conducted in the next section.

For the extra-union import elasticities, we have: eex1=1.60 and e

ex2=0.56. Since

eex2<eex

1, we conclude that WAEMU membership resulted in trade diversion for the

country of Benin. The explanation here is as follows. Because of its membership in a

customs union, and due to the preferential treatment of goods produced within the Union,

Benin is now importing products from other members of the Union (albeit at higher costs)

that it previously imported from lower-cost producers outside the Union. Integration in

this sense has caused a diversion of trade for the country. This is also an analysis at the

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aggregate trade level. Using an alternative approach, we test whether these findings are

maintained. The next section sets out the approach based on the country’s openness.

4.3. The Approach Based on the Degree of Openness

This approach focuses on what changes might occur with respect to the degree of

openness of a country towards other countries within a customs union. The idea is that if

a country experiences increased trade vis-à-vis its Union partner countries in the

aftermath of integration, then it is able to allocate its resources more efficiently in order

to enhance its ability to produce more of the products in which it has comparative

advantage. An analysis of the change in the country’s openness and its trade balance with

respect to the Union indicates whether the country’s trade performance within the Union

has increased overall as a result of integration. As previously indicated, the rate of

openness can be measured with respect to the country’s export, its imports or the sum of

the two. In the present analysis we will use openness measure based on both exports and

imports so as to permit a comparative analysis of the performance of the export sector

relative to the import sector.

Let txc be defined as a measure of the degree of export-based openness of the

Benin trade sector towards the Union. Then,

)(

)(

tX

tXt

T

c

xc = (2)

where,

Xc(t) = Exports of Benin to Union members in year t.

XT(t) = Total exports from Benin in year t.

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Also, let tmc be defined as a measure of the degree of import-based openness of

the Benin trade sector towards the Union. Then,

)(

)(

tM

tMt

T

c

mc = (3)

where,

Mc(t) = Imports to Benin from Union members in year t.

MT(t) = Total Imports to Benin in year t.

Comparing the change in the two measures for the pre- and post-integration periods, we

can determine whether the trade sector in Benin has overall benefited or has performed

worse in the aftermath of integration. Calculated openness ratios are presented in table 4

and graphed in figure 1. In the case of exports, the table and the figure show that Benin

openness toward its regional partners tended to decrease steadily from 1993 to 1996,

before picking up again in 1997 and 1998. On the imports side, the openness measure

generally increased from 1993 to 1998, with a slight decline in 1997 from its high in

1996. The overall conclusion is that the net performance of the Benin trade sector is

worse in the post-integration than it was before integration. This analysis is confirmed by

table 5, which presents the balance of trade of Benin with respect to the rest of the

community. Indeed, the slight increase in exports revenue in 1997 and 1998 was far

outstripped by the rise in imports from member countries during the period under

consideration, so that the country’s trade deficit with respect to the rest of its regional

partners became increasingly worse over the entire period, with acceleration in the last

three years.

Both the elasticity approach and the openness approach seem to indicate that in

general, regional integration had a negative impact on the Beninese economy by resulting

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in trade diversion rather than trade creation for the country. However, both of these

approaches are limited to aggregate-level analysis, which is likely to overlook impacts on

trade in individual lines of product that may differ from the global effect. On the basis of

the results obtained so far, one is inclined to draw the conclusion that, for the period

under consideration, regional integration has produced a negative impact on trade sector

performance in Benin. However, product-specific analysis may yield a different result,

because of the usage of disaggregated data.

In order to undertake the product level analysis, we use the WAEMU

classification of products into four categories: crude products (unprocessed vegetables,

animal products and minerals); arts and craft; industrial products that have qualified for

the Preferential Community Tax (PCT) and non-qualified industrial products. The PCT-

qualified industrial product must be made within the zone, with at least 60% of the raw

materials used in the production process coming from within the bloc. These products,

when certified by the organization, enjoy preferential treatment with respect to taxation.

Non-qualified industrial products do not benefit from this preferential treatment4. We

calculate product-level export-based and import-based openness measures and analyze

their change over the period under consideration.

Let txic(t) denote the openness indicator by product category i. Then,

)(

)()(

tXc

tXtctx i

i = (4)

where,

Xi(t) = Exports product category i from Benin to Union members in year t.

