EFFECT OF TRADE LIBERALIZATION AND INSTITUTIONS ON UNEMPLOYMENT IN ECOWAS COUNTRIES

ABSTRACT

The main focus of this study is to empirically examine the effect of trade liberalization and institutions on unemployment rate in the ECOWAS sub-region using panel data for the period 1996 – 2019. In order to capture the specific institutional effect, disaggregated institution-related variables such as Control of corruption (CCOR), Voice and accountability (VOICE), Rule of law (ROL), Government effectiveness (GEF), Political stability and absence of violence/terrorism (POLST), Regulatory Quality (REGQ) were used as explanatory variables. Other explanatory variables used were degree of Openness (OPEN) a proxy for trade liberalization, Custom and Excise Duty (CEXD), Exchange rate (EXR) while Unemployment (UNEM) was the dependent variable. The Unit root tests results revealed that the variables were stationary at first difference while the co-integration test results confirmed that long-run relationships exist among the variables. Though the correlation test results revealed low correlation between most pairs of the variables, the study ensured that the problems of multi-colinearity are further reduced by formulating six models such that just one institutional variable is contained in each model. The Hausman test supports the adoption of the fixed effect analysis which was then adopted for the analysis. From all the results, the impact of trade liberalization-proxied by the degree of openness- on unemployment rate was not statistically significant even at 10% level. Custom and Excise Duty, Control of Corruption, Rule of Law, Government Effectiveness, Political stability and absence of violence / terrorism and Regulatory quality have negative and significant impact on the Unemployment while Exchange rate has a positive and insignificant impact on the Unemployment; In addition, Voice and accountability has a negative and insignificant impact on the Unemployment; For the interaction variable, CCOR.OPEN, ROL.OPEN, GEF.OPEN, POLST.OPEN and REGQ.OPEN have negative and significant impact on the Unemployment while the impact of   VOICE.OPEN is also negative but insignificant. The findings show that trade liberalization is not statistically significant in explaining the changes in the unemployment level in the ECOWAS region. But this does not mean that ECOWAS countries should impose restriction in trade as the findings also suggest that enhancing institutional quality aids in improving the employment generating potential of trade openness. The study therefore recommends that ECOWAS countries should adopt the policy of trade liberalization with some caution and pay more attention to the development of institutions amongst others.