# The application of knowledge stylised facts in West Africa Economic and Monetary Union (WAEMU) – Journal of Innovation and Entrepreneurship

#### ByNogbou Andetchi Aubin Amanzou, Zie Ballo and Sery Guy Flavien Troupa

Sep 5, 2022

The methodology of the article is twofold: the description of knowledge stylized facts and the empirical analysis of the stylized facts. Each methodology has its own targets and used its own tools. The description of stylised facts aims to match stylised facts in WAEMU and stylized facts of Jones and Romer (2010) in order to make some similar recommendations for economic growth in WAEMU. The main tool used to make this description is the figures based on empirical data collected by Word Development Indicators (WDI) 2018, International Monetary Fund (IMF) (GFS & WEO) 2011, Penn World Tables and Barro & Lee, (2013). So, the analysis of stylised facts aims to establish some relationship between proxies of stylized facts based in order to advise some priorities based on the empirical data collected by Word Development Indicators (WDI). The main tool used for this analysis is the econometric model of RAO (2010). The model allows the inference of coefficients based on empirical data et showed the importance of each variable for economic growth.

### Description of knowledge stylized facts in WAEMU

It’s important to analyse the stylized facts of the area and compared them to the standard facts of Jones and Romer (2010) in order to apply the recommendations of the new economic growth theory to the WAEMU. To reach that end, the facts will be categorized into two groups: overall growth and overall income. Each group will contain three facts.

#### Overall growth

The notion of overall growth covers three stylized facts: (1) increase in the extent of the market, (2) accelerating growth and (3) variation in modern growth. These stylized facts are addressed below.

##### Increases in the extent of the market

After the Second World War, many markets (goods and services, financial, ideas and innovations…) was in hyperactivity all over the world. These activities accentuated the phenomenon of globalization and urbanization. So, the level of globalization and urbanisation was different from an area to others. This difference can be explained by local realities.

Globalisation is seen as the integration of several markets and the connexion of people from different areas. In the context of the WAEMU, globalization was intended on the one hand and imposed on the other. The desire for globalization is seen through economic integration and is expressly reflected in the objectives assigned to the integrated area. Eight countries have joined WAEMU in order to increase the extent of their local markets through integration (Objective 3 of WAEMU): Benin, Burkina Faso, Côte d’Ivoire, Guinea-Bissau, Mali, Niger, Senegal and Togo. To facilitate the reach of this objective, WAEMU has implemented a number of policies concerning: (i) a customs union; (ii) a regional financial market; (iii) a common commercial policy and (iv) community competition legislation.

The customs union concerns the liberalisation of intra-zone trade and the establishment of the Common External Tariff (CET). The CET was gradually introduced in the 2000s and is intended to be an instrument for harmonising the trade policy of member countries vis-à-vis the outside world. The importance of the intra-zone trade was also addressed from July 1996 and is mainly reflected in tariff reductions on intra-zone trade in the WAEMU.

The common trade policies implemented in WAEMU have a bilateral and a multilateral component. The bilateral component concerns trade relations between countries. In terms of bilateral relations, the Union has standardized the bilateral relations of the member countries by substituting the bilateral agreements concluded by each member country with multilateral agreements of WAEMU with third countries. The multilateral component concerns trade relations between member countries and international organisations. Under multilateral agreements, WAEMU has undertaken to notify its multilateral trade and investment agreements to the World Trade Organization (WTO).

The purpose of Community competition legislation is to ensure a better functioning of the common market. The Community’s anti-competitive legislation, which came into force in January 2003, prohibits agreements between companies, the abusive exploitation of dominant positions, aid granted by member countries to companies likely to distort competition, anti-competitive practices attributable to member countries.

The effective establishment of WAEMU’s regional financial market took place in September 1998 with the creation of the Regional Stock Exchange (BRVM). The BRVM aimed to collect internal savings as an alternative to bank loans. In accordance with Articles 4, 16(d), 96 and 97 of the WAEMU Treaty, capital movements between WAEMU Member countries are free and without any restrictions.

