Effectiveness of Policy Responses to Terms of Trade Shocks in Selected African Countries

The terms of trade have an especially marked impact on the economies of developing countries. Some researchers suggest that terms of trade fluctuations are twice as large in developing countries as in developed countries. This movement in their terms of trade is a key determinant of macroeconomic performance and has an important impact on real national income resulting in terms of trade shocks. But African countries have not responded appropriately to these shocks hence this study was carried out to compare the impacts of the application of policy adjustments to terms of trade shocks among selected African countries, and to assess the extent to which these countries respond to the shocks. The study decomposed and estimated critical performance measures of the economic impacts of these adjustments to terms of trade shocks in these countries for the period 1970-2009 into quantifiable economic indicators namely: changes in import intensity, economic compression, export promotion and external debts. The application of the McCathy, Neary and Zanalda (1994) method confirms that adverse terms of trade shocks are not only high in Africa but that policy indicators refuse to adjust appropriately in the face of steep fall in export prices as clearly seen in the 1980 to 1984 period for Gabon and Nigeria. Secondly, the application of a Wilcoxon Matched-Pairs test reveals that the impact of policy responses to terms of trade shocks in oil exporting countries and agricultural commodity exporting countries of Africa are markedly different. The study, therefore, advocates that African countries should, henceforth, take practical steps to ameliorate the adverse effects of terms of trade shocks by carefully selecting and engaging policy thrusts that suit their particular economic problems and environments.