Accounting for Unobserved Heterogeneity in The Relationship between External Trade Benefits and Standard of Living in Eswacs; 1980 -2013

Chukwu Sancho Nwobuisi, Uzomba Peter Chika, Ajie Hycent Amakiri

Cross boundary trade activities are characterized with feedback effect which is referred to as common factors in terms of global shocks, international spill-over effects, dynamic feedback effects, recession, business cycle shocks, global financial crisis and imported inflation. These effects are often transmitted from one country to another within a particular trade region, and are most time unobserved; hence unaccounted for. It is in the light of this worry;that this research is aimed at accounting for unobserved heterogeneity in the relationship between external trade benefits and standard of living in the five English Speaking West African Countries (ESWACs) from 1980 to 2013. These countries include; The Gambia, Ghana, Liberia, Nigeria and Sierra Leone). The study expressed external trade benefits as increase in export earnings (EXE), trade openness (TOP), total government expenditure (TGE) and reduction in foreign exchange rate (FER), and standard of living (SLR). Theoretically, the study relied on two trade theories, in practice; the study constructs a balanced panel data structure (BPDS) and methodologically, it adopted 2nd generation panel data econometric methods in its analyses. The results of the study reveal that external trade benefits have not been able to improve the status of standard of livingand the unobserved heterogeneity in the relationship between external trade benefits and standard of living in ESWACs is accounted for about 0.8746 (approximately 87%) with the period of study, indicating high level of unobserved heterogeneity in the relationship between external trade benefits and standard of living. Based on this result, the study therefore concluded that the inherent unobserved heterogeneity in the relationship between external trade benefits and standard of living has made the impact of external trade benefits on thestandard of living to be a trivial matter. Based on the findings and conclusion, the study recommended, among others, that the governments of ESWACs should encourage and support the real sector through subsidies and investment in social and physical infrastructure and agricultural and manufacturing sectors, and pay attention to investment in human capital as this will help to improve the standard of education and health status.