Journal of Development Studies, Vol. 42, No.

6, 10561074, August 2006

Exports, Growth and Threshold Eects in Africa

NEIL FOSTER
University of Vienna, Vienna, Austria

Final version received June 2005

ABSTRACT The relationship between openness and growth remains a controversial issue in development economics with many studies focusing on the exportgrowth relationship. This paper examines whether the relationship between exports and growth found in large cross-section studies also holds in the context of African economies. The paper employs threshold regression techniques to examine whether African countries benet more from exports when they reach a certain level of development or openness. Our results suggest that there is indeed a positive relationship between exports and growth in Africa. The threshold regression analysis also suggests that it is not necessary for a country to reach a certain level of development or to have an existing export base for this relationship to hold, though it is found that the relationship is stronger for countries that experience higher rates of export growth.

I. Introduction A number of hypotheses concerning the poor performance of Africa have been proposed in the literature. Dierent authors have considered a variety of reasons for Africas relatively weak performance, examples including the role of institutions (Freeman and Lindauer, 1999), ethnic divisions (Easterly and Levine, 1997), scal policy (Schmidt-Hebbel, 1996) and geography (Sachs and Warner, 1997). Many such studies start from the assumption or come to the conclusion that Africa is dierent to other continents, an argument rejected by Rodrik (1998, 1999). Rodrik (1998) for example argues that trade policy in Africa works in much the same way as it does elsewhere, with high levels of trade restrictions being an impediment to exports. He goes on to argue however that trade restrictions have a generally weak impact on output growth in his sample of African countries. Moreover concentrating on how Africa is dierent ignores the fact that the economic performance of countries within Africa has been heterogeneous. From our data we calculate that the average growth rate of per capita GDP for the sample of 43 countries in this paper over the period 196099 was 0.8 per cent (See Table 1), but this hides the fact that while the Democratic Republic of the Congo (73.0 per cent),
Correspondence Address: Neil Foster, Department of Economics, University Hohenstaufengasse 9, A-1010, Vienna, Austria. Email: neil.foster@univie.ac.at ISSN 0022-0388 Print/1743-9140 Online/06/061056-19 2006 Taylor & Francis DOI: 10.1080/00220380600775027 of Vienna,

Exports, Growth and Threshold Eects in Africa 1057

Table 1. Summary statistics Mean DlnGDPPC lnINITGDP INV DPOP SECMRW lnEXP_GDP DlnEXP 0.008 7.30 10.32 0.026 2.23 3.1 0.007 Std. Deviation 0.04 0.74 8.92 0.007 1.7 0.59 0.07 Minimum 70.15 5.77 0.56 70.02 0 1.51 70.24 Maximum 0.12 9.34 69.92 0.06 7.3 4.34 0.26

Central African Republic (71.9 per cent) and Niger (71.6 per cent) amongst many others have performed quite poorly, countries such as Botswana (5.1 per cent), the Congo (3.7 per cent), Cape Verde (3.3 per cent) and others have performed relatively well. This paper concentrates on a sample of African countries in an eort to examine whether variables which work well in large cross-country regressions can help explain African economic performance and dierences in performance across African countries. Of particular interest is the relationship between exports and growth. A large and important body of work has addressed the relationship between exports and growth. The reasons for the inclusion of exports in growth regressions are varied, with studies using exports as a measure of openness or as a test of the export led growth hypothesis, or simply as an additional source of accumulation in a growth framework. This paper examines the relationship between exports and growth and adds to the existing literature in two ways. Firstly, it examines whether the relationship between exports and growth which has been found to hold for a large number of countries in cross-country regressions, also holds for African countries. Given the conclusions of Rodrik (1998) mentioned above, we examine whether a much used measure of openness is related to growth in Africa. Secondly, we employ recently developed threshold regression techniques to examine whether any relationship between exports and growth depends upon a third variable. A number of such threshold variables have been suggested in the literature, the most popular being the level of development (measured by initial GDP per capita) and the level of openness (measured by the level or growth rate of exports). We estimate a now standard growth model for a sample of 43 African countries over the period 196099 using panel data methods and data on ve-year averages. After nding a positive relationship between export growth and per capita GDP growth that is signicant we search for thresholds in the export-growth relationship based on the level of development, measured by initial GDP per capita, and also the level of openness of an economy, measured by both the level and growth of exports in GDP. Our results suggest that a positive and signicant relationship between exports and growth exists for countries with lower levels of initial GDP per capita and lower levels of exports to GDP, but not for higher levels of these variables. As such our results suggest that it is not necessary for a country to have reached a certain level of development or to have an export base in order to benet from exporting. Our results do suggest however that it is those countries that experience the highest rates of growth of exports that benet more from exports.

