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Group Formation and Growth Enhancing Variables: Evidence from Selected WAMZ Countries

Abstract This paper sets out to empirically examine two issues. First, whether countries which belong in the same geographical area are apparently homogeneous and be pooled together in studying their growth drivers. Second and arising from the first, if homogeneity does not hold, what other growth enhancing variables drive the growth process for the group of selected WAMZ countries. The cross-sectional dependence result suggests dissimilarity among the countries and as such, the selected WAMZ countries should be studied independently. Foreign Direct Investment and democratic variables are prominent in the growth process of the WAMZ. However, Official Development Assistance (ODA) negatively impacted on economic growth of the economies studied, thus suggesting that it is highly fungible. To maximize the returns of government spending on growth and avoid the fungibility of foreign aid, fiscal discipline and consolidation are required for the apparent growth of the WAMZ economies.

Keywords Growth • Cross-section dependence • Pesaran's CD test • WAMZ • Dynamic ordinary least squares • Economic integration

JEL Classification C210 • C220 • O2 • O4 • F130 • F150

1 Introduction

The seminal work of Mankiw et al. (1992) is one cross-country study on economic growth that has aroused much interest and debate since the 1990s (Durlauf and Quah 1999; Dinopoulos and Thompson 1999; Durlauf et al. 2001; Narayan et al. 2010; Jalles 2012; Jongwanich and Kohpaiboon 2013; Cooray et al. 2013; etc). The study is an empirical evaluation of an extended version of the Solow-Swan growth model that incorporates human capital. The results of the applied model, among others, are adjudged to have yielded plausible estimates of output elasticity with respect to capital. A plethora of studies that have applied the Mankiw et al. (1992) framework underscores the importance of additional heterogonous factors that could enhance growth of countries even when such countries belong in the same region and are homogeneous by some macro stylized facts.

The second West African Monetary Zone (WAMZ) is a group of six countries within the Economic Community of West African States (ECOWAS) region that has planned to implement a monetary cooperation program among other objectives through a harmonized payments system. The objectives amid other measures are expected to enhance effectiveness of monetary policy, promote macroeconomic stability; increase cross border trade that would crystallize into economic expansion and growth. The accomplishment of the monetary union despite the perceived political will and the associated gains particularly in accelerating the economic growth process of member states has been a daunting task. Some other reasons often adduced have included the economic disparities and poor linkages of the WAMZ economies, perceived fear of domination of smaller economies by bigger ones; weak institutions, dissimilar economic structure, loss of monetary policy sovereignty etc.

In the literature on economic growth and group formation, some studies have opined that heterogeneity be considered when determining whether countries which belong to the same region would follow the same growth process as when they are adjudged homogenous by some macro stylized facts including similar technology. Most of the leading studies, save that Cooray et al. (2013) applies cross-country data in this determination. It is our view that following Cooray et al. (2013) approach, country-specific time series estimation technique is precisely more suitable in detecting growth enhancing variables in different countries, even when they belong to the same geographical area. This view is collaborated by that of Luintel, Khan, Arestis and Theodoridis (2008) who aver that panel regression undermines the importance of cross country differences; a constraint often associated with data pooling in the absence of balanced growth. This study sets out to empirically determine whether other than the apparent homogeneity argument of countries belonging in the same geographical area, which enhances group formation, there could be other sources of heterogeneity such as different political, legal, economic, national policies and interactive forces that drive growth in the WAMZ countries. The study applies appropriate statistical and econometric tests to deal with parameter heterogeneity estimates with a view to reaching unbiased and consistent conclusions. A frippery scan at the available data suggests that the WAMZ countries may be dissimilar as a result of institutional variations; however, rationalizing this is a matter of empiricism. The implication of this if it holds, is that in studying and recommending countries for the monetary union and group formation, countries which share common stylized facts be studied and recommended together in a sequence of monetary union formation! As such, if policy needs are implemented along country specific characteristics, it could serve as a shorter pathway to economic integration of the zone.

Following the introduction in Section 1, the rest of the paper is structured as follows: Section 2 discusses some of the stylized facts of the WAMZ economies, while Section 3 reviews the cross-sectional dependence tests. In Section 4, the empirical results and some economic implications are highlighted. Section 5 concludes the paper.

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