The implications of regional economic integration on the external trade of Zimbabwe

International trade is indeed an essential policy formulation for the growth and development of a country. Developmental theories and Economic Adjustment Programmes have cited trade liberalisation as one of the policy reforms necessary for the growth of developing countries. The growing trend in world trade shows bilateral and regional agreements taking greater precedence over global or inter-regional trade and to that effect every continental region has at least one major integration movement. Almost all countries are members of at least one trade bloc and now one third of world trade takes place within such agreements. Despite these gradual developments in regional trade, economic integration of developing countries has been a failure owing to poverty, political turmoil, overlapping membership and differences in economic structure of members. Researchers have advocated for regional cooperation agreements, rather than regional trade blocs, as better schemes for developing regions. Sub-Saharan Africa is no exception. Since the early 80s there have been major developments in the trade integration policy of Southern Africa. Efforts started with the creation of a regional cooperation scheme and a preferential trade area whose transformation into trade blocs, the current SADC and COMESA respectively, in the 90s seem to bear good results. SADC is one of the few regional economic bodies internationally regarded as having the potential to become a success in Sub-Saharan Africa. The member countries in the two trade blocs have taken bold steps towards integration through, in the case of SADC, the creation of a trade protocol in 2000 that envisaged the formation of a free trade area by 2008 while COMESA implemented its free trade area in 2000. The consequential effects on member countries of such developments remain an interesting but debatable issue especially given a history of unsuccessful attempts to achieve economic integration. This study gives both a theoretical and empirical analysis of the effects of the trade blocs in Southern Africa on Zimbabwe s external trade. The motivation is to establish and possibly quantify the possible gains and costs of regional integration on member countries by looking at Zimbabwe as a case study. Particular emphasis is however put on membership in SADC. The econometric estimation carried out, through running an extended gravity model on Zimbabwe s trade volumes, reveals that economic integration can result in trade creation. There is a potential increase both in exports to and imports from the SADC region. Zimbabwe is more abundant in land and unskilled labour than it is in capital. According to the Heckshcer Ohlin Samuelson (H.O.S) theorem, Zimbabwe is expected to be exporting land and unskilled labour-intensive goods while importing capital intensive goods, so that trade would be determined by factor endowments. Models of regional integration based on factor endowments differences, for example the Venables model discussed in the thesis, predict that countries that are intermediate in terms of factor endowment ratios would gain more from integration. In the present context, South Africa and to a lesser extent Zimbabwe could be interpreted as intermediate, with some other SADC countries having less capital or skilled labour. Due to this, regional integration will promote Zimbabwe s exports even to poorer countries in the region. The results show that Zimbabwe export goods like food and live animals, crude products and beverages and tobacco (which basically are land and labour intensive) and it imports transport and machinery, chemical related products as well as mineral fuels (capital intensive goods). Such type of trade is called inter-industry trade. As pointed out in the Venables model, the effects of regional integration on trade depend on the relative position of each country with respect to others in terms of factor endowment ratios. Countries with the highest capital-labour ratio in a trade bloc benefit from integration since regional integration will divert some imports of capital-intensive goods from outside countries. In SADC, this could particularly be countries like South Africa and Botswana. Given that Zimbabwe is ranked as a lower intermediate country in terms of capital-labour ratio in the region, the major effect of regional integration might be to increase further Zimbabwe s imports of skill-capital intensive goods from South Africa and other countries with higher ratios. But there are some countries in SADC that have even less capital and skilled labour than Zimbabwe, and in that case integration may boost Zimbabwe s exports of skill and capital intensive goods to these countries. On the whole, however, one would expect regional integration to strengthen Zimbabwe s current specialisation trend, with more exports of land and labour-intensive goods. Given such a trade pattern, Intra- Industry Trade (IIT) - trade in the same type of goods that is driven by imperfect competition and market size- is limited in Zimbabwe s external trade, despite the fact that Zimbabwe is intermediate in SADC in terms of market size (although far behind South Africa). But, the econometric analysis suggests the existence of home market effect in Zimbabwe s trade: Zimbabwe is importing more differentiated goods from large countries and exporting more of such goods to small countries. According to recent theories of integration, market access as well as the size of the home market matters strongly for the production of differentiated goods. Theories predict that regional integration will transfer production of differentiated goods from outside countries to the bloc ( production shifting ), and from smaller to larger countries in the bloc. While Zimbabwe is a net importer of such goods, there is also here the possibility that regional integration will promote Zimbabwe s exports of such goods to smaller countries in SADC, contributing to some diversification of Zimbabwe s exports. Whether trade in scale goods could be explained by the endowment effect or scale effects may be difficult to prove empirically due to a collinearity problem. Nevertheless, both H.O.S- based theories and new trade theories predict that integration will on one hand increase Zimbabwe s imports of differentiated goods or skill/capital intensive goods from especially South Africa, but there may also be a diversification effect by promoting Zimbabwe s exports of such goods to other SADC countries. Zimbabwe s imports were observed to be decreasing with tariff. Integration and subsequent elimination of tariff will thus increase Zimbabwe s trade. A crude estimation of the potential trade creation shows that elimination of tariff may increase imports by about 50.4%; with 12.1% of this having been realised already after the partial decrease in SADC tariff while 33.9% is the expected increase for the remaining tariff reduction. In carrying out the analysis the thesis starts by giving a historical background of regional economic integration as well as the macroeconomic overview of Zimbabwe (Chapter 1). Chapter 2 reviews the major trade blocs in Southern Africa with greater emphasis on SADC given its importance, in terms of achievements and membership, in the region. A theoretical perspective on regional integration is presented in Chapter 3. In this chapter the trade creation and trade diversion effects of trade are discussed; the neo-classical theory of trade - the H.O.S theory-, the Venables model; the new trade theory model which include the Dixit-Norman and the Markusen and Venables models, are all discussed. The H.O S theory is ideally noted to be the most suitable theory to explain Zimbabwe s trade. Chapter 4 carries out the econometric estimations by running the natural log-linear form of the gravity equation, using the standard Ordinary Least Squares (OLS) regression analysis. Chapter 5 dwells on the critical analysis of the findings in light of the theoretical expectations. The main implication drawn is that integration, which seeks to remove tariff (and non tariff barrier), could create a potential increase in trade. A country like Zimbabwe has a chance to dominate exports of unskilled labour and land-intensive goods especially agriculture products to the SACU market which is the major importer within the region. The discussion concludes with Chapter 6 by noting that indeed Regional Economic Integration has a potential of creating more trade for Zimbabwe. Increased trade is likely to create welfare gains, but this is not examined specifically in this analysis. However, realisation of such gains depends on certain qualitative factors which this thesis cited as critical issues. These are (i) a quick resumption of political and economic stability and improvement in infrastructure in Zimbabwe to overcome supply side constraints (ii) the removal of non-tariff barriers and the opening up of the SACU market, which is the centre of trade in Southern Africa and Zimbabwe s major trading partner (iii) full commitment to the free trade blocs by member states through ratification of the agreed trade protocols and abiding by the new trade regulations