1058 N. Foster The remainder of the paper is set out as follows. In Section II we briey review the existing literature on the export-growth relationship. Section III describes our empirical specication. Section IV discusses the data sources and construction, while Section V describes the results obtained. Section VI discusses the results and concludes. II. Exports and Growth: A Review of the Literature There are a number of reasons why exports may aect growth.1 Recently developed endogenous growth theories point to the role of exports in facilitating knowledge spillovers, which are an important source of growth in this class of models. Grossman and Helpman (1991) argue that exports may be an important channel for knowledge diusion, with sellers gaining from the knowledge base of their buyers, especially where buyers suggest ways to improve the product or the process of manufacture. The knowledge acquired through interactions with customers may enhance own productivity. Export growth may also increase the scope for economies of scale due to an enlarged market and encourage allocative eciency and improve the competitiveness of exporting rms. Export growth is also the only component of demand that provides the foreign exchange to pay for imports, thus allowing other components of demand to grow, such as investment, consumption and government expenditure, all of which have an import content (Thirlwall, 2000).2 Empirically a number of methods have been employed to investigate the relationship between exports and growth. Early studies such as Michaely (1977) and Balassa (1978) used simple rank correlations to examine whether exports and output growth were related. Michaely for 41 countries and Balassa for 11 countries both found a positive correlation between their measures of the rate of growth of exports and output growth. Later studies tend to use regression analysis that allows one to control for other factors that may impact upon growth. One of two approaches tend to be followed. Firstly, the production function approach of Michalopoulos and Jay (1973) whereby exports are considered to be an input into a standard production function. The production function methodology has been used by inter alia Balassa (1978, 1984), Tyler (1981), Kavoussi (1984), Moschos (1989) and Salvatore and Hatcher (1991). In all of these studies the growth rate of either GNP or GDP is regressed on the growth rate of exports and a set of additional explanatory variables usually including investment, population growth and measures of human capital. Most such studies conclude that exports are signicantly related to economic growth in developing countries, though the size of the relationship can vary substantially. The second approach is that developed by Feder (1983) who developed a model in which exports can play two roles in growth. Firstly, exports generate positive externalities on non-export sectors through more ecient management styles and improved production techniques, and secondly there is assumed to exist a productivity dierential in favour of the export sector. Feder estimated his model on a sample of 31 semi-industrialised countries over the period 196473. He found that exports were related to output growth, and that although both export externalities and export productivity were important in explaining this result, export externalities were relatively more important than productivity dierentials.

Exports, Growth and Threshold Eects in Africa 1059 Given the large number of cross-section studies on the relationship between exports and growth there are relatively few studies that consider the role of exports on growth in African economies exclusively, though Fosu (1990a), Lussier (1993), Ghura (1995) and Ojo and Oshikoya (1995) all nd signicant positive eects of export growth on output growth for African countries. A number of issues have emerged from the empirical literature. Firstly, given the dierent results found in the literature and in particular the sensitivity of the size of the coecient on exports to the sample of countries considered a literature has emerged examining whether the relationship between exports and growth holds only for certain countries. From the policy debate perspective this is an important question that has some bearing on the universality of the outward orientation recommendation. Helleiner (1986) for example, has argued that a minimum level of development is required before the benets of export promotion can be realized and that as a consequence export promotion policies would have ambiguous eects in Africa. The evidence in favour of such threshold eects is mixed however. Michaely (1977) split his sample of countries into two, based on their per capita income levels, and found that while the correlation between exports and growth in the high income group was positive and signicant, the correlation between exports and growth in the low income group was practically zero. Both Tyler (1981) and Kavoussi (1984) using the production function approach nd that export expansion in low income countries tends to be associated with better economic performance, but that the contribution of exports is greater amongst the more advanced developing countries. Ram (1985) using dummy variables on both the slope and intercept terms to dierentiate between middle income and low income developing countries nds that the eect of export performance on economic growth is numerically smaller in the low income developing countries, but that the dierence is not statistically signicant. Others such as Moschos (1989), also using the production function approach, nd that the coecients on the export variable are positive and signicant under both regimes, but that the eect of export expansion on aggregate growth appears to be stronger under the low income regime than under the high income regime. Most studies consider whether there exist threshold eects based on the level of development, Kohli and Singh (1989) however investigate whether countries can be distinguished by a threshold related to the level of trade.3 Kohli and Singh do two things: Firstly, using data on 41 countries they divide their sample into export oriented (rate of growth of exports exceeding 6 per cent per annum or with a share of exports to GNP larger than 17 per cent) and non-export oriented countries. Secondly they examine whether there is any evidence of diminishing returns to exporting by including a quadratic term in their regressions. This follows a criticism of the linear approaches of Michalopoulos and Jay (1973) and Feder (1983) by Ocampo (1986) who argues that these models are subject to criticism on neoclassical grounds since they do not assume diminishing returns to an increasing export share. Using Feders model for the period 196070, Kohli and Singh found the coecient on exports to be positive in both the export and non-export oriented groups, but signicantly greater for the export oriented group. The coecient on exports in the non-export oriented group was often found to be insignicant. Their results also suggest the

