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Does Intra-African Trade Reduce Youth Unemployment in Africa?
John C. Anyanwu
No 201– April 2014
Correct citation: Anyanwu, J. C. (2014), Does Intra-African Trade Reduce Youth Unemployment In Africa?, Working
Paper Series N° 201, African Development Bank, Tunis, Tunisia.
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Does Intra-African Trade Reduce Youth Unemployment in
Africa?
John C. Anyanwu1
1 John C. Anyanwu is a Lead Research Economist at the Development Research Department, AFDB
AFRICAN DEVELOPMENT BANK GROUP
Working Paper No. 201
April 2014
Office of the Chief Economist
Abstract
This study empirically estimates the effect of Africa’s intra-regional trade on the burgeoning youth unemployment in the Continent. We investigate both the aggregate and gender-specific impacts. Our empirical estimates, using available cross-sectional time series data over the period, 1980 and 2010, suggest that higher levels of intra-African trade reduce both the aggregate, female and male youth unemployment in Africa. In addition, our results show that domestic investment rate, institutionalized democracy, secondary education, inflation, economic growth, and higher urbanization tend to reduce youth
unemployment both on the aggregate and gender-differentiated and therefore good for youth unemployment reduction in the continent. On the other hand, higher real per capita GDP and to a lesser extent credit to the private sector have significant positive effect on youth unemployment in Africa. Government consumption expenditure and foreign direct investment have insignificant effect on both the aggregate level and the gendered level of youth unemployment in Africa. Based on these results, some policy recommendations are proffered.
Keywords: Intra-African trade; youth unemployment rate; female youth
unemployment rate; male youth unemployment rate; Africa.
JEL classification: J64, J68, E24, O55.
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I. INTRODUCTION
Discussions on the Doha Development Agenda in the WTO has been going on for years and there are doubts regarding whether or when it will ever be concluded. Thus increasing interest in regional integration is often attributed to the disappointing progress of multilateral trade negotiations in the WTO. This underlines the need for African countries to consider alternatives such as bilateral, sub-regional, or regional initiatives to increase pro-development trade. For example, the recently published fourth report on Assessing Regional Integration in Africa by the UNECA, AfDB and AUC (2010) emphasizes the importance of regional trade for development and poverty reduction in Africa. It is in this context, that the present study seeks to establish the nature of the relationship between Africa’s intra-regional trade as an effort at regional integration and burgeoning youth unemployment in the continent. Does intra-trade reduce youth unemployment in Africa? From a policy perspective, this is important because youth employment is a key channel through which the benefits of intra-regional trade and growth can be shared, especially in African economies with weak safety nets. The importance of intra-trade is further highlighted by the African Union (AU) Summit of Heads of State and Government in January 2012 focused on the theme of “Boosting Intra-Africa Trade”. Africa is pursuing an integration agenda as a collective development and transformation strategy leading to the eventual creation of a continental market (see Ben Hammouda et al, 2009). In 2012, Heads of State agreed to establish a Continental Free Trade Area by 2017 with the option to review the target date according to progress made. In this context, trade is seen as an important element to create productive employment and to reduce poverty. This agrees with the AU “Declaration on Employment and Poverty Alleviation in Africa” at the AU Summit of 2004. Incidentally, Africa is the fastest growing and most youthful population (over 60 percent of the population is currently younger than 25 years) in the world with implications for job creation and stability (see also, UN, 2013). In particular, in view of the “youth bulge” (20 percent of African population is aged 15-24 years) in African populations, regional integration policies that expand the opportunity space by increasing the size of economies and markets will be critical. For a continent that has heavily relied on commodity trade for much of its growth in recent times, the link between intra-African trade and youth unemployment is something that warrants close scrutiny for its impact on the inclusiveness of growth. This has become more urgent in light of the changing trade patterns in favor of regional and South-South trade that are occurring and are expected to occur in the context of global rebalancing and continued sovereign debt crisis in Europe. Such changes will inevitably have impacts on economic structure, employment and labor market institutions of African economies, and to inequalities within and between these economies.
Gender specific impact of intra-African trade cannot be ignored since female and male youth may be affected differently because of gender specific inequalities in labor markets and prevailing norms about the role of females and males in the society in general and the economy in particular. Thus, apart from the overall effect, this study also examines the gender-differentiated youth unemployment effects of intra-African trade. A key question is the extent to which intra-African trade reduces female versus male youth’s unemployment rates. In addition, there is desire for finding out the gender-differentiated youth unemployment impacts of intra-African trade so as to respond to any adverse impacts and promote gender-equitable adjustments.
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Very few studies have been undertaken in the particular context of African countries and to the best of our knowledge there are no studies exploring the intra-African trade-youth unemployment nexus in Africa.2 Thus, the key objectives of the study are: (1) To analyze the scale, trends, and composition of intra-African trade and youth (overall, female and male) unemployment; (2) To quantitatively investigate the relationship between intra-African trade, and youth (overall, female and male) unemployment; and (3) To summarize the key findings and discuss their policy implications for intra-African trade policy and diversification, regional integration, and youth employment. Indeed, an understanding of the scale, trends and composition of intra-African trade is crucial for the effective design and implementation of policies to boost that trade, which can be used as an effective driver of socio-economic cum political development and enhanced social welfare. The next section presents an overview of the scale, trend, and composition of intra-African trade and youth unemployment in Africa. In Section III we briefly review the literature. Section IV presents the econometric model and data while Section V discusses the results. Section VI concludes with some policy implications.
II. OVERVIEW OF INTRA-AFRICAN TRADE AND YOUTH UNEMEPLOYMENT IN
AFRICA
2.1 Scale, Trend, and Composition of Intra-African Trade
African countries have taken several measures to promote regional integration, a major part of which is intra-regional trade. These include the establishment of the African Union and the creation of various Regional Economic Communities (RECs), which are pursuing integration through free trade, and developing customs unions and a common market. Currently, there are 17 regional trade blocs on the continent, of which eight are officially recognized by the African Union (see also Yang and Gupta, 2007). These RECS are considered by the African Union as the building blocks of the future African Economic Community (AEC) as laid out in the Abuja Treaty. The eight officially recognized RECs are the Economic Community of West African States (ECOWAS), Economic Community of Central African Sates (ECCAS), East African Community (EAC), Arab Maghreb Union (AMU), Common Market for East and Southern Africa (COMESA), Southern African Development Community (SADC), Community of Sahel-Saharan States (CEN-SAD), and Intergovernmental Authority on Development (IGAD). The most recent measure to promote intra-African trade is the renewed political commitment by African leaders at the African Union summit in January 2012 to boost intra-African trade and to fast-tracking the establishment of a continental free-trade area. Indeed, intra-African trade is one of the important activities to achieving regional integration and accelerating sustainable and inclusive development in Africa. In particular, intra-African trade has enormous potential to create employment (especially for the burgeoning youth population of the continent), catalyze investment and foster economic growth in the continent. Intra-African trade provides an opportunity for African countries to address a major constraint to export competitiveness imposed by the small size of their national economies and geography/transport cots. It acts as a potent vehicle to promote product and export diversification, hence increasing the prospects for growth and development in these countries. Generally, intra-regional trade enhances movements of 2 Studies relating to Africa include von Uexkull (2012) for ECOWAS, Mashayekhi et al (2012) for SADC, and Chinembiri
(2010) Sandrey et al. (2011) for South Africa but non focused on youth unemployment.