XC(t) = Total exports from Benin to Union members in year t.

By the same token the degree of import-based openness is calculated as:

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)(

)()(

tM

tMtctm

c

i

i = (5)

where,

Mi(t) = Imports to Benin from Union members in product i in year t.

MC(t) = Total imports to Benin from regional partners in year t.

4.4. Data Sources and Results

The data on product category-specific imports and exports are calculated by

authors based on INSAE data. The results are as follows. For the category of crude

products import openness steadily decreased from 7.24% in 1993 to 3.65% in 1996, but

increased to 4.08% in 1998. For exports, the degree of openness see-sawed over the

period, but always remained below the imports openness ratio, so that overall the country

experienced a worsening of the trade balance in this product category, as shown in table 6.

For the case of arts and craft the mean openness ratio of export in this category

was 0.0018 in the 1993-95 period, and increased to 0.009 in the 1996-98 period. In the

case of import in arts and craft, the mean openness ratio was 0.0005 in the 1993-95

period but dropped to almost nil in the 1996-98 period. This category may be one where

the country holds comparative advantage. In the category of PCT-qualified industrial

products, openness in the export sector was 58.06% in 1994, 69.9% in 1996 and 68% in

1998. For imports, it stood at 10.8%, 4.9%, and 25.4%, respectively over the same period.

Therefore, trade creation occurred in this category in the post-integration period. This

result was reversed for the case of non-PCT-qualified industrial products, as indicated in

table 7.

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Overall, subject to its limitations in terms of the length of the time periods being

observed, it appears that the product-level analysis has revealed results that were not

captured in the analysis at the aggregate trade level. Indeed, it appears that Benin

maintains a comparative advantage in the region in the category of industrial production

as well as that of arts and craft. This implies that it is able to greatly benefit from

increased trade with its regional partners in those particular sectors. Having examined the

performance of the trade sector, we turn to the assessment of the effect of integration on

the productivity and competitiveness of firms in the Beninese economy. This is an

important analysis because the relative strength or weakness of a country’s firms is an

important determinant of its ability to take advantage of the opportunities presented by a

regional integration. Thus, in the next section we focus on a field survey-based

assessment of the competitive capacity of Beninese firms.

5. Effect of Regional Integration on the Productivity and Competitiveness of

Beninese Firms

5.1. Methodology

Under the hypothesis that the preferential status of PCT-qualified enterprises can

afford them increased productivity and enhanced competitiveness, we use key indicators

to test whether competitiveness did improve for those firms relative to non-qualified

firms. These indicators were calculated using data collected from a survey that we

conducted on behalf on the Economic Policy Analysis Unit of the Benin Ministry of

Planning and Economic Restructuring.

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Our population base consisted of all domestic firms that export goods admitted by

the Union for the Preferential Community Tax plus those firms that are exporters of non-

qualified goods. The survey was conducted using the rational choice method. The method

is more rigorous than simple empirical surveys, in that each firm included in the sample

is selected on the basis of a known probability of inclusion. The variables of interest are

the firm’s: output, value-added, value of exports to WAEMU member countries, number

of workers (temporary and permanent), number of managers, total sales, fixed assets,

own capital, net profit, and other qualitative or quantitative variables that may affect a

firm’s admission to the PCT.

The survey questionnaire was administered to 25 exporting industrial firms. The

response rate was 80%, so the final sample size was 14. Desired competitiveness

indicators include:

a. the rate of export from a domestic firm to the rest of the Union, calculated as

the ratio of firm’s share in total exports to WAEMU countries to its total

production. This is an indicator of the firm’s ability and effort to gain a bigger

share of the Union market.

b. The productivity of capital, calculated as the ratio of firm’s value-added to its

fixed asset.

c. The value-added ratio, found as the ratio of firm’s value-added to total

production. This is an important measure in that according to WAEMU

studies, those countries that are best positioned to benefit most from the

WAEMU integration are those with the highest manufacturing value-added,

and not necessarily those with the highest GDP. For example, even though the

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GDP of Togo is less than that of Benin, the former country is better able to

take advantage of the integration because of differences in value-added.

d. Firm’s profitability. This is found as the ratio of net profit to the firms’ own

capital. It is an indicator of the firm’s ability to increase shareholders’

dividend.