1060 N. Foster possibility of diminishing returns to exporting with a positive coecient on the export variable found, but a negative one on the quadratic term. A related study by Salvatore and Hatcher (1991) comes to a dierent conclusion. They use a production function approach and time series data (for the periods 196373 and 197385) to study the relationship between exports and growth for 26 developing countries. The countries were classied as strongly outward oriented, moderately outward oriented, moderately inward oriented and strongly inward oriented according to a classication based on trade orientation published in the 1987 World Development Report. The classication was made for two time periods, 196373 and 197385. Salvatore and Hatcher estimated their model separately for the four dierent groups and also for the pooled outward oriented and the pooled inward oriented groups. The coecient on the export variable was found to be positive for all six categories in both time periods, suggesting that openness benets all of the countries in the study. Salvatore and Hatcher however noted that the coecient on the export variable was only highly signicant for the inward oriented countries in both periods. A second issue that has also been highlighted in the literature concerns the issue of causality: does the evidence suggest that a higher rate of export growth causes a higher rate of output growth? Cross-section and rank correlation studies can only show a correlation between variables and cannot address the issue of causality. To examine the issue of causality therefore the cross-country framework has to be abandoned in favour of a time series approach. Early studies of causality such as Jung and Marshall (1985) and Hutchinson and Singh (1987) using Granger or similar causality tests provide mixed evidence of exports causing output growth. In some cases exports are found to cause growth, in others growth is found to cause exports, but in most cases it is not possible to determine the direction of causality. More recently authors have employed the Engle and Granger (1987) approach to cointegration and error correction modelling for the study of causality, which is a better approach to adopt if the time series in question are cointegrated. BahmaniOskooee et al. (1993) using this approach and employing quarterly rather than annual data nd strong empirical support for two way causality between export growth and GDP growth in eight out of nine countries. Other studies using this approach nd evidence in support of either export led growth (Ghatak et al., 1997) or bidirectional causality (Doraisami, 1996). Much of this strand of the literature concentrates on Asia though Abdulai and Jaquet (2002) examine the issue of causality for the Ivory Coast over the period 196197. They nd evidence in support of export growth causing output growth. Lal and Rajapatirana (1987) have criticised the role of such causality tests in the debate on openness and growth however. They argue that a small country that is developing in line with its comparative advantage will begin to specialise and be forced to turn to export markets in goods that use the countrys most abundant factor most intensively. According to tests such as the Granger causality test this would be seen as growth causing exports; yet if the economy were closed the countrys growth would have been stunted due to the limited size of domestic markets. The third issue that has been addressed more recently concerns the importance of the composition of exports. An early study by Fosu (1990b) argues that the manufacturing export sector is likely to be accompanied by greater diusion of

Exports, Growth and Threshold Eects in Africa 1061 innovative technology and may involve more backward and forward linkages than the primary export sector, since manufacturing generally entails relatively extensive training of its workers and the introduction of relatively advanced technologies. Fosu employs the production function approach on a sample of 64 developing countries with data averaged over the period 196080. Included alongside the average annual growth rate of merchandise exports is the interaction between this variable and the average share of manufacturing exports in total merchandise exports. He nds the coecient on the export variable to be positive, but insignicant, while the coecient on the interaction term is positive and signicant. As such the results are suggestive of the importance of manufacturing exports in total exports, while pointing to an insignicant impact of the primary export sector on growth. More recently So derbom and Teal (2002), using a similar approach and aggregate data for a sample of nine African countries, nd that the coecient on the share of manufactured in total exports is negative and occasionally signicant. Other studies have considered a ner disaggregation of exports. Greenaway et al. (1999) employ a dynamic panel data model on a sample of 69 countries over the period 197593. They nd for their sample the usual result that exports are positively and signicantly related to growth. They proceed to examine if the relationship between exports and growth that is commonly found holds only for exports of certain commodities or more generally. They consider the relationship between exports and growth for seven industries nding in general positive coecients on the dierent aggregates of exports. The coecients tend to be signicant only for fuel, machinery and textiles however. The authors argue that this is not surprising given the importance of textiles and of fuel and manufacturing for many developing countries, and given that demand for products such as food tend to be income inelastic. Similarly, Crespo-Cuaresma and Woerz (2005) examine the importance of export composition in a Feder type model for 45 countries over the period 198197. They nd that non-manufacturing and high technology intensive exports are positively and signicantly related to growth, but that low technology exports do not have a signicant impact on growth. After accounting for potential endogeneity using a two stage least squares estimator, the relationship between low technology exports and growth becomes negative and signicant. The coecient on the export variable for the other two aggregates remains positive and signicant. III. Empirical Specication The sample on which our empirical model is estimated is a sample of 43 African countries over the period 196099 with data averaged over eight ve-year periods. Employing a panel rather than the more usual cross-section specication yields a large number of degrees of freedom and allows us to investigate both the cross country and intertemporal variation in the data. By looking at data on ve-year averages the study also attempts to eliminate business cycle eects that would be present in annual data. Moreover, by considering averaged data the problem of lagged responses is likely to be less severe. One implication of this approach when compared with much of the existing cross-section literature that considers data averaged over a long period of time is that rather than looking at the long term relationship we are considering the impact of exports on short term growth.

