Aurora Borealis
1 May 2014 CFA Institute Journal Review

Does Economic Integration Stimulate Capital Mobility? An Analysis of Four Regional Economic Communities in Africa (Digest Summary)

  1. Yueping Liu

Some major regional economic integration initiatives in Africa have influenced capital mobility in member countries. The authors examine the changes in the savings/investment relationship and conclude that the effect has been limited.

What’s Inside?

The authors explore capital mobility that results from regional economic integration. The potential benefits of such integration include portfolio risk diversification. The integration also affects monetary policies, as well as tax policies on capital and saving. The authors analyze the effect on capital mobility of such major regional economic community initiatives as the Southern African Customs Union (SACU), West African Economic and Monetary Union (UEMOA), Common Market for Eastern and Southern Africa (COMESA), and Economic Community of West African States (ECOWAS).

How Is This Research Useful to Practitioners?

The authors test the relationship between domestic savings (measured by the ratio of savings to income, or STY) and domestic investment (measured by the ratio of investment to income, or ITY)—a relationship also known as β, or the “savings retention coefficient.” The hypothesis is that when capital is perfectly mobile, domestic savings must flow to finance the most attractive investment projects and should not be correlated with domestic investment and that the savings retention coefficient should be low or statistically insignificant.

According to the authors’ research, economic integration enhances capital mobility, but the changes are small and capital mobility remains low. Weak implementation and slow progress of regional economic community initiatives because of a lack of political will—as well as a lack of trade complements, leading to very low levels of intraregional trade—may be to blame.

The authors also observe that in these regional agreements, certain countries are dominant in terms of production and trade and that some countries belong to two or more regional economic communities. Further study reveals that the slight increase in capital mobility for SACU is largely the result of South Africa (which has the lowest savings retention coefficient by itself), not the agreements. Overlapping membership does not have a significant impact on the authors’ original results.

Their findings could point to potential investment opportunities, but significant further research is needed. The authors’ results indicate that even in less developed countries with weak trade agreement implementation, (slightly) better capital efficiency can be achieved. Thus, when a company or an industry in a developing country is set to gain more resources, better technology, or market access from a potential trade agreement with neighboring countries, a case for investment can be made. Investors need to balance the argument for investment against their judgment regarding implementation effectiveness and timeliness, as well as performing a quantitative analysis of potential benefits.

How Did the Authors Conduct This Research?

Annual data for 25 African countries from 1960 to 2009 is used. ITY and STY estimates are obtained from the World Development Indicators and International Financial Statistics. ITY and STY series are tested for their time-series properties, are proven to be co-integrated, and are each autoregressive at the first degree.

The authors divide the data into subsamples: one prior to the international agreements and one after. If economic integration causes better capital mobility, β will be smaller in the latter subsample, which the authors find to be true. Similarly, subsamples excluding the dominant country or overlapping countries are constructed, and the new βs are compared with the original estimates.

Finally, the authors test for robustness using fixed effects, random effects, and Mark and Sul’s (Oxford Bulletin of Economics and Statistics 2003) dynamic ordinary least-squares methods and conclude that the estimates are robust.

Abstractor’s Viewpoint

The authors’ findings would be of interest to those with an investment interest in Africa or those who seek investments in developing countries by opportunistically anticipating potential trade agreements. In addition, the study would interest political economists studying trade policies and international capital mobility.

It would be helpful for investment professionals if the authors had examined the time that it takes for the trade agreements to produce a significant decline in β, which would help determine the potential investment horizon. They also fail to further explore other compounding forces that could affect β during the same time period.

We’re using cookies, but you can turn them off in Privacy Settings.  Otherwise, you are agreeing to our use of cookies.  Accepting cookies does not mean that we are collecting personal data. Learn more in our Privacy Policy.