The impact of trade liberation on the manufacturing sector in Cameroon

Abstract

Trade liberalisation has been a prescription for all countries performing poorly and is seen to be necessary in all economies that have grown (Krueger, 1997). Cameroon initiated trade liberalisation in the late 1980s; however, the implementation was not sustained because the government used tariffs to correct trade deficit and raise revenue. By the early 1990s, the government was pressured by external factors, such as participation in the World Trade Organisation (WTO), the imposition of a Structural Adjustment Programme (SAP), membership of the Regional Trade Agreement (RTA), the debt crisis, and internal factors, such as demands to promote competitiveness. The tariff rates were reduced along with other quantitative restrictions. The aim of this research is to measure the impact of trade liberalisation on the manufacturing sector. The main hypothesis is that trade liberalisation based on theory should have a positive impact on the manufacturing sector. To test this hypothesis, appropriate methodologies were used to empirically determine the hypothesis. Two periods were selected, 1980 to 1991 (pre–liberalisation period) and 1992 to 2006 (post–liberalisation period). The use of the period 1980 to 1991 allows for the capture of the status quo ante policy, while the period 1992 to 2006 allows for the capture of postliberalisation impacts (ex poste). The performance variables were regressed with trade policy variables and other control variables that can influence performance. The Ordinary Least Squares was used. The result of the study shows that reduction in protection rates (tariff) did not affect manufacturing positively, as measured by the export performance. The result from the estimation of the single equation supply model reveals that the relative price variable proxied for by the exchange rate and imported inputs is an important determinant of the performance of the manufacturing sector, as measured by export performance, though not significant statistically. The gravity model is used to complement the results from the estimation of the single equation supply model. The main manufacturing performance indicator is bilateral trade. Bilateral trade was regressed with trade and other control variables such as the Gross Domestic Product (GDP) of the two countries, distance, tariffs, membership of RTA, common language and border and colonial ties, which can all have an impact on the performance of the manufacturing sector. The results show that bilateral trade did not improve as a result of liberalisation. The results further reveal that the membership in RTA and the reduction in tariffs (all indications of liberalisation) did not positively influence bilateral trade in manufacturing. The distance variable and GDP variables equally did not influence bilateral trade in manufacturing. Overall, support for the hypothesis that trade liberalisation in the early 1990s has had positive impacts on the manufacturing sector in Cameroon has not been obtained. The evidence indicates that liberalisation has negatively affected the manufacturing sector in Cameroon. The findings show that the long–term relationship between trade opening and industrialisation of the manufacturing sector is not stable and that trade opening negatively affects the manufacturing sector of Cameroon. This result is explained by the fact that importation of some inputs cannot be reduced. Moreover, Cameroon manufacturing enterprises are apparently unable to satisfy domestic demand and are uncompetitive. Given the evidence that, under Import Substitution Industrialisation policy, Cameroon established manufacturing firms not on the basis of revealed or latent comparative advantage, the seeming failure of ISI might be a consequence of these wrong decisions that were based on political needs rather than sound economics (Bhagwati, 1978). It is recommended that Cameroon should develop an industrial policy, which should be based on the identification of the revealed and latent comparative advantage in addition to the progressive and systemic acquisition of acquired comparative advantage as prescribe in the new trade theories. Government’s role should be an enabling one relying on market determination of resource allocation, and intervention should only take place when there is market failure. Clustering and agglomeration should be encouraged using the suggested tools, which should avoid rent seeking at all cost. Rigorous research at the microeconomic level is needed to identify the comparative advantage of Cameroon. Despite the findings of the research, intuitive reasoning and analysis of the various policies and actions indicate that trade liberalisation and market–economic decision–making, through government’s support (Lin & Monga, 2010) of the private sector (in a public–private partnership), through an overarching vision, is the way to go. The results from this research contribute towards policy–making that is grounded on sound and rigorous research and not rhetorical or political exigencies, which will ensure and guarantee a sound industrial policy reaffirming the importance of trade liberalisation despite the criticism and an industrial policy based on revealed and latent comparative advantages, which will lead to competitiveness with scientifically justified potentials for the manufacturing sector (GESP, 2010:35).