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goods and services to emerging economies and pooling of capacities, endowments, and energies. It increases competition in the local market, which in turn increases productive efficiency and price convergence across countries and regions. Intra-regional trade also promotes the transmission of technological innovation and the creation of enhanced capacity to compete with more advanced economies on the international market. In addition, it creates incentives for governments to adopt less distortionary domestic policies and more disciplined macroeconomic management (UNCTAD, 2013). However, African countries have not made significant progress in boosting intra-African trade. In 2012, the average intra-African trade was just 12 percent compared with 67 percent for Asia-Pacific Economic Cooperation (APEC), 61 percent for the EU, 41 percent for The North American Free Trade Agreement (NAFTA), 25 percent for Association of Southeast Asian Nation (ASEAN), and 17 percent for Common Market of the South (MERCUSOR) (Figure 1). Over the period from 1995 to 2012, the average intra-African trade was only 12 percent for Africa against 70 percent for APEC, 64 percent for the European Union (EU), 44 percent for NAFTA, 24 percent for ASEAN, and 18 percent for MERCUSOR.
Source: Author, using data from RIKS Platform Databases. NB: APEC = Asia-Pacific Economic Cooperation, ASEAN = Association of South East Asian Nations, EU = European Union, MERCOSUR = Southern Common Market, NAFTA = North American Free Trade Agreement.
In value terms, Africa has made tremendous progress in intra-African trade, increasing from US$27.9 billion in 1995 to US$148.9 billion in 2012 (Figure 2), representing over fivefold increase. Intra-African trade experienced positive growth in all years except for 1998 and 2009 due primarily to economic and financial recessions/crises. Intra-African exports rose from US$13.7 billion in 1995 to US$72.7 billion in 2012 while intra-African imports increased from US$14.2 billion to US$75.9 billion during the same period3.
3 In principle, for the same trade flow, total exports and total imports should be equal. However, there are several reasons why imports
reported by one country do not necessarily coincide with exports reported by its trading partner. This difference can be attributed to various factors including differences in valuation (imports CIF, exports FOB), inclusions/exclusions of particular commodities (such as differences in nomenclature/classification used by exporter and importer countries) and timing (an exporter can declare an item before the importer country declares it).
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Figure 1: Intra-Regional Trade for Selected Regions (%)
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Source: Author, using data from RIKS Platform Databases.
As Figure 3 shows, since 2005, the East African sub-region has enjoyed the deepest levels of trade integration in Africa, standing at 10.6 percent in 2012. This is followed by West Africa, Southern Africa, North Africa, and then Central Africa, in that order. We note, however, that intra-trade in Southern and Central Africa had recently been on the downward trend.
Source: Author, using data from RIKS Platform Databases. However, in value terms, the West African sub-region dominated intra-regional trade, reaching US$22.7 billion in 2012 from US$4.1 billion in 1995 (Figure 4). Again, Central Africa performs poorest even in value terms.
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Figure 2: Intra-African Trade (US$m), 1995-2012
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Figure 3: Intra-African Trade by Sub-Region, 1995-2012
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Source: Author, using data from RIKS Platform Databases.
As demonstrated in Figure 5, on average, of all eight African RECs, intra-RECs trade was highest in SADC between 1995 and 2012, reaching 15.3 percent. Within EAC intra-trade amounted to 14.3 percent during the same period, compared to 10.2 percent for ECOWAS, 8.3 percent for IGAD, 6.7 percent for CEN-SAD, 5.7 percent for COMESA, 13.3 per cent for COMESA, 2.9 percent for AMU, and only 1.8 percent for ECCAS.
Source: Author, using data from RIKS Platform Databases. As Figure 6 shows, in value terms, SADC also led the pack with an average of US$29 billion, followed by CEN-SAD with US$17.6 billion, an amount considered small given its large membership. For ECCAS whose intra-REC trade value was the least at about US$1.1 billion.
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Figure 5: Intra-African Trade By Selected RECs (%), 1995-2012
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Source: Author, using data from RIKS Platform Databases. In terms of the structure of intra-African trade, as Figure 7 shows, it is dominated largely by mineral fuels, followed by manufactured goods, and machinery and transport equipment.
Source: UNECA (2013), Compendium of Intra-African & Related Foreign Trade Statistics 2011, UNECA, Addis Ababa, February.
As Figure 7 also indicates, intra-African trade in agriculture and food is relatively low hence a great deal of effort is needed to position food and agriculture favorably in the intra-African trade profile, along with manufactured goods. Another important feature is that the share of intra-African trade in total trade is significantly higher for non-fuel exporters than for fuel exporters (UNCTAD, 2013). For example, in the period from 1995 to 2012, seven countries (Burkina Faso, Malawi, Mali, Mozambique, Togo, Uganda and Zimbabwe) – all non-fuel exporters - had at least 30 percent of their trade in Africa. During the period, the five best
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Figure 7: Structure of Intra-African Trade, 2010
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performers in terms of intra-regional trade were: Zimbabwe (48.9 percent), Malawi (45 percent), Uganda (44.5 percent), Mali (44 percent), and Mozambique (36 percent). In contrast, major African economies such as Nigeria and South Africa have minimal proportionate trade within Africa. In addition, oil heavy exporters, such as Algeria, Angola, Equatorial Guinea, Libya, Nigeria, and Sudan, display limited export integration with the rest of Africa. For these economies, total trade with the rest of Africa ranged just between under 2 percent to less than 8 percent. Also, the above analysis, excludes huge unrecorded informal intra-African trade. UNECA, AfDB and AUC (2010) suggest that Africa is under-trading with itself and could potentially realize more trade, given geographic proximity, cultural affinity and the size of the economies. Using gravity model, UNECA, AfDB and AUC (2010) estimate that countries in West and Central Africa are trading only 43 percent of their potential trade in the region, while countries in Eastern and Southern Africa are trading 75 percent, respectively (see Afrika and Ajumbo, 2012). Many interlocking factors have been advanced for Africa’s weak intra-regional trade, including weak infrastructure (especially crumbling or non-existent road and rail networks), logistical (including unnecessary bureaucratic delays brought about by cumbersome documentation as well as corruption) and financial barriers, poor policy support, other non-tariff barriers (NTBs) such as lengthy customs clearance procedures at border posts (Hasse, 2013), ineffective RECs, and limited role of the private sector (UNCTAD, 2013). However, as Ernst & Young (2012) has observed, poor status of intra-African trade is primarily structural, especially the mismatch between what most African economies are able to produce, and what they typically consume. For example, most African economies are unable to produce the types of goods (essentially manufactured) its rising consumer base (the middle class) demand: in 2011, just 8 percent of the Continent’s machinery, electrical and electronic equipment, vehicles and ships/boats imports were produced in Africa. Also, Africa’s weak industrial base limits demand for its abundant commodities: in 2011, almost 75 percent of Africa’s total exports consisted of four categories of hard commodities, only 6 percent of which were absorbed regionally.
