The impact of international trade on the economic growth of Cameroon

Project Details

Department
ECONOMICS
Project ID
ECO04
Price
5000XAF
International: $20
No of pages
80
Instruments/method
Quantitative Method
Reference
YES
Analytical tool
Descriptive Statistics
Format
 MS Word & PDF
Chapters
1-5

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Abstract

The main objective of this study was to examine the impact of international trade on the economic growth of Cameroon. The research was conducted using secondary data. Data was collected using information from the World Bank, National Institute of Statistics, International Trade Database, and the World Trade Organization. To ease the interpretation of data, inferential statistics were used. The Ordinal Least Square technique (OLS) was used to estimate the parameter (GDP used as a proxy to measure economic growth) of a linear regression model to test the null hypothesis and to determine the significant effect of foreign trade on the economic growth of Cameroon. The main finding of the study is that international trade has a positive effect on the economic growth of Cameroon. The study equally found out the main variables or factors that stimulate the economic growth of a country. The study, therefore, concludes that international trade has a significant impact on the economic growth of Cameroon.

CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

International trade between countries and across continents have existed for centuries including previous civilizations. The outcomes of International Trade (IT) on Economic Growth (EG) can be said to be pioneered by Adam Smith (1776). This idea prevailed until World War II (WWII), although with relative hibernation during the ‘marginalist revolution’. After WWII, the introverted and protectionist Economic growth experiments had some significance, especially in Latin America. From the ’60s on, owing to the failure of those experiments and the association of quick Economic growth with the introduction of International trade and the consequent international specialization in several countries as well as to the results of many studies based on the neoclassical theories of Economic growth and international trade, a newly decisive role was given to International trade as economic growth’s driving force. However, although the dominant theoretical position tended, from the very start (with the Classics), to indicate a correlation between International trade and economic growth, many studies linked the gains of international trade only with static effects. But Baldwin (1984), for example, concluded, in a survey of empirical studies, that the static effects were of little relevance.

The debate has broadened in the last decades, precisely in the direction of pointing out and stressing the dynamic effects of international trade. The theoretical development afforded by the models of endogenous economic growth [especially after the works of Romer (1986) and Lucas (1988)], which triggered the creation of empirical studies, moved toward an integrated analysis of the economic growth and international trade theories. So, the classical tradition, plainly interrupted by the neoclassical separation of those two areas of the theory, seems to have been recovered, assigning, as a result, a decisive role to international trade on the countries’ rate of economic growth. Due to the recognition of this relevancies has led to the incessant appearance of proposals from international organizations, such as the World Bank (WB) and the United Nations (UN). As a result, many countries began to reduce commercial barriers and other controls of economic activity and obtained a significant (and sustainable) increase in the rate of economic growth, which suggests that extroversion has an ever-changing effect on the economy, helping to accelerate the rate of economic growth. Moreover, the processes of economic integration intensified.                 

 Besides, the relationship between export and economic growth has triggered an ever-growing curiosity; theoretically, it has been debated upon that a change in export rates could change output (Gross domestic product). Export, therefore, is often considered to be the main determinant of the production and employment growth of an economy which is shown in Gross Domestic Product (GDP) growth (Ramos, 2001). The aim to achieve rapid economic growth and development is most relevant and crucial for developing countries as a whole specifically Cameroon and exports are generally perceived as a driving force for economic growth. Empirical and theoretical studies regarding the role of exports in raising the economic growth and development of a country are not exhaustible. Adam Smith and David Ricardo (The Classicalists) have argued that foreign trade is the primal source of economic growth and more economic gain is achieved from specialization. Exports being the major source of economic growth have many theoretical justifications according to the export-led growth theory hypothesis.

Firstly, in the Keynesian theory, more exports generate more income growth through foreign exchange multiplier in the short run. Secondly, export raises more foreign exchange which is used to purchase commodities such as machinery,  electrical and transport equipment,  fuel and food which is motivating factors for the economic growth of any nation. Thirdly, exports promote growth indirectly through increased competition, economies of scale, technological development and increased capacity utilization. Furthermore, many positive externalities like the reduction of organizational inefficiencies or more efficient management, better production techniques, positive learning from foreign rival countries and technical know-how about product design are accrued as a result of more exports,  leading to economic growth.  In fact, over the past decade, Cameroon, like other countries in Sub-Saharan Africa (SSA), has experienced a dramatic increase in export growth in general and agricultural exports. According to the “conditional convergence theory,” it suggests that Cameroon could bridge the gap of poverty with other richer nations by trading with those countries which have high income and good trade policies.

