Role of trade in natural rubber and palm oil in the composition of GDP in Ivory Coast

Paul-Alfred Kouakou Kouakou

Purpose. This paper discusses the effect of natural rubber and palm oil exports on economic growth in Ivory Coast from 1980 to 2016 using World Bank data.

Methodology / approach. The analysis involved the use of Augmented Dickey-Fuller (ADF) and Phillips-Perron (PP) unit root tests and the ARDL model.

Results. This paper discusses the effect of natural rubber and palm oil exports on economic growth in Ivory Coast from 1980 to 2016 using World Bank data. The analysis involved the use of Augmented Dickey-Fuller (ADF) and Phillips-Perron (PP) unit root tests and the ARDL model. The results of the study show that there is a positive and non-significant relationship between natural rubber exports and short-term economic growth. On the other hand, in the long term, they have a positive and significant influence on economic development. However, in the short and long term, palm oil exports have a positive and significant impact on gross domestic product. Finally, labour, investment and market opening have a positive and significant effect on economic growth in the short and long term respectively. Therefore, the Ivorian government needs to promote good agricultural practices and agricultural financing in order to increase the competitiveness of the Hevea -Oil palm sector.

Originality / scientific novelty. Previous studies in natural rubber and palm oil focused mainly on its production, constraints to production and processing. However, very few studies on its effects on economic growth have been done so far. This study fills that gap. It expanded the existing literature and the subject of the causal relationship between natural rubber and palm oil exports and economic growth in Ivory Coast and shed light on required efforts to enhance the production and utilization of natural rubber and palm oil at larger scale to bring economic development in Ivory Coast. At last, the ARDL model is used to address this issue.

Practical value / implications. The generated information will be useful to a number of organizations including: research and development, marketers, producers, policy makers, government and non-governmental organizations to assess their activities and improve their mode of operations, to help better guide the design and implementation ofpolicies and strategies. Finally, knowing the existing relationship between natural rubber and palm oil exports and economic growth, together with impediments faced by natural rubber and palm oil exports, the study provides the various ways to improve these exports by increasing exports capacity of local producers. Research on this issue is too important to inform policymakers regarding resource allocation in the natural rubber and palm oil sector to achieve economic growth.

Key words: exports, economic growth, natural rubber, palm oil, Ivory Coast.

Introduction and review of literature

At the dawn of independence, African countries were less endowed in human capital and technology than those in the North. Thus, the fertility of their soils combined with good climatic conditions led them to turn naturally to the agricultural sector, which they saw as an engine of economic development and a comparative advantage. Ivory Coast did not escape this situation by opting for an agrarian-type rentier system.

Agriculture contributes to the creation of more than 22.3 % of GDP and represents more than 47 % of the country's overall exports in 2013 (62 % excluding oil) according to Banque Mondiale [BM] (2016). This sector employs more than 46 % of Ivory Coast's working population and is a source of income for two-thirds of the Ivorian population, 50.3% of whom are rural (Institut National de la Statistique [INS], 2014).

However, Ivory Coast's dependence on world prices and the State 's involvement in the productive economy plunged the country into a deep crisis from 1980 to 1993. This crisis was characterized by a sharp fall in economic growth, a significant drop in per capita income, and the aggravation of internal and external imbalances (deterioration of the balance of payments, growing public deficits).

In order to remedy this situation, the country embarked from 1994 on a process of liberalization of its economy under the aegis of the Bretton Woods institutions. Several structural adjustment programmes were adopted. These programmes consisted in the gradual disengagement of the State from the productive sphere through privatization reform. Furthermore, export diversification remains one of the watchwords of the government's strategy. Several agricultural export products were introduced to create wealth, namely oil palm and natural rubber in the southern and western half of the country (Zamblй, 2015).

Today, Ivory Coast ranks first (1st) in Africa and seventh (7 th) in the world in the production of natural rubber. Natural rubber is also the third (3rd) export product in Ivory Coast and the second (2nd) non-oil, representing 6 % of the country's exports. As for palm oil, it is the fourth (4th) in the Ivorian economy and employs more than one million people. With 400,000 tons of crude palm oil produced per year, Ivory Coast ranks fifth (5th) in the world after Malaysia, Indonesia, Nigeria and Colombia. Moreover, it is the first (1st) African exporter and the second (2nd) African producer behind Nigeria (BM, 2016). Ivory Coast has 75,000 ha of industrial oil palm plantations and 155,000 ha of village plantations. The sector generates 220,000 direct jobs, feeds more than two million people and accounts for 1.5 % of GDP. The country holds 90 % of the West African Economic and Monetary Union (WAEMU) market, consumes 60 % of its production and exports 25 %. The turnover is 170 billion CFA francs for crude palm oil and 280 billion CFA francs for byproducts such as soap (Maxime, 2020).

Therefore, the objective of this study is to assess the effect of the hevea and oil palm sector to economic growth in Ivory Coast. Specifically, it aims to determine the causal effect of natural rubber and palm oil exports on economic growth in Ivory Coast.

Several empirical studies focused fundamentally on the relationship between exports, trade and economic growth in several countries. For example, Tamaschke's (1979) econometric work on the states of Victoria and New South Wales showed that commodity exports contributed significantly to the GDP of both states. However, according to the same author, the driving role was only evident if indirect effects such as linkage effects arising from transport and railways mainly were added. trade rubber palm oil

In the same vein, making estimates on cross-sectional data to overcome the drawbacks of the Balassa methodology with a set of 55 developing countries over the period 1960-1977, Tyler (1981) confirmed the role played by exports in economic growth and argued that countries that neglect the export sector should expect a low rate of economic growth.