2.2 Trend and Characteristics of Youth Unemployment in Africa
Youth (aged 15–24) unemployment4 is currently one of the greatest development challenges facing countries globally (Figure 8), including those in Africa. In 2011, about 74.8 million youth globally were unemployed (an increase of more than four million since the start of the global financial and economic crisis in 2007), with nearly 20% of them in Africa. The global youth unemployment rate, estimated at 12.7% in 2011, remains a full percentage point higher than the pre-crisis level (ILO, 2012a). In 2011, youth unemployment in Sub-Saharan Africa (SSA) was slightly higher than the global average at 12.8% but with North Africa averaging 27.1%, the highest amongst the regions of the world. This gives an average of about 20% youth unemployment in Africa in 2011. In addition, young people in Africa are about three times as likely as adults to be unemployed. Youth unemployment is also predominantly an issue for women in Africa, especially in North Africa. While the unemployment rate for young women in North Africa was 34.3% in 2010 (compared to the global average of 13.1%), the rate for young men stood at 18.5% (compared to the global average of 12.6%), all two are the highest for any region.
4 This ILO definition (see, for example,
http://www.ilo.org/public/english/employment/yen/whatwedo/projects/indicators/2.htm)
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Figure 8: Global Trend in Youth Unemployment, 1991-2012
Source: Author, using data from ILO database
The human misery and social exclusion of youth unemployment in Africa (especially in North Africa) is indeed a time-bomb, given that it is one of the main triggers of the Arab Spring (“revolution”) in North Africa from January 2011, which had led to the fall of the governments in Tunisia, Egypt and Libya. It had also triggered a spate of socio-economic cum political reforms in the other countries in the sub-region and elsewhere in the world. Thus, youth employment is currently a global policy issue. It increases economic growth, promotes political and social stability, positively affects progress toward the Millennium Development Goals (MDGs), and poverty reduction generally. It also leads to better social equalities, especially among the youth, and results in efficient resource allocation, increased productive potential, and low dependency ratio (Ncube and Anyanwu, 2012). Figure 9 shows that North Africa (followed by the Middle East) has the highest (exceeding 25%) youth unemployment in the world – significantly higher than the 16.3% of the OECD area (OECD, 2013). Indeed, North Africa (with the Middle East) is the only region where youth unemployment exceeds 20% globally, showing that unemployment is particularly acute among the youth (15-24 years). As seen in Figure 10, significant country differences exist in youth unemployment in Africa, with a number of the relatively high-income countries exhibiting high youth unemployment rates. Indeed, the issues of high unemployment (youth and overall) and regulations surrounding it were some of the main triggers of the self-immolation of Mohamed Bouazizi in Tunisia that eventually led to the Arab revolution. Without doubt, Africa, where about 200 million young people between the ages of 15 and 24 (representing about 20% of the continent’s population) (“youth bulge”) urgently needs both gainful and dignified employment. Current figures also show that Africa has the youngest population in the world while projections indicate that, by 2030, nearly 1 in 4 young people in the world will be African. Youth unemployment rates are also higher for women, but much more so in North Africa where female youth unemployment rate is almost double that of the male (Figure 11).
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Figure 9: Trend in Regional Youth Unemployment Rate, 1991-2011
Source: Author, using data from ILO database.
Figure 10: Youth Unemployment Rate (%) in African Countries, Latest Data
Source: Author, using National/ILO database.
In addition, youth unemployment rates are generally more than twice the rates of adult unemployment in many countries in the continent. Indeed, while the ratio of youth to adult unemployment in Sub-Saharan Africa is about two (2), it is about four (4) in North Africa (Figure 12).
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Figure 11: Trend in Youth Unemployment Rate by Gender, 1991-2010
Source: Author, using data from ILO database.
Figure 12: Ratio of Youth Unemployment Rate to Adult Unemployment Rate, 1991-2010
Source: Author, using data from ILO database. In Africa, as in other regions, youth unemployment rates are higher than those of adults (aged 25 years and over) (see Figures 13). A number of reasons have been advanced for the labor market bias against young people. The younger workers tend to be easier and less expensive to dismiss than older ones and employers lay off young workers first because the cost to establishments of releasing young people is generally perceived as lower than for older workers. Also, employment protection legislation usually requires a minimum period of employment before it applies, compensation for redundancy usually increases with tenure since they make up a disproportionate share of new jobseekers, the youth suffer most from freezes in hiring by establishments or economically induced (such as the current financial crisis) reductions, and young people tend to “shop around” for jobs while easily entering and exiting the labor force as they move between employment, school enrolment and unemployment.
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Figure 13: Youth & Adult Unemployment Rates by Region, 2011
Source: Authors, using data from ILO database. Figure 14 illustrates the depth of the youth employment challenge by region. Using latest available data, the share of unemployed youth in youth population in Sub-Saharan Africa, at 9.6%, is the highest among the world’s regions. This indicates that the sub-region is clearly having a problem in utilizing its potential youth labor force. Moreover, unlike in East Asia, Central and South Eastern Europe as well as Developed Economies & European Union, the share of unemployed youth in total unemployment in Africa (Sub-Saharan and North) is high, showing that the unemployment problem is more of a youth one in the Continent. In these two sub-regions (Sub-Saharan and North Africa), more than 45% of jobseekers are young and they face barriers in fierce competition for the limited numbers of existing vacancies. Figure 14: Share of Youth Unemployment in Total Unemployment and in Youth Population, Regional Averages of
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III. REVIEW OF THE LITERATURE
The theoretical and empirical literature on trade and (un)employment linkages indicate four different channels or links to show the various aspects of “trade” as: trade integration measured by volume of exports or imports; trade openness measured by value of exports plus imports over gross domestic product (GDP); trade liberalization measured by changes in the trade policy regime (reflected, for instance, in changes in the level of industrial or agricultural tariffs); and the value of outsourcing or total flows of FDI (Jansen, Peters and Salazar-Xirinachs, 2011). In particular, trade liberalization is associated with both job destruction and job creation. In the short run, the resulting net employment effects may be positive or negative depending on country specific factors such as the functioning of the labor and product markets. But in the long run, the efficiency gains caused by trade liberalization are expected to lead to positive overall employment effects, in terms of quantity of jobs, wages earned or a combination of both. The empirical studies that analyze the effects of regional trade (and even trade generally) on youth unemployment are surprisingly rare. Majority of the existing studies are on the effects of trade (variously defined) on either unemployment or employment. In what follows, our review follows the following order: theoretical propositions, negative and positive effects of trade on unemployment, and ambiguous results. There are also theoretical studies that conclude that the effect of trade on aggregate unemployment is ambiguous. Moore and Ranjan (2005) argue that trade liberalization leads to an increase in the unemployment of unskilled workers, but have theoretically ambiguous effects on aggregate unemployment. Trade liberalization increases the profitability of innovation activity by raising the profit margin of the exporting firms. As a result, more firms will be engaged in research and development (R&D), and the demand for skilled labor increases. But this induces a larger share of the population to undergo training and become skilled while on the other hand, the higher frequency of innovations increases the turnover rate of unskilled workers by speeding up the creative destruction process, and increases the frictional unemployment rate of unskilled workers. This, thus, makes the effect of trade liberalization on the aggregate unemployment rate ambiguous. In the same manner aggregate unemployment is likely to decrease in skilled-labor abundant country and increase in unskilled-labor abundant country. The standard international trade theory (Hecksher-Ohlin-Stolper-Samuelson theory) predicts employment gains for women in export sectors of developing countries and employment losses for women in industrial countries. Also, Becker’s theory predicts decline in labor market discrimination in response to increasing competition in product markets generated by trade expansion, leading to demand-induced dynamic toward greater gender equity (Becker, 1971; Black and Brainerd, 2004). There is also lack of consensus on whether an increase in trade will lead to higher or lower aggregate unemployment rate. The general intuition to the negative association between trade and unemployment is that trade gives rise to specialization in domestic production, which improves the economy-wide value of the marginal product of labor. Thus, one of the main findings in recent literature is that trade liberalization reduces unemployment rates in the trading countries (Egger and Kreickemeier, 2009, 2011; Newfarmer and Sztajerowska, 2012; Felbermayr, Prat, and Schmerer, 2011a, b; Helpman and Itskhoki, 2010; Helpman, Itskhoki, and Redding, 2010, 2011). von Uexkull