Unfortunately, the current extent of the globalization in WAEMU cannot be explained solely by the economic integration of WAEMU member countries. This statement is true if we took into account the low level of intra-zone trade in the WAEMU compared to that of others integrated areas of the world. The share of intra-zone exports between WAEMU Member States is estimated at 12.6% in 2015 compared to 20.9% in the Southern African Development Community (SADC) and 61.6% in the European Union (CNUCED & UNCTAD, 2016).

Notwithstanding the efforts of member countries to achieve integrated markets, the stylized facts of Jones and Romer (2010) showed an upward trend in the size of all global markets (integrated and non-integrated) driven by globalization. To highlight this observation, globalization is approximated by international trade and foreign capital. International trade is described as the value of a country’s imports and exports. The WAEMU organisation includes eight countries with economic internal and external transactions. The value of trade in the area have been synthesized by the arithmetic average of the annual imports and exports of each country in the area as a percentage of Gross domestic product (GDP). The value of the foreign capital is represented by Foreign Direct Investment (FDI) as a percentage of GDP. The arithmetic average of the FDIs of each country in the area made it possible to obtain the average FDI of the whole area.

##### Result and discussion

Figure 1 shows that the trends in international trade and foreign capital investment in WAEMU are upward in accordance with the general observation made by Jones and Romer (2010) over the period 1960–2010. According to Jones and Romer (2010), the world international trade as a percentage of GDP has doubled between 1960 and 2010. In the WAEMU countries, the level of international trade has also doubled over the period 1960–2010. The average in 1960 was 34.059 compared to 68.887 in 2010, representing an annual average change of 0.01%.

Jones and Romer (2010) have shown that the FDI increased in the world over the period 1960–2010. The FDI has also increased from 0.7504 in 1960 to 3.6472 in 2010 in WAEMU for an average annual variation of 3.86% over the period. The FDI has increased overall for the region, demonstrating the dynamism of the region’s markets.

Urbanization, on the other hand, is defined as the concentration of the population in urban areas. Seen as a market potential, urbanization in the WAEMU is a challenge to overcome because the member countries are struggling to cope with an uncontrolled exodus. Among the challenges caused by urbanization are the problem of access to drinking water, sanitation, electricity, health and the environment. The amount of investment required to ensure a minimum level of well-being remains a constraint for government budget under pressure.

To face the urbanization issues, WAEMU has set up the Regional Indicative Programme for Urban Development (PIRDU) for a period of 10 years (2009–2018). This programme aimed to strengthen the driving role of the Union’s cities in terms of attractiveness and competitiveness; to improve the living conditions and environment of urban populations within the Union; to facilitate the emergence of secondary cities and equipped relay cities; to strengthen decentralisation processes, governance and civic participation of local authorities and the various stakeholders in the life of their cities.

The globalization and rapid urbanization of the WAEMU make it possible to explain the expansion of markets, but not its impact, because of the enormous challenges of efficient intra-zone trade and controlling urbanization issues’. A gap between the potential of the region and the use of this potential therefore arises for decision-makers. The concern for challenges must not overshadow the potential of a rapidly expanding market with an ever-increasing urban population. The integration of the countries of the WAEMU is undoubtedly an opportunity that the member countries have not yet exploited. The large population and the flow of foreign innovation and technologies should make it possible to improve the region’s performance by taking them into account.

The pace of the area’s performance must be able to inform us about the effects of globalization. Successful globalization will therefore result in accelerated and inclusive growth and virtual globalization will lead to slow and non-inclusive growth. To analyse the rate of growth according to population, Jones and Romer’s Fact 2 is studied below.

