The Potential Economy-wide Effects of Economic Integration in the African Continental Free Trade Area (AfCFTA): Evidence from Ethiopia. A Recursive Dynamic Computable General Equilibrium (CGE) Model Approach
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Date
2022-07-03
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A.A.U.
Abstract
Historically, economic integration, which has been an important structural feature in the international economy, is an integral part of the economic policy issue of global, continental, and regional economies such as Africa. Most of the literature on the potential economy-wide effects of economic integration in Ethiopia shows ambiguous results. Owing to this fact, the main aim of this study is to identify aspects of the sectoral, trade, revenue, and welfare effects of economic integration in Ethiopia, in particular, if the African continental free trade area (AfCFTA) implementation plays a role. This study adopted a theoretical framework and employed descriptive as well as simulation analysis. The simulation analysis employed a recursive dynamic computable general equilibrium (CGE) model and used a 2015/16 social accounting matrix (SAM) dataset. The simulation result shows that economic integration in the African Continental Free Trade Area (AfCFTA) is likely to have a positive effect on the Ethiopian economy, such that sectoral productivity of most economic sectors, trade flows, and welfare are improved (affected positively). However, government revenue decreased due to tariff reduction (cut); hence, it is one of the most important sources of government income, and such tariff reduction results in no more government income from import tariffs. In sum, Ethiopia is likely to benefit from joining the African Continental Free Trade Area (AfCFTA). Hence, it will have a positive effect on the Ethiopian economy by improving sectoral productivity, trade flows, and welfare. Ethiopia might face a revenue loss. Due to this, the way of reaction to structuring its tariff offer and negotiating with its African partners, it is necessary to retain a significant number of tariff lines for sensitive and excluded items over a longer period of liberalization, and subsidization programs or targeted tax incentives are required to help the transformation of those sectors that stand to lose as a result of trade liberalization. Moreover, multidimensional policy measures are vital, in addition to tariff reduction (cut), protection of the domestic infant industries, building the potential to produce (substitute) products that are largely imported from outside, and removing production side (infrastructural) constraints should also be a long-term policy or strategy for Ethiopia and other member countries of the AfCFTA.
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Economic integration, Economy-wide, Welfare, Trade, Sectoral, Revenue, AfCFTA, and Ethiopia