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(2012) finds that regionally exporting firms in ECOWAS contribute significantly to the creation of jobs, even significantly faster than global exporters. Using CGE approach, Mashayekhi et al (2012) results for SADC suggest that where high tariffs are removed, substantial changes in employment in a specific sector may occur. The employment effects from the elimination of intra-SADC tariffs are positive but small in all SADC member countries. A number of studies have focused on the effects of NAFTA on employment and unemployment (O’Leary et al, 2012). For example, in a one-sector general equilibrium simulation model of monopolistic competition with efficiency wages, Matusz (1998) shows that introducing trade increases employment in both trading countries. Also, based on a partial equilibrium analysis of NAFTA-region traded-industry sectors, Hinojosa-Ojeda et al. (2000) estimated modest employment impacts for the first years of NAFTA. They established that a potential job creation effect in the US due to imports between 1990 and 1997 would average 37,000 jobs per year for Mexican trade and 57,000 per year for Canadian trade. The US Department of Agriculture (1997) examined the effect of NAFTA on rural employment using a dynamic general equilibrium model. Their analysis found that US rural employment in 1996 was 0.07 percent higher with NAFTA than it would have been in the absence of the NAFTA agreement. Relatedly, the US International Trade Commission (1997) analyzed the effect of NAFTA on 120 detailed manufacturing sectors and found seven sectors in which imports from NAFTA countries had an adverse effect and four sectors where effects were positive. The remaining 109 industrial sectors exhibited no effect from NAFTA. Krueger (1999) estimated the effect of NAFTA on exports with observations from 61 countries using data through 1998 and find that NAFTA would have a small but statistically insignificant effect on employment. Gould (1998), using a similar model but with time-series data for the NAFTA countries only, found similar results. Campos-Vázquez and Rodríguez-López (2011) analyze the effects of trade liberalization on Mexican employment at an occupational level for the period from 1992 to 2009, ranking occupations by skill level. They find that the reduction in trade costs associated with Mexico's entry to NAFTA is related to larger employment expansions in low-skill occupations. Dutt et al. (2009), using cross-country data, find fairly strong and robust evidence that indicates that trade openness results in lower aggregate unemployment as the Ricardian comparative advantage dominates, which will lead to more investment in job posting and job search.. They also find that trade liberalization episodes give an immediate rise in unemployment and in the longer-term employment recovers and unemployment will eventually decline in the steady state. Felbermayr et al. (2008) argue that trade liberalization lowers unemployment as long as it improves the aggregate productivity. This happens through crowding-out of the least productive firms and the labor reallocation into more productive firms. Matusz (1996) also agrees that trade may lead to an increase in employment in both trading partners. OECD’s estimates show that, even under recession conditions, further trade liberalization among the G20 economies leads to improved labor market outcomes: a 50% reduction in tariffs and non-tariff measures can lead to increases of 0.3% to 3.4% in employment for low skilled workers and between 0.7% and 5% for high skilled workers (OECD Week, 2012). In addition, there are country-specific evidences suggesting that the potential employment creation following greater trade integration can be significant (Hoekman and Winters, 2007), but skill-biased technical change dominates. Zaki (2011) estimates the macroeconomic impact of exports on employment over the period 1960 to 2009, finds that exports have a significant and positive effect on
18
employment. The positive correlation between export orientation and female intensity of manufacturing employment has been confirmed by a number of studies (Seguino, 2000; Heintz, 2006; Özler, 2007). The associated emerging export processing zones (EPZs) have attracted substantial proportion of women employees (Horton, 1996; Boyange, 2007; Amengual and Milberg, 2008; Domínguez et al., 2010). Also, Klein and Weirowski (2011) investigate the link between exports and unemployment in Germany. They find that exports (or, equivalently, total trade, i.e. the sum of exports and imports) have a significantly negative impact on unemployment rates. Using two different economic models, Sandrey et al. (2011) find a remarkably consistent pattern whereby agricultural trade liberalization in South Africa is predicted to increase agricultural employment. The results of Hahn and Park (2011) suggest that exporting promotes the employment of the skilled workers in Korean manufacturing sector but had a less beneficial effect on the unskilled workers in the Korean manufacturing sector since the 1990s when Korea’s economy accelerated its pace of globalization. Iapadre (2011) confirms that, after controlling for the effects of output growth and technical progress on labor demand, trade specialization has played a positive role in sustaining the growth of employment in the previous decade, offsetting the negative impact of the competitive pressure from developing countries and of production off-shoring by Italian firms. Using the Japanese input-output table for the period from 1975 to 2006, Kiyota (2011) finds that the demand for employment from exports has increased since 1985 both in manufacturing and non-manufacturing. A key characteristic of the process of global integration since the late twentieth century has been the rapid incorporation of women in export sectors producing manufactured goods, agricultural products and services such as tourism and data processing (Mehra and Gammage, 1999). This trend has been referred to as “global feminization of labor,” where often a double meaning is invoked: the increase in women’s share of employment and the spread of conditions of employment – part-time, temporary work with low pay and no or limited benefits – which traditionally characterized jobs held by women (Standing, 1989, 1999). By contrast, Helpman and Itskhoki (2007) argue that lower trade barriers can raise unemployment. They assume two sectors; the competitive homogeneous-product sector which has no labor market frictions, and the monopolistically competitive differentiated-product sector where labor market frictions exist. As the lowering of trade barriers makes exporting more profitable in the differentiated-product sector, more firms choose to export in larger volumes in this sector thus making low-productivity firms exiting. As a result of these changes, labor demand rises. Aggregate unemployment rises, as workers reallocate towards the high-wage sector, which has higher unemployment rate. Higher trade exposure is associated with a higher level of equilibrium unemployment because job destruction by small low-productivity firms’ exit exceeds job creation by large high-productivity ones. This is essentially because large firms extract higher rents by limiting the amount of job creation. Using the data of 20 OECD countries for the years 1961-2008, Kim (2011) finds that an increase in trade leads to higher aggregate unemployment as it interacts with rigid labor market institutions, whereas it may reduce aggregate unemployment if the labor market is characterized by flexibility. In a country with the average degree of the labor market rigidities, an increase in trade has no significant effect on unemployment rates. Also, Goldberg and Pavcnik (2003) and Revenga (1997) show an increase in worker displacement after trade liberalization while Krugman (1993), Mussa (1993) and Attanasio et al. (2004) claim that trade does not affect the rate of unemployment.