Africa plays only a marginal role in world trade. Its share of global exports is 2.4 per cent, with Sub-Saharan Africa accounting for just 1.7 per cent. Yet for these countries themselves, world trade in fact plays a major role. In many parts of Sub-Saharan Africa, foreign trade measured in terms of imports and exports of goods and services represents more than 50 per cent of GDP. This frequently means a great dependency on imports, not adequately balanced by corresponding exports. The comparatively strong import dependency of these economies is reflected in statistics showing the share of GDP accounted for by foreign trade as a whole to be considerably more than twice the share accounted for by exports. For Mozambique for example, trade represents 96 per cent of GDP and exports only 26 per cent, for Rwanda, the figures are 45 per cent to 15 per cent, Kenya 50 per cent to 16 per cent. The situation is more balanced in South Africa with 64 per cent to 31 per cent (in other words, the trade share as a whole is roughly double the export share). Sub-Saharan Africa’s exports to the rest of the world remain dominated by raw materials; almost two-thirds comprise fuels, ores and metals, and another 15 per cent agricultural product. Only 16 per cent are finished products, whose exports are being crucial for value creation and employment in these economies.

 Cameroon is a low middle-income country with vast quantities of natural resources open to international trade. It is a member of the Commonwealth, the Free Trade Zone and the CEMAC (Central African Economic and Monetary Community). The share of foreign trade in Cameroon concerning its GDP is around 50%. Spain, Italy and France are its three prominent export traders. The main export commodities are mineral fuels, oil, wood, coal, cocoa, cotton, and aluminium. Its three prominent import suppliers are Nigeria, France and China. Cameroon mainly imports mineral fuels, oil, cereals, vehicles, machinery, electrical and electronic equipment. The European Union is Cameroon’s primary trade partner, accounting for more than 50% of its trade (apart from oil) (Cameroon report 2014).

On January 15, 2009, the two entities signed an economic partnership agreement. Consequently, Cameroon has committed itself to liberalize 80% of its imports from this area over a period of 15 years. For some years now, eastern Asian countries (especially China, Japan, India and Thailand) have been reinforcing their trade ties with Cameroon. Today, this zone represents almost 20% of the country’s total trade. Due to the massive import of food products, the country’s trade balance remains in deficit and Cameroon has to improve its level of openness starting 2011, to improve its performance in the foreign trade plan. Never the less, Cameroon is engineering great efforts to facilitate its trade environment. In 2013, the country was classified 161 out of 185 countries on the Ease of Doing Business ranking, which signifies am upward movement of more than 4 places from its rank in the previous year. The Douala free port is the hub of foreign trade and importers are allowed eleven free days without having to pay storage fees. Furthermore, the country is gearing its efforts towards optimization of its one-one-stop-shop foreign trade GUCE which digitalization is on the way. (International trade centre, Cameroon report 2014).

Cameroon is the 111th largest export economy in the world and the 106th most complex economy according to the Economic Complexity Index (ECI). In 2017, Cameroon exported $4.27B and imported $5.88B, resulting in a negative trade balance of $1.61B. In 2017 the GDP of Cameroon was $34.9B and its GDP per capita was $3.71k.The top exports of Cameroon are Crude Petroleum ($1.34B), Sawn Wood ($616M), Cocoa Beans ($492M), Bananas ($306M) and Rough Wood ($219M), using the 1992 revision of the HS (Harmonized System) classification. Its top imports are Refined Petroleum ($396M), Special Purpose Ships ($351M), Rice ($304M), Crude Petroleum ($220M) and Packaged Medicaments ($195M). The top export destinations of Cameroon are France ($559M), China ($488M), Italy ($392M), Belgium-Luxembourg ($359M) and the Netherlands ($356M). The top import origins are China ($1.06B), France ($548M), the Republic of the Congo ($441M), Thailand ($275M) and Nigeria ($253M), ( International Trade Database, 2017).

