Effectiveness of Policy Responses to Terms of Trade Shocks in Selected African Countries

Benedict Ibekwe Ezema

Abstract


The terms of trade have an especially marked impact on the economies of developing countries. Some
researchers suggest that terms of trade fluctuations are twice as large in developing countries as in developed
countries. This movement in their terms of trade is a key determinant of macroeconomic performance and has an
important impact on real national income resulting in terms of trade shocks. But African countries have not
responded appropriately to these shocks hence this study was carried out to compare the impacts of the
application of policy adjustments to terms of trade shocks among selected African countries, and to assess the
extent to which these countries respond to the shocks. The study decomposed and estimated critical performance
measures of the economic impacts of these adjustments to terms of trade shocks in these countries for the period
1970-2009 into quantifiable economic indicators namely: changes in import intensity, economic compression,
export promotion and external debts. The application of the McCathy, Neary and Zanalda (1994) method
confirms that adverse terms of trade shocks are not only high in Africa but that policy indicators refuse to adjust
appropriately in the face of steep fall in export prices as clearly seen in the 1980 to 1984 period for Gabon and
Nigeria. Secondly, the application of a Wilcoxon Matched-Pairs test reveals that the impact of policy responses
to terms of trade shocks in oil exporting countries and agricultural commodity exporting countries of Africa are
markedly different. The study, therefore, advocates that African countries should, henceforth, take practical steps
to ameliorate the adverse effects of terms of trade shocks by carefully selecting and engaging policy thrusts that
suit their particular economic problems and environments.


Full Text: PDF DOI: 10.5539/ijbm.v7n8p88

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International Journal of Business and Management   ISSN 1833-3850 (Print)   ISSN 1833-8119 (Online)

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