19
Chinembiri (2010) analyses the impacts of trade liberalization on employment at the aggregated levels for South Africa and finds that derived labor demand in the primary sectors (agriculture, fishery forestry and mining activities) and the secondary sectors (manufacturing, utilities and construction industries) have been impacted negatively by increased imports. Meanwhile, there was insufficient statistical evidence from the aggregate data to suggest that derived labor demand was increased by increased exports openness. Most recent empirical literature reviewed by (McMillan and Verduzco, 2011) on trade and employment reveals that in Brazil, South Africa and the United States, trade liberalization has been associated with employment losses in the industrial sector according to general equilibrium studies. In the case of Germany, Görg and Görlich (2011) conclude that the probability of switching into unemployment is positively correlated with the export share – that is, individuals in industries with high export shares are more likely to lose their jobs. When the authors split the sample into export-intensive and not export-intensive sectors, they find that it is only in the latter sectors the positive relationship exists. According to Thompson et al (2012), trade liberalization causes relocation of jobs in Australia, leading to decreased manufacturing employment and increased employment in mining and services. Aswicahyono et al (2011) examines the impact of exports on jobs in Indonesia, based on an analysis of input–output tables over the period 1995–2005. They find that fewer jobs were created through exports in manufacturing industries in 2005 than before the crisis, because of slower growth in manufacturing exports and a shift away from light industry. However, there was an increase in jobs in the services sector, partly because of indirect connections with the main export industries. Biscourp and Kramarz (2007) analyze the link between trade and employment for French manufacturing firms and find a negative association between imports and employment. In particular, importers of finished goods shed more jobs than importers of intermediate inputs, with the link being stronger for larger firms. Conversely, exports of finished goods have a positive employment effect and exports of other goods have negative effects. Consistent with the results on Biscourp and Kramarz (2007), Kramarz (2011) finds that when the number of exported products increases, the effect on employment in France is clearly negative for all periods while an opposite phenomenon appears to be associated with an increase in the number of products imported: more products imported are associated with an increase in employment. Using firm-level data, Stone et al (2013) find that in the majority of cases in a six-country study (Brazil, Canada, Israel, South Africa, UK, and the US), higher export shares are associated with lower probability of unemployment while import penetration shows a tendency to increase slightly the probability of unemployment. However, their results at the occupation level are more varied: overall, impacts are generally larger than at the industry level; in some cases, export shares are associated with slight increases in the probability of unemployment, in particular for medium skilled workers; import penetration has little effect on the probability of unemployment, and in some cases even lowers it. In particular, for South Africa, similar to Israel and Brazil, greater export shares are generally associated with a reduction in the probability of unemployment for low skilled workers but increases for higher skill levels while imports improve the prospects of higher skilled workers.
20
From the above review, it is clear that studies on the effect of intra-regional trade on youth unemployment are very thin, particularly in Africa. In addition, results seem to have varied among country, firm-level and occupation-level studies. The results also differ between developed and developing countries.
IV. METHODS AND DATA
4.1 The Model
Based on the above review and following the frameworks posited by Kim (2010), Choudhry, Marelli and Signorelli (2012), Anyanwu (2013), and Anyanwu and Augustine (2013) the relationship that we want to estimate can be written as:
)1.......(),........,.....,1;,....,1(
)()()2log()log()log(intlog 54321
TtNi
ZXpolityrgdpaderafricantrYU ititititititiit
where YU is the measure of youth unemployment in country i at time t; i is a fixed effect reflecting
time differences between countries; 1 is the youth unemployment effect with respect to intra-
African trade, intrafricantrade; 2 is the youth unemployment effect with respect to real per capita
GDP in 2000, rgdp; 3 is the coefficient of institutionalized democracy, polity2; X is the control variables, including domestic investment (% of GDP) (inv), government final consumption expenditure (% of GDP) (gfce), secondary school enrolment ratio (educ), inflation (inf), foreign direct investment (% of GDP) (fdi), credit to the private sector (% of GDP) (credit), urban population share (urbanpop), and one-period lagged real growth rate (laggrowth)5; Z represents country dummies used as fixed
effects; and is an error term that includes errors in the youth unemployment measure. In addition to the overall estimation, we also estimate separately for female and male youth unemployment in Africa. For robustness, our estimations are done with pooled OLS with country fixed effects and IV-2SLS with country fixed effects. In addition, one possible problem with Equation (1) is that it assumes that all of the right-hand side variables in the model — including intra-African trade — are exogenous to youth unemployment rate. However, it is possible that intra-African trade may be endogenous to youth unemployment rate. Reverse causality may be taking place: intra-African trade may be reducing youth unemployment, but youth unemployment may also be affecting the level of intra-African trade. Without accounting for this reverse causality, the estimated coefficients in Table 2 may be biased. One way of accounting for possible endogenous regressors is to pursue an instrumental variables approach. Therefore, to deal with this problem, we also estimate the equation, instrumentalizing the intra-African trade variable with its lagged levels (as in Felbermayr et al, 2009 and Klein and Weirowski, 2011), using a two-step (IV) estimation method.
5 We use the one-period lagged real growth rate for two reasons. First, the observed correlation in our data set between
youth unemployment and the contemporaneous growth rate is weak, and second, using a lag we avoid endogeneity
problems on the right-hand side.
21
4.2 The Data
Data covering 46 African countries from 1980 to 2010 are largely drawn from the World Bank’s WDI Online database, except intra-African trade data from the IMF DOTS as well as polity2 from the PolityIV Project Online (2013). Table 1 provides detailed descriptions of the raw dataset, representing unbalanced panel.
Table 1: Descriptive Statistics of Main Regression Variables (Excluding Dummies) Variable Observations Mean Median Standard Deviation
Intra-African Trade (%) 1643 12.885 8.743 12.737
Total Youth Unemployment (%) 118 23.967 23.35 14.125
Female Youth Unemployment (%) 98 26.899 27.15 17.341
Male Youth Unemployment (%) 98 21.516 19.45 13.404
Log of Real Per Capita GDP 1510 6.243 5.927 1.064
Gross Fixed Capital Formation to GDP (%) 1483 20.737 19.667 10.480
Govt. Consumption Expenditure to GDP (%) 1411 16.284 14.719 7.790
Secondary Education Enrolment (Gross) Rate 1094 31.811 24.509 24.592
Polity2 (Institutionalized Democracy) 1465 -1.584 -4.00 5.832
Inflation Rate (%) 1336 66.098 7.784 952.705
Real GDP Growth (%) 1524 3.564 3.771 7.086
Net FDI to GDP (%) 1257 2.536 1.067 6.851
Credit to the Private Sector to GDP (%) 1459 19640 13.955 20.052
Urban Population Share (%) 1643 35.777 34.64 17.166
Note: These are raw data before the log transformation Source: Author's calculations, using data from the World Bank WDI (2012) and ILO KILM Online Figures 15 to 17 show clear and unambiguous significant negative correlation between intra-African trade and total youth unemployment, female and male unemployment rates, respectively. This indicates that intra-African trade reduces youth (total, female and male) unemployment rates. A one percent increase in intra-African trade results in 0.45 percent reduction in overall youth unemployment rate in the continent, all other factors being constant. It also results in a 0.61 percent reduction in female youth unemployment and a 0.34 percent reduction in male youth unemployment.