1062 N. Foster Following the contributions of Levine and Renelt (1992) and Sala-i-Martin (1997) there has been some convergence in the variables included in studies of growth and we follow these including as independent variables: initial GDP per capita, the ratio of investment to GDP, population growth, secondary education and the ratio of exports to GDP. The basic estimating equation for our growth model is thus the following, D ln GDPPCit b1 ln INITGDPit b2 INVit b3 DPOPit b4 SECMRWi b5 D ln EXPit mi Zt eit where DlnGDPPCit is the growth of per capita income for country i in period t, lnINITGDP is (log) initial GDP per capita, INV is the ratio of investment to GDP, DPOP is population growth, SECMRW is the percentage of the working age population in secondary schooling from Mankiw, Romer and Weil (1992), DlnEXP is the growth of exports to GDP, mi and Zt are country and time specic constants and eit is a normally distributed error term. This study improves upon many previous studies searching for thresholds in the relationship between exports and growth by searching for threshold eects using techniques recently developed by Hansen (1996, 1999 and 2000). This has the advantage over many previous threshold studies in that it allows the data to determine the position of the threshold rather than imposing the break arbitrarily. Moreover, it allows the data to determine the number of thresholds, which has usually been imposed as being one. If one threshold is imposed on the data when there are in fact more, then the resulting coecient estimates could under/over estimate the impact of exports on growth.4 Threshold analysis allows for the introduction of asymmetry in to the relationship between exports and growth, and in particular it allows the coecient associated with growth to vary discretely depending upon the value of a third variable. The third variables (that is the threshold variables) considered in the analysis are initial GDP per capita, the export to GDP ratio and the growth of the export to GDP ratio. Firstly, initial GDP per capita is used as a measure of a countrys level of development. It has been argued that a country needs to have reached a certain level of development to benet from exports, though the empirical results on this hypothesis are mixed with the full range of possibilities found. Secondly, the study examines whether thresholds exist on both the level and the growth rate of exports. Here we follow Kohli and Singh (1989) and argue that in order to benet from exports, a country must have a minimum level of exports or its exports must be growing at a minimum rate. The threshold techniques of Hansen (1996, 1999 and 2000) provide an econometric technique that allows the sample data to determine the number and location of the thresholds. This is achieved by estimating the following model: D ln GDPPCit b1 ln INITGDPit b2 INVit b3 DPOPit b4 SECMRWi d1 D ln EXPit ITHit  l d2 D ln EXPit ITHit > l mi Zt eit where THit is the threshold variable of interest (either initial GDP per capita or one of the measures of exports) and l is the estimated breakpoint. Here the observations

Exports, Growth and Threshold Eects in Africa 1063 are divided into two regimes depending on whether the threshold variable is smaller or larger than the value l. The impact of exports on growth will be given by d1 for countries in the low regime and d2 for countries in the high regime. To estimate the model the threshold value l and the slope parameters are jointly estimated. Hansen (2000) recommends obtaining the least squares estimate of l as the value that minimizes the concentrated sum of squared errors. To ensure a sucient number of observations in each regime the model is estimated for all values of the threshold variable between the 10th and 90th percentile. After obtaining a value of l the parameters of our growth model can be estimated. Having found a threshold it is necessary to identify whether it is statistically signicant. This involves testing the null hypothesis that d1 d2. One complication is that the threshold l is not identied under the null hypothesis, implying that classical tests do not have standard distributions and critical values cannot be read o standard distribution tables. The p-value for the test of a signicant threshold is obtained using the bootstrap procedure of Hansen (1996). IV. Data Sources and Construction Data was collected for 43 African countries5 over the period 196099, with data being averaged over eight ve year periods. Much of the data for this paper were taken from the Penn World Tables (version 6.1). This was the case for per capita GDP growth, initial GDP per capita, the investment to GDP ratio and population growth. The data on exports were taken from the World Development Indicators 2002 database. To help deal with the problem of endogeneity the initial values are used as opposed to the average over each ve-year period for both exports and investment. Education data is from Mankiw et al. (1992) and is dened as approximately the percentage of the working age population that is in secondary school and is reported as an average for the period 196085. As such it is a constant across time. This variable is used rather than the education data from Barro and Lee (2000) because it is available for a larger number of African countries enabling us to maximise the number of countries in our sample. Table 1 reports summary statistics for the variables employed in our analysis and gives some indication of the wide disparities in economic performance across African countries mentioned in the introduction. V. Results The empirical analysis begins with estimating the linear model. Table 2 reports the base specication and the results from including exports in a linear fashion. The table also reports results from including a quadratic term on both education (SECMRW_SQ) and export growth (DlnEXPSQ) in the model. This allows the study to examine whether there exist simple nonlinearities in both the relationship between education and growth and between exports and growth. Including the quadratic term on the export variable allows one to examine whether there is evidence of diminishing returns to exports as suggested by Ocampo (1986) and found by Kohli and Singh (1989). The literature on human capital and growth is mixed with many studies nding an insignicant or even negative relationship between a measure of

1064 N. Foster
Table 2. Initial results DlnGDPPC lnINITGDP INV DPOP SECMRW SECMRW_SQ DlnEXP DlnEXPSQ Observations F Statistic R2 293 11.95*** 0.42 293 11.95*** 0.42 293 5.69*** 0.43 1 70.03 (72.92)*** 0.05 (1.76)* 0.26 (0.39) 0.008 (3.39)*** 2 70.03 (72.92)*** 0.05 (1.76)* 0.26 (0.39) 70.02 (72.67)*** 0.004 (3.19)*** 3 70.03 (72.90)*** 0.05 (1.92)** 0.26 (0.39) 70.02 (72.79)*** 0.004 (3.30)*** 0.06 (1.87)* 4 70.03 (72.90)*** 0.05 (2.01)** 0.23 (0.35) 70.02 (72.72)*** 0.004 (3.23)*** 0.05 (1.41) 0.30 (0.79) 293 6.96*** 0.43

Notes: All equations include a full set of unreported country and time dummies. t statistics are reported in brackets. All models estimated using White Heteroscedasticity consistent standard errors. *, **, *** indicate statistical signicance at the 10, 5 and 1 per cent level respectively.

