The Implications of HO and IRS Theories for Bilateral Trade Flows within Sub-Saharan Africa
Julie Lohi, West Virginia University
From the gravity regression, Sub-Saharan-Africa (SSA) tends to trade less Within itself. This paper aims to examine to what extent the Hecksher Ohlin (HO) and the increasing return to scale (IRS) theories account for bilateral trade owes within SSA. The average difference in capital to labor ratio across SSA countries is used to test the HO's predictions while the average Grubel Llyod (GL) index which determines the rate of intra-industrial trade (IIT) is computed to examine the IRS theory. Results show that the shares of homo-generous and differentiated goods in total exports within SSA are respectively 70 percent and 30 percent.
The GL index for SSA is 0.03 and is the lowest IIT rate compare to other regions. The region exhibits homogeneous endowments. The GL index and the difference in factor endowment ratio in SSA support the lower bilateral trade rate found from the gravity regression for SSA.
Indeed, IRS and HO conditions are not satisfied to boost trade within SSA. Industrialization and product differentiation will create demand and increase intra SSA trade which will contribute to the region's growth.