22
Figure 15: Mean Intra-African Trade and Mean Total Youth Unemployment Rate, 1980-2010
Source: Author, using data from ILO’s KILM and IMF DOTS Online Data Base
Figure 16: Mean Intra-African Trade and Mean Female Youth Unemployment Rate, 1980-2010
Source: Author, using data from ILO’s KILM and IMF DOTS Online Data Base
Algeria
Benin
Botswana
Burkina FasoBurundi
Cape Verde
Egypt
Ethiopia
Gabon
Ghana
Lesotho
Liberia Madagascar
Malawi
Mauritius
Morocco
Namibia
Niger
Nigeria
Rwanda
SenegalSeychelles
Sierra Leone
SomaliaSouth Africa
Sudan
Swaziland
São Tomé & Príncipe
Tanzania
Tunisia
Uganda
Zambia
Zimbabwe
010
2030
4050
Ave
rage
You
th U
nem
ploy
men
t Rat
e
0 10 20 30 40Average Intra-African Trade ( %)
(mean) uemp1524dub Fitted values
Algeria
Benin
Botswana
Burkina FasoBurundi
Cape Verde
Egypt
Ethiopia
Gabon
Ghana
Lesotho
Liberia Madagascar
Malawi
Mauritius
Morocco
Namibia
Niger
Nigeria
Rwanda
Senegal
Seychelles
Sierra Leone
SomaliaSouth Africa
Sudan
Swaziland
São Tomé & Príncipe
Tanzania
Tunisia
Uganda
Zambia
Zimbabwe
01
02
03
04
05
0
Ave
rag
e F
em
ale
You
th U
nem
plo
ymen
t Ra
te
0 10 20 30 40Average Intra-African Trade ( %)
(mean) uempf1524dub Fitted values
23
Figure 17: Mean Intra-African Trade and Mean Male Youth Unemployment Rate, 1980-2010
Source: Author, using data from ILO’s KILM and IMF DOTS Online Data Base.
V. MODEL ESTIMATION RESULTS AND ANALYSIS
Table 2 shows the results when Equation (1) is estimated using pooled Ordinary Least Squares (OLS) with country fixed effects. Table 3 presents the IV results (the frist-stage results are omitted for brevity). The consistency of the IV estimators depends on whether lagged values of the explanatory variable are valid instruments in the youth unemployment regression. We examine this issue by considering the tests of over-identifying restrictions. The non-rejection of the null hypothesis implies that instrumental variables are not correlated with the residual and are satisfying the orthogonality conditions required. That is, In order for a variable, z, to serve as a valid instrument for x, the following must be true: The instrument must be exogenous, or valid, that is Cov(z; ε) = 0 (the restriction is tested using the Hausman and Wu-Hausman tests) and the instrument must be informative, or relevant, that is Cov (z; x) ≠ 0 (the restriction is texted using the Sargan and the Basmann tests).
Algeria
Benin
Botswana
Burkina Faso
Burundi
Cape Verde
Egypt
Ethiopia
Gabon
Ghana
Lesotho
Liberia Madagascar
Malawi
MauritiusMorocco
Namibia
Niger
Nigeria
Rwanda
SenegalSeychelles
Sierra Leone
SomaliaSouth Africa
Sudan
Swaziland
São Tomé & PríncipeTanzania
Tunisia
Uganda
ZambiaZimbabwe
01
02
03
04
05
0
Ave
rag
e M
ale
You
th U
nem
plo
ymen
t R
ate
0 10 20 30 40Average Intra-African Trade ( %)
(mean) uempm1524dub Fitted values
24
Table 2: Estimates of the Effects of Intra-Africa Trade and Other Variables on Youth Unemployment in Africa (Pooled OLS Results with
Country Fixed Effects)
Variable All Youth Female Youth Male Youth
Intra-African Trade -0.451 (-5.05***)
-1.466 (-3.25***)
-0.614 (-5.30***)
-1.672 (-2.06**)
-0.337 (-3.52***)
-1.456 (-2.26**)
Log of Real Per Capita GDP 58.840
(2.01**)
77.567
(2.17**)
45.593
(1.60)
Gross Fixed Capital Formation to GDP
-0.741 (-1.97*)
-0.746 (-1.48)
-0.768 (-1.92*)
Lag of Govt. Consumption
Expenditure to GDP
0.823
(1.30)
0.953
(1.16)
0.734
(1.12)
Secondary Education Enrolment (Gross)
-0.562 (-1.72*)
-0.712 (-1.77*)
-0.467 (-1.46)
Polity2 -2.343
(-2.79**)
-2.623
(-2.48**)
-2.268
(-2.70**)
Inflation Rate -0.683 (-3.57***)
-0.767 (-3.17***)
-0.548 (-2.84***)
Lag of Real GDP Growth -1.033
(-3.06***)
-1.102
(-2.65**)
-0.958
(-2.89***)
Net FDI to GDP -0.139 (-0.22)
-0.307 (-0.38)
-0.042 (-0.07)
Urban Population Share -1.083
(-1.88*)
-1.592
(-2.15**)
-0.541
(-0.92)
Lag of Credit to Private Sector to GDP
0.225 (1.74*)
0.227 (1.36)
0.212 (1.59)
Constant 28.637
(19.07***)
-391.589
(-1.89*)
33.048
(17.08***)
-287.991
(-1.88*)
24.891
(15.55***)
-148.741
(-1.22)
Country Fixed Effects No Yes No Yes No Yes
R-Squared Adjusted R-Squared
F-Statistic
Prob>F/chi2 N
0.1800 0.1730
25.47
0.0000 118
0.9386 0.8592
11.83
0.0000 56
0.2264 0.2183
28.09
0.0000 98
0.9348 0.8458
10.51
0.0000 53
0.1141 0.1049
12.36
0.0007 98
0.9344 0.8449
10.44
0.0000 53
Source: Author's calculations. Note: t-statistics in brackets; *** 1% significant level; ** 5% significant level; * 10% significant level.
Therefore, our subsequent analysis is based on the pooled OLS with country fixed effects. First, intra-African trade has a significant and negative effect on both total, female, and male youth employment over the period, 1980 to 2010, confirming the results in Figures 15 to 17. This is because regional trade liberalization usually leads to trade creation among member states and trade diversion regarding trade with non-members. Increase in exports to members and rising output lead to positive employment effects (Mashayekhi, Peters, and Vanzetti, 2012). Thus, we observe that the intra-African trade coefficient is larger for female youth than for male youth. The negative effect is persistent when intra-African trade is regressed alone on youth unemployment and when it is regressed with other variables. Similar results are obtained in the IV-estimations in Table 3. All these confirm the correlation results represented in Figures 15 to 17. Thus, increased intra-African trade reduces youth unemployment, with larger impact on female unemployment. For example, a one percent increase in intra-African trade will result in 1.47 percent reduction in overall youth unemployment. Also, a percent increase in intra-African trade will lead to 1.67 percent and 1.46 percent reduction in female and male youth unemployment rates, respectively. The result is consistent with the prediction of the Hecksher-Ohlin-Stolper-Samuelson theory that shows that to the extent that women workers predominate in less-skilled jobs in developing economies such as Africa’s, there are usually employment gains for women in export sectors of the economy. In addition, in line with Becker’s theory, with decline in labor market discrimination in response to increasing competition in product markets generated by trade expansion, there results a demand-induced dynamic toward greater gender equity. Also, developing countries that enjoy a comparative advantage in unskilled-labor abundant sectors tend to see women disproportionally employed in the exports sector, mostly manufacturing.