human capital and growth (Caselli et al., 1996; Pritchett, 2001). Others have found evidence of a nonlinear relationship between human capital and growth (Benhabib and Spiegel, 1994). The quadratic term is included here to account in a simple way for any potential nonlinearities in the relationship between human capital and growth. The base specication (Column 1) shows that most of the core variables in our model are of the expected sign and signicant. This is the case for initial GDP, investment and the education variable. Population growth is found to be positive, and tends to be insignicant.6 Including the quadratic term on education (Column 2) we nd a negative coecient on SECMRW and a positive coecient on SECMRW_SQ implying that for countries with low levels of education there is a negative relationship between education and growth, but for countries with higher levels of education the relationship is positive. A negative coecient on the education variable has often been found in the empirical literature. Pritchett (2001) identies a number of reasons why this negative relationship may exist. One such argument is that in poor countries it is often the case that educated people are employed in rent seeking and directly unproductive activity or in the public sector, which can inhibit growth by drawing educated people away from the most productive sectors. Given that both the education and its quadratic term are found to be signicant we include them in all future regressions. When the export variable is included in our model (Column 3) we nd that the size, sign and signicance of the core variables in our model tend to be largely unaected. The coecient on the export variable itself is found to be positive and signicant at the 10 per cent level, which thus conrms that in this sample of African economies exports are

Exports, Growth and Threshold Eects in Africa 1065 signicantly related to growth. The results suggest that an increase in export growth of 1 per cent is associated with a 0.06 per cent increase in growth of per capita output, which is somewhat smaller than that found in some of the larger cross country studies (for example, Balassa (1978) and Feder (1983)) and somewhat smaller than those studies mentioned above that concentrate on Africa, which tend to nd a coecient around 0.1. With the quadratic term included (Column 4) the coecient on the export variable becomes insignicant at standard levels, while the quadratic term itself, although positive, is insignicant. As such there is little evidence of diminishing returns to exporting and of nonlinearities modelled in this simple way. After estimating the linear model, a single threshold is estimated in turn for each of our threshold variables. The results of our initial threshold analysis are reported in Table 3. The rst thing to note from the table is that regardless of the threshold variable employed the size, sign and signicance of the core variables in our model are quite stable. Turning to the threshold results themselves we nd evidence of a signicant threshold for all three of our threshold variables. Considering the threshold on the log of initial GDP per capita we nd a signicant threshold at a value of 7.11 ($1,224 in 1996 US dollars) that splits the data nearly in half (the threshold is found at the 49th percentile of the distribution). The results suggest that for countries in the low income regime a positive and highly signicant

Table 3. Threshold Results DlnGDPPC lnINITGDP INV DPOP SECMRW SECMRW_SQ DlnEXP TH  l DlnEXP TH 4 l TH Value p value Observations F Statistic R2 lnINITGDP 70.03 (72.76)*** 0.05 (1.74)* 0.26 (0.39) 70.02 (72.21)** 0.004 (2.83)*** 0.12 (3.30)*** 70.09 (71.75)* 7.11 (49th percentile) 0.00*** 293 8.36*** 0.45 lnEXP_GDP 70.03 (72.90)*** 0.05 (1.88)* 0.25 (0.36) 70.02 (72.68)*** 0.004 (3.18)*** 0.18 (2.92)*** 0.03 (0.77) 2.33 (11th percentile) 0.04** 293 8.21*** 0.44 DlnEXP 70.03 (72.84)*** 0.05 (2.06)** 0.20 (0.29) 70.02 (72.68)*** 0.004 (3.23)*** 70.01 (70.21) 0.15 (3.01)*** 0.075 (89th percentile) 0.02** 293 18.42*** 0.44

Notes: All equations include a full set of unreported country and time dummies. t statistics are reported in brackets. All models estimated using White Heteroscedasticity consistent standard errors. *, **, *** indicate statistical signicance at the 10, 5 and 1 per cent level respectively. The p value is computed using the bootstrap procedure of Hansen (2000) with 1000 replications.

1066 N. Foster relationship between exports and growth exists, but for countries in the high income regime a negative and signicant relationship between exports and growth exists. As such our results suggest that it is the low income countries in Africa that benet from exporting. Turning to the threshold based on the log of the ratio of exports to GDP we nd a signicant threshold at the lower end of the distribution (11th percentile). The threshold is found at a value of 2.33 or at an export to GDP ratio of 10.3 per cent. The results again suggest that it is countries in the low regime that benet more from exports than those in the high regime. The results suggest that while countries in the low regime benet signicantly from exports there exists no signicant relationship between exports and growth in the high regime. As such the results suggest the presence of diminishing returns to exporting. Finally, there is a signicant threshold based on the growth of the export ratio towards the upper end of the distribution (89th percentile) at a value of 0.075. Here we nd that for observations in the high regime (rate of export growth above 7.5 per cent) there exists a positive and signicant relationship between exports and growth, but in the low regime (export growth less than 7.5 per cent) we nd an insignicant coecient on the export variable. Here the results suggest that those countries that are expanding their exports at a greater rate benet more from exports.7 One advantage of the threshold technique of Hansen is that it allows the search for more than one threshold. Given the evidence of signicant thresholds for all of the threshold variables the possibility of a second threshold based is also considered. The estimating equation thus becomes: D ln GDPPCit bj Xjrt d1 D ln EXPit ITHit  l1 d2 D ln EXPit Il1  THit  l2 d3 D ln EXPit ITHit > l2 mi Zt eit where Xjrt now refers to the vector of core variables in our model. Here there are three regimes with the relationship between exports and growth given by d1, d2 and d3 for the low, middle and high regimes respectively. It is a straightforward extension to search for the values of l1 and l2 that minimise the sum of squared errors. At the same time however this can be quite expensive in terms of computation time. Chong (1994) and Bai (1997) have shown however that sequential estimation is consistent, thus avoiding this computation problem. This involves xing the rst threshold at l1 and searching for a second threshold assuming that the rst threshold is xed.8 We continue to impose the restriction that at least 10 per cent of all observations must be in each regime. Given that the rst threshold on lnEXP_GDP was at the 11th percentile we search for a second threshold with a value greater than 2.33, while for DlnEXP the threshold was at the 89th percentile so we search for a second threshold at a value less than 0.075. For lnINITGDP however the rst threshold was found in the middle of the distribution (49th percentile). A second threshold both above and below the value 7.11 is searched for. The value that minimised the sum of squared residuals was at a value below 7.11. The results of the estimated second threshold are reported in Table 4. Since the results on the core variables appear to be fairly robust to the threshold analysis we can turn immediately to the threshold results. For initial GDP per capita and the ratio of exports to GDP we nd evidence of a second threshold at a value of