##### Accelerating growth

The facts of economic growth in United States of America and twenty Western European countries have been empirically studied by Maddison (2007). He showed that GDP increased slowly before the 2000s and grown rapidly (× 100) over the last two centuries. Jones and Romer (2010) noted that this strong contemporary economic growth is characterized by a concomitant increase of population and per capita income. The linkage between growth and population highlighted by the authors is indirect. According to them, the increase in population rate lead to the increase of the stock of knowledge held individually by these populations and then, the used of the knowledge improve the growth rate. Jones (2005) have already established the linkage between knowledge stock and economic growth under the title of “Sources of US economic growth in a world of ideas”.

In WAEMU, the concept of population includes all individuals living in the Member countries. With a population of over 100 million, the area provides lot of ideas. According to the New Growth Theory, the large stock of ideas leads to a dynamic efficiency of economic growth. To estimate the link between population and economic growth in WAEMU, the number of individual living in the area was used as a proxy of population and GDP per capita was used as proxy of population well-being. An increase in GDP per capita is considered to be an increase in the well-being of the population notwithstanding inflation rate.

##### Result and discussion

Within the WAEMU, wages paid by central governments have been a constant function of economic growth (see Fig. 6). This consistency is explained not only by the stability of salaries in most countries in the region, but also by the rationed annual recruitment of new employees according to budget availability.

Human capital has also appreciated over time in the WAEMU. This is reflected in an increasingly long period of schooling over the years. However, many challenges remain to be met to support the efforts of the member countries. Among other things, we have the problem of adult literacy and the dropout of the youngest.

The low literacy rate in the WAEMU is coupled with a high dropout rate. In 2006, the educational structure of Mali showed that 93.1% of the population was not in school, 5.3% has been in school with an advanced age and 1.6% has dropped out of school at the primary level (World Bank, 2016). This structure is identical to that of Niger in 2006. However, Niger has made efforts in the area of primary school enrolment between 2006 and 2012, the rate of people who have never been to school has varied from 95 to 90.4%. This effort is tarnished by a 6.1 percentage point increase in the dropout rate. The dropout rate increases drastically in primary school after the age of 10. This high dropout rate is explained by the high opportunity cost of school, mainly due to the need to work and/or marry. Dropout is a subtle determinant of the bad quality of human capital in WAEMU and is mainly caused by age in Sub-Saharan Africa (Ricardo et al., 2010).

The analyses of the stylized facts of WAEMU showed that they are consistent with the stylized facts of Jones and Romer (2010). So, these stylized facts were established on the four variables (ideas, population, human capital and institution). As the stylized facts were what we hoped for, the contribution of the variables to economic growth must also be positive.

#### Empirical analysis of knowledge stylized facts in WAEMU

It’s difficult to use empirical approach to analyse stylized facts. Stylized facts are described through the appearance of a set of data curves. These curves are produced by proxies’ variables. Knowledge stylized facts have been established on four variables (ideas, population, human capital and institution). These variables could be studied in order to analyse their contributions to economic growth. At the end, It will be possible to draw some systems and systems theory and demonstrate further this can be applied to knowledge (Carayannis et al., 2016).

It’s also possible to deal with the stylized facts show the relationship between one or more variables. These relationships can be turned into hypothesis for the empirical studied. Along the same lines, each fact will be considered as a hypothesis about the relationship between two variables.

#### Variables and data

Some data have been collected in different databases to illustrate the appearances of stylized facts. The collection of these variables and data is based on some assumptions. Each variable is described according to its importance in explaining a stylized fact. The relation between the variables are those interpreted as stylized facts. These relations can be analysed to identified the proxy’s variables. Variables are measured in databases in order to be studied. There are many databases available and some slight differences between them.

##### Fact 1: Increases in the extent of the market

The increased in the extent of the market is illustrated by the relationship between the trade and investment (internal or external). According to Jones and Romer (2010), this relation is mainly important because it enhance the flow of local ideas through Foreign Direct Investment (FDI). Foreigner invest their money but also their knowledge to implement new activities. The same argument had already been used by Romer (1992) to explained how Mauritius, a poor country has used knowledge to perform his economic development. Based on this approach, trade can be considered has a good proxy of idea. Data about trade have been collected in World Development Indicator (WDI) database 2019.