25
Table 3: Estimates of the Effects of Intra-Africa Trade and Other variables on Youth Unemployment in Africa (IV Results with Country Fixed
Effects)
Variable All Youth Female Youth Male Youth
Intra-African Trade -1.565 (-4.31***)
-2.307 (-3.35***)
-1.835 (-3.36***)
Log of Real Per Capita GDP 62.883
(2.99***)
0.881
(1.63)
52.166
(2.68***)
Gross Fixed Capital Formation to GDP -0.783 (-2.98***)
-0.979 (-2.67***)
-0.907 (-3.12***)
Lag of Govt. Consumption Expenditure to
GDP
0.817
(1.97*)
0.881
(1.63)
0.690
(1.61)
Secondary Education Enrolment (Gross) -0.592 (-2.64**)
-0.800 (-2.97***)
-0.520 (-2.43**)
Polity2 -2.421
(-4.21***)
-2.849
(-4.03***)
-2.403
(-4.29***)
Inflation Rate -0.691 (-5.47***)
-0.802 (-5.01***)
-0.568 (-4.48***)
Lag of Real GDP Growth -1.058
(-4.65***)
-1.141
(-4.18***)
-0.982
(-4.54***)
Net FDI to GDP -0.120 (-0.29)
-0.195 (-0.37)
0.025 (0.06)
Urban Population Share -1.121
(-2.91***)
-1.601
(-3.31***)
-0.547
(-1.43)
Lag of Credit to Private Sector to GDP 0.226 (2.67**)
0.211 (1.92**)
0.202 (2.32**)
Constant -200.026
(-1.86*)
-299.425
(-2.37**)
-163.805
(-1.64*)
Country Fixed Effects Yes Yes Yes
R-Squared Wald chi2
Prob>chi2
Durbin (score) chi2(1)
WU-Hausman F-test
Sargan (score) chi2(1)
Basmann chi2(1)
N
0.9384 847.76
0.0000
0.2201 (0.6390)
0.0908
(0.7659) 1.2072
(0.2719)
0.5067 (0.7659)
56
0.9330 740.14
0.0000
2.1221 (0.1452)
0.8759
90.3600) 0.1011
(0.7505)
0.0401 (0.8412)
53
0.9333 742.12
0.0000
1.1869 (0.2760)
0.4811
(0.4955) 1.5094
(0.2192)
0.6156 (0.4327)
53
Source: Author's calculations. Note: t-statistics in brackets; *** 1% significant level; ** 5% significant level; * 10% significant level.
Second, in our results, the coefficient associated with the level of real GDP per capita is found to be positive and statistically significant in the overall and female youth unemployment estimations. This indicates that more affluent countries tend to have higher overall and female youth unemployment in Africa. The result is ironically consistent with the positions of relatively high-income, oil and mineral exporting nations that have high youth employment in Figures 15 to 17. Third, as shown in Tables 2 and 3, a nation’s domestic investment rate is found to be negatively and highly significantly associated with overall, female and male youth unemployment. A one percent increase in domestic investment rate will lead to 0.74 percent reduction in overall youth unemployment but results in 0.75 percent and 0.77 percent reduction in female and male youth unemployment rates, respectively. The results are consistent with those of Choudhry, Marelli, and Signorelli (2012) on the impact on youth unemployment for a panel of countries. Thus, an increase domestic investment is good for youth unemployment reduction in the Continent, and more so for male youth unemployment. Domestic investment must be promoted in order to generate jobs for the majority of the unemployed youth in Africa. Indeed, domestic investment is a key source of employment, wealth creation and innovation. Increasing domestic investment levels is also fundamental to poverty reduction. Without it, countries are unable to spur the growth of their
26
economies or to sustain the reduction of poverty over the long-term. Where domestic investment is low, the productive capacity of the economy fails to increase. This results in lower rates of economic growth, fewer opportunities for the poor to improve their livelihoods, and lower rates of job creation. Fourth, the education variable has negative and highly statistically significant effect on total and female youth unemployment in African countries, but not for male youth unemployment. An additional year of secondary education will lead to a 0.56 percent fall in overall youth unemployment rate while reducing female youth unemployment rate by a larger level of 0.71 percent. Indeed, at least secondary education is relevant for youth (especially female) unemployment reduction as it strengthens and builds upon knowledge begun in the primary levels, provides essential skills for the labor market, and has greater potential to help people secure jobs or even create jobs themselves. Thus, for African female youth especially, education matters and at least secondary education level is good for youth unemployment reduction. As Boserup (1970) suggests, men’s greater access to education and technologies implies that they displace women from the labor force during the early stages of a country’s development. However, as development continues and women gain more access to education and technologies, female labor force participation increases. In addition, secondary level education is a commonly used indicator of the capability of the workforce. Secondary and higher education are more relevant for unemployment reduction than primary education as they strengthen and build upon knowledge begun in the primary levels and provide essential skills for the labor market. Fifth, the level of institutionalized democracy is negative and statistically significant at the one percent level in both the overall, female and male youth unemployment in the Continent. Institutionalized democracy is characterized by economic and political freedom and civil liberties (including union rights and rule of law). People are free to start and run businesses of their choice property rights are protected by law and by the courts. Thus, the quest for the establishment of enduring liberal democracy in African countries is good for reducing the scourge of youth unemployment. Sixth, our results indicated that there is evidence of significant and high negative relationship between inflation and youth unemployment – overall, female and male. This gives evidence that the Phillips curve holds for African countries. Again these results are consistent with those of Choudhry, Marelli, and Signorelli (2012) for a panel of countries. This shows that youth unemployment in African countries can be reduced by stimulating spending (which causes inflation to rise) though this may not be sustained in the long-run if inflation runs out of hand. Seventh, the results show that real GDP growth has negative and significant effect at the one percent level on total, female and male youth unemployment rates. For example, a one percent increase in previous year’s economic growth will lead to 1.03 percent reduction in overall youth unemployment but results in 1.10 percent and 0.96 percent reduction in female and male youth unemployment rates, respectively. Indeed, as the economy improves, households’ unearned incomes rise, increasing the incentive of the youth to work or to enter the labor market. Our results are thus congruent with those of Choudhry, Marelli, and Signorelli (2012) for a panel of countries as well as Gomez-Salvador and Leiner-Killinger (2008) for the Euro Area youth, and Vandenberg (2010) using a global panel. Economic growth is therefore good for youth unemployment reduction in Africa. This indicates that any inclusive growth strategy in the continent has to be one that ensures that countries “climb the
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ladder” of economic growth sustainably. To increase economic growth, African countries must deepen macroeconomic and structural reforms for economic transformation of their economies. Eight, increasing urbanization rates are found to be negatively and significantly associated with youth unemployment, especially for female youth unemployment. If the urban share of the population increases by one percent, overall youth unemployment rate falls by 1.08 percent while that of female youth falls by a larger level of 1.59 percent. Ninth, our results show that credit to the private sector has positive significant effect on male youth unemployment though not on the total and female youth unemployment. Rather than reflecting a threshold problem, this may be linked to the increased incidence of financial and banking crises and instability consequent upon the rapid liberalization of financial markets in many countries since the late 1980s and particularly since 1990s. Unfortunately, the resulting increases in financial depth in these countries took place without the requisite development of lending expertise, mechanisms for monitoring, and supervisory and regulatory skills. Rapid and excessive financial deepening as manifested in a credit boom, can be problematic even in the most developed markets because it can both weaken the banking system and bring inflationary pressures without promoting inclusive development. Finally, our results also indicate that government consumption expenditure as a percent of GDP and FDI-GDP ratio have insignificant effect on youth unemployment in Africa. In particular, our results, therefore, do not support the proposition that the inflow of foreign direct investment reduces unemployment, especially for the youth (unlike Inekwe’s (2013) for overall unemployment rate in Nigeria).