Exports, Growth and Threshold Eects in Africa 1067

Table 4. Multiple threshold regression model DlnGDPPC lnINITGDP INV DPOP SECMRW SECMRW_SQ DlnEXP TH  l1 DlnEXP l1  TH  l2 DlnEXP TH 4 l2 DlnEXP l2  TH  l3 DlnEXP TH 4 l3 Threshold 1 (l1) Threshold 2 (l2) Threshold 3 (l2) p value Observations F Statistic R2 lnINITGDP 70.03 (72.84)*** 0.05 (1.82)* 0.28 (0.41) 70.02 (72.25)** 0.004 (2.85)*** 0.06 (1.14) 0.18 (3.83)*** 70.09 (71.78)* lnEXP_GDP 70.03 (72.79)*** 0.05 (1.70)* 0.24 (0.35) 70.02 (72.39)** 0.004 (2.96)*** 0.18 (2.90)*** 0.04 (1.17) 70.11 (70.83) DlnEXP 70.03 (72.86)*** 0.06 (2.35)** 0.09 (0.16) 70.02 (72.46)** 0.004 (3.30)*** 70.03 (70.41) 71.84 (72.70)*** 0.14 (2.73)*** DlnEXP 70.02 (72.79)*** 0.06 (2.31)** 0.07 (0.12) 70.02 (72.37)** 0.004 (3.26)*** 70.01 (70.06) 71.72 (72.49)** 70.01 (70.12) 0.16 (3.08)*** 70.016 (34th percentile) 0.01 (54th percentile) 0.075 (89th percentile) 0.07* 293 27.7*** 0.46

6.87 (31st percentile) 7.11 (49th percentile) N/A 0.13 293 8.16*** 0.46

2.33 (11th percentile) 3.7 (81st percentile) N/A 0.18 293 6.24*** 0.44

70.016 (34th percentile) 0.01 (54th percentile) N/A 0.00*** 293 9.03*** 0.45

Notes: For ease of presentation the thresholds are listed by value, with l1 being the smallest estimated threshold, regardless of whether it was the rst estimated threshold. All equations include a full set of unreported country and time dummies. t statistics are reported in brackets. All models estimated using White Heteroscedasticity consistent standard errors. *, **, *** indicate statistical signicance at the 10, 5 and 1 per cent level respectively. The p value is computed using the bootstrap procedure of Hansen (2000) with 1000 replications.

6.87 ($963 in 1996 dollars) and 3.7 (ratio of exports to GDP of 40.4 per cent) respectively, but in neither case is this second threshold found to be signicant at standard levels. The results suggest however that for the poorest countries in our sample there is no signicant relationship between exports and growth, while for the richest countries there remains the negative relationship between exports and growth. For countries in the middle of the distribution however there is a strong positive relationship between exports and growth. The threshold results based on the level of exports suggest again the presence of diminishing returns to exporting. For countries with the lowest levels of exports there is a strong positive relationship between exports and growth, for countries in the middle of the distribution there is a

1068 N. Foster positive though insignicant relationship and for countries with the highest level of exports there is a negative, albeit insignicant relationship between exports and growth. Finally we turn to the results on the growth rate of exports where a signicant second threshold is found (at a value of 70.016). In this case the rened estimator for l1 is quite dierent from that found in the one threshold model (0.01 versus 0.075) and is indicative of the problems that may arise by assuming a single threshold. The results suggest that for countries in the high regime, which comprise 46 per cent of the total observations and are all observations with export growth above 1 per cent we nd a strong positive relationship between exports and growth. For countries in the low regime we nd a negative albeit insignicant relationship between exports and growth, while for countries in the middle regime with a growth rate of exports between 71.6 and 1.0 per cent (19 per cent of our observations) we nd a strong negative relationship between exports and growth. Given the large change in the estimator of l1 in the two threshold model and given its signicance we also searched for a third threshold based on DlnEXP, xing the rst and second thresholds at 0.01 and 70.016 respectively. We searched for a third threshold for observations with a growth rate of exports above 0.01 (that is for the 46 per cent of observations in the high regime). The results are reported in the nal column of Table 4. Here we nd evidence of a signicant third threshold at the value of 0.075, the estimated threshold in the one threshold model. The results suggest that in the high regime (11 per cent of observations) a positive and signicant relationship between exports and growth exists, while in the rst and third regimes (34 and 35 per cent of observations respectively) no signicant relationship between exports and growth exist. In the second regime a strong negative relationship between exports and growth is again found. VI. Discussion and Conclusions The relationship between trade and growth has been examined extensively in the literature, yet numerous controversies still remain. One popular approach in this literature has been to examine the relationship between some measure of exports and growth. Cross-country studies of the relationship between exports and growth tend to nd a positive and signicant relationship between exports and growth, though the strength of this relationship tends to vary. In addition, uncertainty remains over the direction of causality, over the importance of the composition of exports and of the importance of threshold eects. This paper examines whether exports can help to explain the dierences in the performance of African economies using panel data on a sample of 43 countries over the period 196099. In addition to examining the relationship between exports and growth in Africa the paper contributes to the literature by employing threshold regression techniques to examine whether there exist thresholds in this relationship. The results suggest that the positive relationship between export growth and output growth that is found to hold in large cross country studies also holds in our panel analysis of African economies, with those countries with higher rates of export growth also having higher rates of growth of output. As such, dierences in export