5.2. Results

We obtain the following results from the survey. Of the respondent firms, 14.3%

indicate that the lack of more participation of Beninese firms in the WAEMU preferential

tax program is due to information asymmetry; 28.5% cite, in addition to the lack of

information, other reasons such as the heavy load of administrative requirements, and the

fear of increased fiscal burden as to why they fail to apply for preferential status. Further,

we find that 50% of those firms that have failed to be admitted into the preferential

program point to the heavy administrative requirements as the reason for their failure.

The average labor productivity and valued-added ratio are higher for participating

firms than for non-participating firms, as shown in figures 2 and 3. The gap widened after

1996 indicating that even if there were residual effects from the defunct WAEC, the

creation of the new union produced an added impact on firms’ productivity. Due to lack

of adequate data, we were unable to calculate such indicators as the productivity of

capital or the net profit per firm. Overall, it is difficult to draw strong conclusions from

this analysis due to limited numbers of observations (therefore making econometric

analysis impossible) and limited number of firms in the sample.

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6. Concluding Remarks

The West African Economic and Monetary Union remains a relatively young

organization and it may be too early to calculate its effects on countries’ economies.

However, this study, first of its kind conducted for the country of Benin, has revealed

several interesting results. First, we find that despite the small size of its economy, Benin

has the ability to benefit from the regional integration both in the areas of arts and craft

and industrial products. Although the structural trade balance of the country is in deficit,

its product-specific trade balance in particular lines of products remains positive. Thus, if

the analysis had focused solely on aggregate trade activities, then the conclusion might be

that integration did not benefit Benin. But, the use of disaggregated data permitted us to

reach a different conclusion, which is that Benin can profit from regional integration with

regard to at least two of the four WAEMU-defined product categories we analyzed.

We also discover through results of a survey of industrial units in the country that firms

that participate in the Union’s preferential status program appear to have a higher labor

productivity and value-added than non-participating firms.

One particular result, which is a cause for concern, regards the low participation

rate of Beninese firms in the Union’s preferential tax system. The country cannot fully

exploit its comparative advantages in the Union without a much more pronounced

participation of its firms. Therefore, we recommend that the authorities initiate a vigorous

information and training campaign not only to increase firms’ awareness of the

opportunity of reduced taxation of their export goods, but also to enhance their capacity

to apply for an obtain admittance into the Union preferential tax program. Moreover,

given that the country’s economic policy seems to favor commerce more than industry,

21

we also recommend that authorities support the industrial export sector through, for

example, provision of financing, since the domestic banks loans are granted for

commercial activities only, and not for industrial projects. Finally, Benin must raise its

stature in the Union by becoming fully engaged and invested in the

decision-making process. This will require outfitting the Benin Regional Integration

Office with competent staff and the necessary equipment needed to raise the efficacy of

the country’s participation in the Union.

22

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27

Appendix 1: Tables and Figures

Table 1: Some basic indicators in WAEMU countries

Country Areas

(000 km2)

Population (millions)

Life expectancy at birth

GNP per capita

US$ Average Growth

Benin 116 5.8 53.5 380 1.8

Burkina Faso 274 11.3 44.7 240 1.7

Cote d’Ivoire 318 14.3 46.9 700 1.3

Guinea Bissau 36 1.2 44.9 160 -3.4

Mali 1240 10.7 53.7 250 0.8

Niger 1267 10.1 48.9 200 -1.0

Senegal 193 9.0 52.7 520 0.5

Togo 57 4.4 49.0 330 -1.4

Sources: UNDP (2000), Human Development Report, and www.izf.net

Table 2: Selected Indicators of Macroeconomic Performance in Benin as Compared to the WAEMU.