VI. CONCLUSION AND POLICY IMPLICATIONS
Our empirical estimates, using available cross-sectional time series data over the period, 1980 and 2010 suggest that, higher levels of intra-African trade, domestic investment rate, institutionalized democracy, secondary education, inflation, economic growth, and higher urbanization tend to reduce youth unemployment both on the aggregate and gender-differentiated and therefore good for youth unemployment reduction and inclusive growth in the Continent. On the other hand, higher real per capita GDP and to a lesser extent credit to the private sector have significant positive effect on youth unemployment in Africa. Government consumption expenditure and FDI have insignificant effect on youth unemployment in Africa. Our findings point to some key policy implications for increased intra-African trade, youth unemployment reduction and hence inclusive growth in Africa. First, Efforts to expand intra-African trade for unemployment reduction include eliminating tariffs and non-tariff barriers, enhancing mutually advantageous commercial relations through trade liberalization schemes, the adoption of comprehensive and harmonized regional trade policies. In addition, there is need to intensify cooperation in regional infrastructure development projects not only to increase access to and reduce the cost of provision of these facilities, but also to help to lower transactions costs, boost trade, and increase the attraction of the Continent to investors. There is need to promote and deliberately support the development of the domestic capital markets through a sub-regional approach and putting in place supportive infrastructure for the markets. African governments should adopt a sub-
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regional approach to the support and development of capital markets, so as to strengthen their catalytic role in mobilizing savings for increased domestic investment. Also, strengthening of regional integration groups will be useful in reducing the incidence of domestic policy reversals and improving the credibility of economic policies in Africa. Indeed, full implementation of the plan to boost intra-African trade during the January 2012 African Union Summit of Heads of State and Government will be very critical. Concerning the provision of durable and reliable national and regional infrastructure, investments should address persistent bottlenecks in the quantum and quality of electricity supply, availability of ports and ports facilities, road and air transport infrastructure as well as their quality, and thus reducing non-labor costs. Innovative financing methods include the use of domestic infrastructure bonds, Diaspora bonds, sovereign wealth funds, and resource-backed infrastructure financing, including commodity-linked debt instruments Second, a key challenge, for African countries is to mobilize increased resources for high domestic investment. Successful promotion of investment in Africa will require actions and measures at the national and regional levels: At the national level, apart from continuing to deepen the reforms (macroeconomic and institutional) that they have embarked on in the last decade, African countries need to increase efforts at the mobilization of higher domestic savings, including through the implementation of tax reforms, cost sharing in the provision of public goods and services and enhancing public expenditure productivity. Tax reforms should focus on broadening the tax base, emphasizing indirect taxes/value added tax (VAT) (and hence keeping marginal and average income tax rates low), raising tax elasticity with respect to economic growth, reducing exemptions, simplifying and improving tax administration, especially developing more efficient and effective tax collection systems. Further efforts should also be made to improve the efficiency and effectiveness of public institutions, if these are to serve as genuine partners for the private sector. Sustainable domestic investment needs increased human capital investment to enhance the health and welfare of populations and generate the skills required in a competitive global environment. Third, effective policies that invest in human capital of the citizens and workforce are needed. In the educational sector, there is very urgent need to re-orientate the thinking and value system of both parents and their children through mass educational campaign regarding the importance of education (particularly technical and vocational education that bestows life skills for self-employment) and the need for parents to insist on their children (male and female) going to school (at least up to technical and vocational secondary education level) before seeking employment or going into business. In addition, apart from quantitative expansion (including through private participation and public-private partnership), there is urgent need for a fundamental reform of content (e.g. curriculum reforms, availability of school books equipment/facilities, and other teaching materials) towards more emphasis on skill acquisition through technical and vocational education and training (TVET) and problems faced by the poor. It will also be necessary to devise means to assist poor households with school fees, textbooks and other school materials for their children. These will have to be complemented with increased employment opportunities through public works, especially for the female youth, and infrastructural development using labor-intensive technology so as to encourage children to go to school and hence have greater assurance of finding more quality jobs on graduation and hence reduce unemployment.
29
Fourth, in addition, apart from promoting increased regional trade, especially through the removal of cross-border barriers and infrastructure bottlenecks (among others), the promotion of diversification away from natural resources dependence is imperative. Indeed, developing a successful modern economy based on natural resource exports is, in principle, feasible, given the right institutions and policies, as demonstrated by OECD countries such as Canada, Australia, or the Scandinavian countries like Norway. However, it is critical to use natural resources to develop a more diversified economic structure. Some policies are helpful in fostering diversification. These include establishing a conducive business environment and providing sufficient incentives to invest in non-natural resources sectors. A conventional measure is to use the tax system to assist the development of non-natural resource sectors. In addition to tax policy, there is also need for structural reforms, including financial sector and administrative reforms, to facilitate the diversification of economic activity. In many natural resource-dependent African economies, there is a large scope to reduce the burdens imposed by heavy regulation and an often corrupt bureaucracy, which, in addition to strengthening the financial system, would help create a more level playing field and decrease barriers to entry. Fifth, the majority of African countries are trapped in the export of unsophisticated, highly standard products that are poorly connected in the product space. This makes the process of structural transformation of the region particularly difficult. The products that are nearby to those they already export have the same characteristics. Thus, shifting to these products will do little to improve African countries’ economic growth prospects. To jump-start and sustain growth, governments must implement policies and provide public inputs that will encourage the private sector to invest in new and more sophisticated activities. Getting out of the trap, that is, diversifying and upgrading its productive structure, is Africa’s key challenge. The sparse productive structure of Africa has significant implications for its diversification prospects. The region is poorly diversified, and its exports are (mostly) ubiquitous peripheral products, that is, exported by many other countries, implying the standardness of inputs or capabilities required in their production (Hidalgo and Hausmann, 2009). Sixth, to increase economic growth, African countries must deepen macroeconomic and structural reforms. to increase their competitiveness, create increasing and more quality jobs and hence increase participation in economic activity, dismantle existing structural bottlenecks to private and public investment, scale-up investments in hard and soft infrastructure, check rapid population growth, and increase productivity, especially in agriculture, through creating incentives and opportunities for the private sector and increasing government support to small farm holders in terms of finance, formalization of land ownership, and technical advice. Finally, gender-specific analysis shows that the negative impact of intra-African trade for female youth unemployment is higher in comparison to male youth unemployment – and even in comparison to overall youth unemployment. Investments in education, social services and infrastructure required by these gender-equity policies will promote gender-equitable employment. Increased investments in education, easing of unpaid workloads through the provision of childcare and infrastructure investments, social services and infrastructure are necessary gender-equity policies to promote gender-equitable employment. In particular, African countries need to continue to emphasize girls’ education and close gender gaps in not only the quantity of education but also its quality. One approaching that has proved successful in a number of Latin America countries is the use of conditional cash transfers, aimed at providing economic incentives for families to encourage long-term school attendance and school completion by girls.
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Without doubt, sustainable inclusive growth and development as well as inclusive governance should be the basis for policy-makers and leaders in Africa to bridge the transformation between pain of current youth unemployment time bomb and the promise of the future.
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