Evidence brief: A methodological comparative analysis of monetary policy and trade openness on economic growth in West Africa: Does language play a role?

Abstract

The study examines the effect of monetary policy and trade openness on economic growth in the ECOWAS countries. Using panel regression analysis and the Random Forest algorithm from the machine learning technique, the study reveals the existence of a major difference between the two language communities. The expansion of the broad money supply has a highly positive effect on economic growth in the two language communities; the impact is much greater in the Francophone countries. But trade openness has contradictory associations; it is positive in the Francophone countries and negative in the Anglophone countries. The Random Forest approach outperforms the standard econometric approach in terms of predictive accuracy (R² = 67.56%), thereby confirming the existence of non-linear associations. The evidence of major differences is linked to the existence of different post-colonial institutions; that is, the common CFA currency institutions in the Francophone countries and the independent national monetary policies in the Anglophone countries. The study implies that ECOWAS countries require distinct policies instead of standard policies.

1. Introduction

Policymakers consider economic growth essential in increasing living standards and achieving overall prosperity and world stability [1,2,3]. Important government policies and international trade pacts are critical in shaping the world’s economic growth [4]. Monetary and trade policies significantly contribute to the growth of economies as they influence access to international markets, technology, and resources [5]. Unlike open economies, closed economies respond strongly to changes in expected inflation since the former pay more attention to accurate exchange rate adjustments. Consequently, when the marginal propensity to import is zero, the effect on the budget is absent, but interest rates fall due to the depreciation of the real exchange rate [6]. Free trade may help reduce the adverse effects of contractionary monetary policy on income distribution. A positive trade openness shock decreases both consumption and income inequalities, reducing the rise in inequality caused by the contractionary monetary policy [7]. Adopting a standard monetary policy in a currency zone is associated with less volatility in macroeconomic performance and a less steep Phillips curve. Moreover, it highlights complex interactions between trade openness and monetary policy, implying more inflation and output trade-offs [8].

Colonisation has created distinct institutional frameworks between Anglophone and Francophone countries that shape economic policy effectiveness today. The monetary institutions differ, with Francophone countries sharing the CFA franc, while their Anglophone counterparts maintain their currencies [9,10,11]. Other areas include the legal system, which ranges from common to civil law, and the administrative framework. These institutional legacies of colonialism persist in divergent policy implementation methods, different monetary sovereignty, and differing economic integrations with former colonial masters. Pacquement [12] and Vallin [13]also observe that through the monetary cooperation agreement between France and Africa, France still maintains appreciable economic relations with its erstwhile colonies, while the Anglophone countries mostly follow independent monetary policies. These historical and institutional differences provide a basis on which identical economic policies may turn in different directions across these language groups. These factors flag why it is so important to understand how such colonial legacies shape the effectiveness of macroeconomic policies in ECOWAS [14,15].