Examining Trade by Destination, Innovation and Human Development in FOCAC

Abstract

There are few empirical research papers on the impact of trade by destination on human development, most of which focus on the direct impacts completely ignoring the indirect impacts through various channels. The main objective of this paper was to examine the impact of trade by destination towards strategic partners on human development through innovation channel captured using capital imports, while controlling for endogenous impacts from economic growth and at the same time providing new evidence on the direct impacts. This study was demonstrated using a sample of 40 Sub Saharan African countries (SSACs) and their trade partnership with China under the Forum for China-Africa Cooperation (FOCAC) framework for the period from 2000 to 2017. To avoid bias, the study controlled for other SSACs trade partners using rest of world trade patterns. The framework was estimated using two simultaneous equation generalized methods of moments (GMM) for economic growth and human development and also considering that trade and innovation can impact both economic growth and human development. The results indicated that both SSACs trade openness towards China and SSACs trade openness towards rest of world, had positive and significant impacts on human development at 1% level. The study also found that innovation from China and innovation from rest of world had both negative and insignificant impacts on human development. The results were robust to simultaneous equation three stages least squares (3SLS) and single equation two-step GMM. The study also found comparable results when time period was extended from 1990 to 2017 and innovation was instead captured using total capital trade. These findings suggest that trade partnerships matter for enabling potential gains from trade openness on human development and to maximize such gains, SSACs need to reform and incorporate human development aspects in their key policies including innovation as these create a conducive environment through which trade impacts can be sustainable and inclusive.