1.2 Problem statement and Justification of the study

It is evident from the statistics shown in the World Trade Organization (WTO) from the year 1995 to date that, there is no country (including Cameroon) that is self-sufficient or in a state of economic independence so nations have to engage in trade with one another to enjoy goods and services with a comparative disadvantage in its production. This is a situation in Cameroon where a majority of her labour force is employed in the agricultural sector while few others are employed in the manufacturing and tertiary sectors. With the large labour force and other favourable natural conditions, it gives her a comparative advantage in the specialization in agricultural products such as cocoa beans, coffee, cotton, and oil which are predominant in Cameroon’s exports. In recent years, the tertiary sector is the main driver of economic growth, telecommunications and transport being particularly dynamic. In the primary sector, industrial and export-oriented agriculture has driven growth. Rubber and cotton exports have continued to rise while cocoa exports have reversed their downward trend due to better prices. Coffee exports, however, have fallen by about 50 per cent, due to a combination of factors: the slowdown in production due to ageing plants and a gradual retreat from the sector was compounded with exporters building up coffee stocks because of the low international price (World Bank, 2013).

Petroleum accounts for more than 50 per cent of the country’s total exports. Others include natural gas, aluminium and gold. Cameroon’s main export partner is the European Union (EU) (45 per cent of total exports). Others include China and the United States (Institute National de la Statistique, Cameroon 2017). Oil makes a contribution of some 6% to Cameroon’s GDP, 40% to exports and accounts for around 40% of the Cameroonian government’s fiscal revenues. In the oil sector, the upward trend in production has continued, expanding to 17.4 million barrels in the first three quarters of 2013, compared to 17 million barrels over the same period last year. However, this expansion is slower than that projected earlier this year because of delayed activities in new oil fields. Total oil production for 2013 is estimated at    24.3 million barrels, compared to the 27 million barrels projected in April. Overall, it is important to note that Cameroon is not as dependent on oil other neighbouring oil-producing countries. Oil GDP represented 8 per cent of total GDP in Cameroon in2011, compared to 38 to 48 per cent in Angola, Nigeria and Chad. While oil accounts for one-fourth of government revenues and half of the exports in Cameroon, in the other three countries more than three fourth of the revenues and almost all of the exports stem from oil (World Bank, 2013). The trade deficit is expected to have grown in 2013 to 1.6 per cent of GDP, compared to 1.1 per cent in2012. This is mainly as a result of increased imports of intermediary goods for the realization of large infrastructure projects and low prices for some of Cameroon’s major export products, especially coffee. Non-oil exports are expected to have dropped from 11.1 per cent of GDP in 2012 to 10.5 per cent in2013.  At the same time, the current account deficit is projected to amount to 4.9 per cent of GDP in 2013, which is about the same as the year before, but more than one per cent above 2011 figures. Foreign reserves dropped by about 63 million USD (30 billion FCFA) to 3.3 billion USD (World Bank, 2013). In 2017, Cameroon recorded a trade deficit of 1089.50 billion CFA. Balance of Trade in Cameroon averaged -468.43 CFA Franc Billion from 2001 until 2017, reaching an all-time high of 304.50 CFA Franc Billion in 2006 and a record low of -1774.90 CFA Franc Billion in 2015 ( World Trade Organization, 2017).

However, it is realized that from time immemorial most agricultural exports in Cameroon had witnessed a substantial fall in revenue due to changing world prices. As a result, the products became less competitive as compared to manufactured goods bought from other countries, thus leading to unfavourable terms of trade. This has strongly influenced their share contribution to economic growth in the country. The aforementioned issue raised brings us to the central point of this research work which is to investigate the contribution of foreign trade to the economic growth of Cameroon with a case in point being net exports (exports and imports), foreign direct investment, gross capital formation, and inflation and trade openness. This problem is transformed into the following research question: Specifically,

  • What is the effect of net exports (trade) on economic growth?
  • To what extent has foreign direct investment affect economic growth?
  • Is there any relationship between gross capital formation and economic growth?

Based on the research questions presented above, the objectives of this research can be captured and formulated.

1.3 Objectives of the Study

1.3.1 Main Objective of the Study

– The primal objective of this study is to examine the impact of foreign trade on the economic growth of Cameroon.

1.3.2 Specific Objectives of the Study

– To examine the extent to which net exports (trade) has affected the economic growth of Cameroon.

-To analyze the extent to which foreign direct investments have influenced economic growth in Cameroon.

-To determine the other factors of economic growth in Cameroon.

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