1997 1998

Benin WAEMU Difference Benin WAEMU Difference

Growth Rate 5.7 5.8 -0.1 4.4 5.4 -1

Inflation (%) 3.3 3.7 -0.4 5.8 3.6 2.2

Investment (% of GDP) 18.4 17.5 0.9 18.5 19.6 -1.1

Saving (% of GDP) 10.1 16.2 -6.1 9.2 17.7 -8.5

Current Debt / GDP 60 104.9 -44.9 55.5 82.2 -26.7

Debt Service / Exports 17.4 21.9 -4.5 16 21.5 -5.5

Sources : Central Bank of West African States (1999) and WAEMU Commission (1999)

28

Table 3 : Selected Convergence Indicators: Bénin and Mean WAEMU 1997 – 1998 (in %)

1997 1998

CONVERGENCE INDICATORS Benin WAEMU Difference Benin WAEMU Difference

Salaries / fiscal revenue (≤ 40%) 39 38.4 0.6 35 37 -2

Intern. Fin. Invest / Fisc. Rev. (≥ 20%) 7.5 17.5 -10 8.2 21.6 -13.4

Prim Budg. Surp/ Fisc. Rev. (≥ 15%) 25 20.4 4.6 35.4 19.1 16.3

Sources : Central Bank of West African States (1999) and WAEMU Commission (1999)

cited by www.IZF.net

Table 4 : Benin-to-WAEMU Aggregate Openness Ratios in %, 1993-98

1993 1994 1995 1996 1997 1998

txc 4.59 3.72 2.91 2.92 4.67 4.08

tmc 4.07 5.13 6.44 8.06 7.11 7.84

Source : Authors’ Calculation from INSAE Data (1999)

Table 5 :Benin-WAEMU Balance of Trade (all products) 1993-1998 (billions of CFA Francs)

1993 1994 1995 1996 1997 1998

Union share of Exports 2.27 3.22 2.59 3.86 5.06 5.12

Union share of Imports 5.46 10.02 20.46 23.05 24.97 29.57

Trade Balance - 3.19 - 6.80 - 17.87 -19.19 -19.91 -24.45

Source : Authors’ Calculations from INSAE Data (1999)

29

Table 6 : Benin-WAEMU Trade in Domestic PCT-qualified Industrial Products 1993 –

1998 in CFA Francs

1993 1994 1995 1996 1997 1998

Imports 299,410,889 1,084,345.68 922,635,441 1,128,703.89 1,462,980.22 4,543,307.58

Exports 1,833,773.91 1,867,717.56 1,309,842.46 2,700,314.04 2,877,991.04 3,462,467.93

Trade Balance

1,534,363.03 783,371,878 387,207,028 1,571,610.15 1,415,010.81 -1,080,839.6

Source : Authors’ Calculations from INSAE Data (1999)

Table 7: Benin-WAEMU Trade in non-Qualified Industrial Goods 1993 – 1998 in CFA F.

1993 1994 1995 1996 1997 1998

Imports 4,758,793.363 8,235,951.807

1.8795 E +10

2.1084 E+10

2.2525 E+10 2.3817 E+10

Export 371,616.518 1,069,531.67 1,047,607.41 979,175.00 2,002,224.47 1,305,606.11

Trade Balance -4,387,176.8 -7,166,420.1 -1.7747 E+10

-2.010 E+10

-2.0523 E+10

-2.251 E+10

Source : Authors’ Calculations from INSAE Data (1999)

30

Figure 1: Benin to WAEMU openness

0

1

2

3

4

5

6

7

8

9

1992 1993 1994 1995 1996 1997 1998 1999

Year

XprtOpn

MprtOpn

Figure 2: Average Productivity of Labor, 1993 -1998

0

500000

1000000

1500000

2000000

2500000

3000000

3500000

4000000

1 2 3 4 5 6

Particip Non-Particip

31

Figure 3:Average Value-Added, 1993 -1998

0.000

100,000,000.000

200,000,000.000

300,000,000.000

400,000,000.000

500,000,000.000

600,000,000.000

700,000,000.000

1 2 3 4 5 6

Particip Non-Particip

32

Endnotes

1 The schedule of reductions is as follows: 30% between July 1st 1996 and June 30th 1997; 60% between July 1st 1997 and December 31st 1998; 80% between January 1st 1999 and December 31st 1999; and 100% since January 1st 2000. 2 Defined as total revenue minus primary expenditures, which include salaries, pensions, scholarships, other operational expenditures and transfers, and public investment expenditure. 3 UN Human Development Report, 2000. In simple exchange rate term, the country’s per capita GDP is estimated at $380 in 1998. 4 In keeping with the requirements of the WTO, the industrial products, which do not qualify for the PCT, have a flat tariff reduction of 5%.