Exports, Growth and Threshold Eects in Africa 1069 performance across African countries do appear to help explain the dierent growth performance of countries within Africa. This result is found in a linear model. When attention shifts to the threshold analysis that allows nonlinearities in the relationship a number of interesting results are obtained. The study concentrates on variables that have been proposed as potential threshold variables in the literature, namely initial GDP per capita and both the level and growth of exports. The results in general support the existence of a single threshold, except in the case of export growth. For the threshold based on initial GDP per capita the results suggest that it is for the countries with the lowest levels of initial GDP per capita that a positive and signicant relationship between exports and growth exists, with a marginally signicant negative relationship between exports and growth found for the richest countries in the present sample. For the level of exports, again it is for the countries in the low regime that a signicant positive relationship between exports and growth exists, with a positive but insignicant coecient found in the high regime. Finally the results for thresholds based on the growth of exports suggest a three threshold model, with only countries in the regime with highest export growth beneting signicantly from exports. The results of the threshold based on the level of initial GDP per capita to some extent support those found by Moschos (1989), with both studies nding that the relationship between exports and growth is stronger in the relatively low income countries. Where the results do dier however is that Moschos nds an insignicant coecient on the export variable for relatively high income countries, whereas here there is evidence of a negative relationship that is marginally signicant. A potential explanation for this negative coecient is due to the observation that higher income African countries tend to export a greater share of manufactured exports out of total exports.9 As discussed above, So derbom and Teal (2002) reported a negative relationship between manufacturing exports and growth in African countries, while Crespo-Cuaresma and Woerz (2005) found a negative relationship between growth and low technology manufacturing, a sector of manufacturing in which African countries are likely to specialise. So derbom and Teal argue that the reason for the poor performance of manufacturing exports in Africa has been the macroeconomic environment, with overvalued exchange rates and constraints on imports making exporting unprotable. They also argue that the business environment in which African rms operate also plays a role, with rms facing high transaction costs due to inappropriate government policies and poor infrastructure. It is argued that these factors will particularly disadvantage manufactured exports as they are intensive users of these services. Given these arguments we may expect that relatively rich African countries that are specialised to a greater extent in manufacturing production are likely to be aected by poor export performance.10 The results of the threshold based on the level of exports on the one hand contradict those found by Kohli and Singh (1989) for a wider sample of countries, who found that the relationship between exports and growth was stronger in their sample of countries with higher levels of exports to GDP. Our results suggest that it is countries with lower levels of exports to GDP that benet more from exports, and as such our results are more in line with those of Salvatore and Hatcher (1991) who found the relationship between exports and growth to be stronger in more inward oriented economies. Once again this result may be related to the argument above

1070 N. Foster with the countries in our sample classed as high exporting countries being those with higher average shares of manufactured in total exports (15.1 per cent in the high export group versus 4.8 per cent in the low export group). There are other reasons to expect a greater impact of exports on growth in countries with lower levels of exports however, and in particular the results presented here support the arguments of Ocampo (1986) and the other main conclusion of Kohli and Singh (1989) that there are diminishing returns to exporting. In the one threshold regression this is seen by the positive and signicant coecient in the low regime, but a positive and insignicant coecient in the high regime. Although the second threshold is insignicant the notion of diminishing returns is clearer in the two threshold regression, with a positive and signicant coecient found in the low regime, a positive but insignicant coecient in the middle regime and a negative and insignicant coecient in the high regime. The results for thresholds based on the growth of exports are similar to those found by Kohli and Singh (1991), who imposed a threshold at a value of export growth of 6 per cent and found a positive and signicant relationship between exports and growth for countries above the threshold but an insignicant relationship for countries with export growth below this level. This paper estimates the thresholds and nds a positive and signicant relationship between exports and growth for observations with export growth above 7.5 per cent, but in general no signicant relationship between exports and growth for observations with export growth below this level. By searching for more than one threshold however, evidence of a large, negative and signicant relationship between exports and growth is found for observations with export growth between 71.6 and 1.0 per cent. A partial explanation for this relates to the arguments of Thirlwall (2000) who argues that low export growth can lead to balance of payments problems which can oset the gains from trade by the reduction in output and increase in unemployment needed to compress imports. Whilst oering a partial explanation for the negative coecient in this regime, it cannot be considered a complete answer since we would also expect a negative and signicant coecient for observations with export growth less than 71.6 per cent (Regime 1), unless the impact of falling exports for this group was oset by other factors, such as higher foreign aid. Moreover, the size of the coecient is still rather large. In general, it is dicult to provide an adequate explanation for such a large negative coecient, though the outlier tests of Hadi (1992 and 1994) tend to suggest that the majority of observations (49 out of 57) in this regime can be classed as outliers. Overall for this sample of African countries the results suggest that there is a signicant relationship between the rate of growth of exports and the rate of growth of output. Moreover the results indicate that it is not necessary for a country to be relatively developed in terms of initial income for an African country or for it to have a relatively large export base in order for this positive relationship between exports and growth to exist. This it is argued may be due to the fact that manufacturing exports, which appear to increase as a countrys income and level of exports increases, tend to perform relatively poorly in African countries due to an overvalued exchange rate and high business costs. The results also suggest the presence of diminishing returns to exporting. A strong relationship between exports and growth is found however for those African countries whose exports are growing