##### Fact 2: Accelerating growth

The fact 2 is more clear than fact 1 because it established a positive correlation between the population and economic growth. As population increases, the economic growth increased too. This positive correlation can be explained by the increase in the number of main power and the flows of ideas. The size of the population acts to the size of ideas produced and the sized of workers for local industries. As population fuelled economic growth, it can be considered as a factor of economic growth. Data about the population size have also been collected in the WDI database 2019.

##### Fact 3/4: Variation in modern growth rates/Large income and total factor productivity (TFP) differences

These facts point out the efficiency of capital and labour. According to the both facts, capital and labour are efficient when associated with knowledge. This efficiency is mainly due to institution. A good quality of institution is better than a poor quality one. So, the institutions are acting more on capital than labour because capital can be listed and shown to populations. An investment in Gross Capital Formation (GCF) is a good indicator to justify the role and the importance of institutions. That’s why, we resort to link the index of institution to the volume of GCF as a proxy for the capital efficiency. Political stability has been used as the index of institution and associated to GCF in a multiplicative relationship. Data about the Gross Capital Formation have been collected in WDI database and data about institution have been provided by the PRS Group’s database 2019.

##### Fact 5/6: Increases in human capital per worker/ Long-run stability of relative wages

The facts 5 and 6 are focus on the efficiency of labour force and its implication for well-being. In facts, human capital must be improved by education and health. Jones and Romer (2010) focus facts 5 and 6 on education and showed that people spend more times at school to learn. This learning improves their human capital and salaries. Education is individual before being collective because more educated you are and huge salary you received. So, education is important for workers than unemployed. In that case, the more important challenge is increase of educated people and that of teachers. That why, the ratio of pupil-teacher ratio in primary school has been associated to the size of labour force in a multiplicative relationship. Data about labour and the pupils-teacher ratio have both been collected in WDI database 2019.

#### Econometric model

The econometric model of RAO (2010) has been used to illustrated the relationships described by stylized facts. The technology of the model is that of Cobb–Douglas. The basic form of the model is:

$$Y_{it} = C(NK)_{it}^{gamma } K_{it}^{alpha } L_{it}^{1 – alpha }$$

(1)

By applying the logarithm at each side of the equation, we obtain:

$$ln Y_{it} = ln (C) + gamma ln (NK)_{it} + alpha ln K_{it} + (1 – alpha )ln L_{it}$$

(2)

With (Y_{it}): GDP/capita, ((NK)_{it}): Knowledge variable. (K_{it}): Capital, (L_{it}): Labour and (C): Constant.

In long term, the derived function of Eq. (2) allowed the calculation of the growth rate of each variable. The point on the variables indicates a derivative time.

$$frac{{dot{Y}}}{Y } = frac{{mathop {NK}limits^{ bullet } }}{ NK} + alpha frac{{dot{K}}}{K} + beta frac{{dot{L}}}{L}$$

(3)

Knowledge variable is a set of four variables ideas, population, institution and human capital. These variables must be also approximated in order to collect data. The proxy used for ideas is trade, the proxy used for human capital are Pupil-teacher ratio in primary and the size of labour. As population, we resorted to the size of the population and finally, political stability and Gross Capital Formation has been used as proxy for institution. Equation (2) is rewritten as:

$$ln Y_{it} = ln (C) + gamma left[ {phi ln (Ideas)_{it} + varphi ln (Pop)_{it} + eta ln (Hum)_{it} + chi ln (Inst)_{it} } right] + alpha ln K_{it} + (1 – alpha )ln L_{it}$$

(2′)

With (Y_{it}): GDP/capita, ((Pop)_{it}): Population, ((Ideas)_{it}): Ideas, ((Hum)_{it}): Human Capital, ((Inst)_{it}): Government Institution, (K_{it}): Capital, (L_{it}): Labour and (C): Constant.