In addition, Rodrigue (1987), studying 19 OECD (Organization for Economic Cooperation and Development) countries (Belgium, Canada, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Japan, the Netherlands, New Zealand, Norway, Spain, Sweden, Switzerland, Austria, the United Kingdom, the United States and the United Kingdom) from 1966 to 1983, using cross-sectional tests, stated that growth in OECD countries was stimulated significantly by both export and investment growth rates.

Henneberry and Curry (2010) examined the relationship between agricultural exports and economic growth in Pakistan. Using three simultaneous equations representing GDP, agricultural exports, and imports, they found a favourable relationship between agricultural exports and economic growth in the country.

Along the same lines, Kpйmoua (2016 ) in his study on the impact of exports on economic growth in Togo showed that there was a causal relationship between exports and economic growth by using a model based on a neoclassical production function.

Rakhmetullina et al. (2017) found an empirical relationship between agriculture and economic growth in Nigeria using autoregressive distributed lag model (ARDL) and vector error correction model (VECM).

Khan and Ansari (2018) studied the contribution of agriculture to economic growth in Uttar Pradesh, India. The study employed a long-run cointegrating analysis and found that agricultural development drives economic growth. Based on their findings, they suggested the public investment in irrigation, credit to farmers and the supports for micro and small agro-based industrialists as the strategic actions to achieve economic growth in India.

Faycal and Ali (2016) analyzed the impact of agricultural production on the economic growth in Algeria using the Autoregressive Distributed Lag (ARDL) model. The study revealed that the impact of agriculture on the economic growth was negative in the long-run when the governmental support was focused only on the production side of the agricultural sector. Otherwise, when the support is for the agricultural sector as a whole, the impact turns into positive.

Finally, Zahonogo (2017) used a dynamic growth model and employed the pooled mean group estimation technique and tested the empirical link between trade and economic growth for 42 sub-Saharan African countries. According to the results, the link between trade and economic growth was non-linear for these sub-Saharan African countries. Moreover, there is a threshold below which international trade is beneficial to economic growth.

From all the above, we note that in most cases, exports are a major determinant of economic growth.

The purpose of the article

This paper discusses the effect of natural rubber and palm oil exports on economic growth in Ivory Coast from 1980 to 2016 using World Bank data. Specifically, it aims to determine the causal effect of natural rubber and palm oil exports on economic growth.

Methodology. The data used in this study are the World Bank Development Indicators (WDI). They cover the quantity of natural rubber exported, the quantity of palm oil exported, trade openness, agricultural investment, labour force and GDP from 1980 to 2016. For processing, we used the software Eviews 10. The causal relationship between the export of natural rubber and palm oil and economic growth are studied using the ARDL model. The dependent variable is GDP. The explanatory variables are: the quantity of rubber produced as a proxy variable for the quantity of natural rubber exported; the quantity of oil palm produced as a proxy variable for the quantity of palm oil exported; trade openness; labour force and agricultural investment.

The ARDL model can be written as follows (Eq. 1):

GDP = F(HEVPPAL,LAB,TRA, INV) (1)

The Long Term Equation can be written as follows (Eq. 2):

The cointegrating relationship equation is obtained from the error correction model (ECM) and is written as follows (Eq. 3):

, represents the error correction term.

Taking into account the short-term and long-term effects between the explanatory variables and the explained or dependent variable, the ARDL representation is as follows (Eq. 4):

With A: First Difference Operator; ao: a constant;

a1, ..., a6: the short-term coefficients;

л1, …, л6:: the long-term coefficients;

µt ~ iid (0; у):error term (white noise).

However, the expectations regarding the effects of the explanatory variables on the dependent variable are shown in Table 1. A plus sign (+) indicates a positive effect and a minus sign (-) shows a negative effect of the dependent variable on GDP.

Table 1 Used variables

Source: author's research on the basis of the theory.

Results and discussion

Descriptive characteristics. In terms of standard deviation (Table 2), the variable «LNHEV» is more volatile than all other variables. In fact, natural rubber appears to be more sensitive to the effects of price fluctuations on world markets, unlike the other variables.

Table 2 Descriptive analysis of variables

Source: author's estimation using Eviews 10.

Gross Domestic Product (GDP) of Ivory Coast (USD). The evolution of GDP in Ivory Coast is undergoing three (3) major phases according to Fig. 1. The period from 1980 to 1985 is marked by a slowdown in economic growth due to the deterioration in the terms of trade linked to the economic crisis of the 1980s. Then, the period from 1985 to 2004 shows a slight improvement in the economic situation due to the measures of the structural adjustment programme adopted by the State. Finally, the period from 2005 to 2016 is characterised by continuous and sustained GDP growth.

Natural rubber exports to Ivory Coast in current USD. There are two (2) main trends in natural rubber exports according to Fig. 2. Firstly, from 1980 to 2011, there was a gradual evolution of exports due to the agricultural diversification policy undertaken by the State of Ivory Coast after the crisis in the cocoa-coffee sector.

Fig. 1. Evolution of GDP from 1980 to 2016

Fig. 3. Evolution of Palm exports from 1980 to 2016