Exports, Growth and Threshold Eects in Africa 1071 over time. The results suggest therefore that for countries with low levels of exports, increasing exports could help stimulate growth in African countries. There are a number of directions that future research on exports and growth could take. Given the recent development of panel smooth transition regression models by Gonzalez, Terasvirta and van Dijk (2005) it may be worthwhile considering nonlinearities in the relationship between exports and growth using this method. It may also be worthwhile considering thresholds on other variables. A number of variables may be considered, but one that is potentially fruitful is in considering the role of human capital in the relationship between exports and growth relationship. The argument being that as a countrys level of human capital increases it is able to produce higher quality goods or move into sectors where learning by doing has not been exploited, thus increasing technological progress and growth. This was not possible in our sample due to our human capital data having no time series variation, but for a dierent sample of countries this could be a fruitful exercise. Given the results presented above and the arguments of So derbom and Teal (2002) it would also seem worthwhile examining in greater detail the importance of manufacturing exports in African countries. One possibility would be to examine the importance of manufacturing exports using threshold methods. Alternatively it may be worthwhile attempting to isolate factors that lead to a negative impact of manufacturing exports. The obvious starting points would be those variables suggested by So derbom and Teal (2002), namely an overvalued exchange rate and high business costs. Exploring such relationships will help identify policies that can help African countries benet to a greater extent from openness. Notes
1. For a thorough review of the theory and evidence on the relationship between exports and growth see Edwards (1993) and Greenaway and Sapsford (1997). 2. Rodrik (1999) argues that paying for imports is the only role for exports. Esfahani (1991) included intermediate imports in his study of 31 semi-industrialised countries and found that the coecient on exports falls and for some periods becomes insignicant. The coecient on imports was always found to be positive and signicant however. 3. Other studies examine dierences in the relationship between exports and growth based on world market conditions, such as oil crises (examples include Balassa (1985) and Ram (1985)). 4. Whilst the threshold technique employed here improves on those employed in many previous studies, it still shares the limitation that it imposes a discrete break in the data rather than allowing for the possibility of continuous coecient change. One method that may allow for such a possibility would be to employ a smooth transitions analysis (see Granger and Terasvirta, 1993) that allows for a smooth transition between regression regimes over time rather than a single structural break. Gonzalez, Terasvirta and van Dijk (2005) have recently begun developing this technique for panel regressions which oers a suitable alternative to the techniques of Hansen and in our setting would allow the parameter associated with exports to change smoothly as a function of a third variable, such as initial income or export growth. 5. The 43 countries are Algeria, Angola, Benin, Botswana, Burkina Faso, Burundi, Cameroon, Cape Verde, Central African Republic, Chad, Congo, Democratic Republic of the Congo, Cote dIvoire, Egypt, Ethiopia, Gabon, Gambia, Ghana, Guinea, Guinea-Bissau, Kenya, Lesotho, Madagascar, Malawi, Mali, Mauritania, Mauritius, Morocco, Mozambique, Namibia, Niger, Nigeria, Rwanda, Senegal, Seychelles, Sierra Leone, South Africa, Tanzania, Togo, Tunisia, Uganda, Zambia and Zimbabwe. 6. The coecient on population growth is expected to be negative and signicant. In the existing (mainly cross-section) literature however both positive and negative coecients have been obtained, with

1072 N. Foster
Levine and Renelt (1992) nding the coecient on this variable to be fragile. We nd that excluding the country xed eects and estimating a pooled or a random eects model give us the more usual negative coecient on population growth, though the coecient tends to be insignicant. One possibility therefore is that population growth is capturing some form of market size eect. The diering results for thresholds based on the level of exports and the growth of exports do not appear to be driven by the notion that countries with currently low levels of exports have higher growth rates of exports. The correlation between those countries in the low regime according to the level of exports and those according to the growth of exports is only 0.05. In the two threshold model the estimate of l1 is no longer asymptotically ecient since it was estimated from a sum of squared errors function that was contaminated by the presence of a neglected regime. Bai (1997) suggests a renement estimator for l1, which involves xing the second threshold at the estimate for l2 and searching for the rst threshold again, now including the second threshold. In Table 4 we report the rened estimator for l1. We have data on manufactured exports in total merchandise exports for less than two thirds of our observations. The average value of this variable for the countries classied in our threshold model as high income was signicantly greater than that for those countries classed as low income in our analysis (20.1 versus 6.9 per cent). Some support for this explanation is found by considering a threshold based on the share of manufacturing exports in total merchandise exports for the reduced sample of 185 observations. Here we nd a signicant threshold at a value of 23.6 per cent. For observations in the low manufacturing share regime we nd a positive coecient on exports, while for observations in the high manufacturing share regime we nd a negative coecient. The coecients tend to be insignicant in both regimes however. These results are available on request.

7.

8.

9.

10.

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