With trade between member states increasing, the ‘Commonwealth effect’ on trade and investment could be the key to unlocking growth potential, writes Danny Sriskandarajah
When you think of the Commonwealth, do you think first and foremost of politics, history and culture? Or of business, investment and trade? I would suggest that most of us would lean towards the former. But new research suggests that the economic advantages of the Commonwealth may be of far greater importance than previously recognised.
Looking back at the 60-year history of the association, it is clear that the perceived value of both its economic and political identities has ebbed and flowed. Most recently, changing geopolitical realities and the proliferation of multilateral political bodies have led some to argue that the Commonwealth has lost a degree of its political salience. Indeed, at the most recent Commonwealth Heads of Government Meeting, leaders went so far as to convene an Eminent Persons Group tasked with exploring options for the association’s reform.
Yet just as its political relevance is being questioned, the Commonwealth’s trade and business links are seen once again to be of growing interest.
In 2008, Commonwealth countries traded around $4 trillion worth of goods between them and there is no doubt that business incentives seem to be increasingly attractive to current and potential Commonwealth member states. In explaining Rwanda’s interest in joining the association, President Paul Kagame has repeatedly highlighted increased trade and investment opportunities as a primary motivation.
It is in this context that the Royal Commonwealth Society set out to research the facts behind the theory and, in September 2010, published a working paper entitled, ‘Trading Places: The ‘Commonwealth Effect’ Revisited’.
The first and most notable attempt to analyse the significance of a ‘Commonwealth effect’ on trade and investment was made in the late 1990s by Sarianna Lundan and Geoffrey Jones. They concluded that there is an overall tendency for high levels of intra-Commonwealth trade, even when factors such as regional trade agreements or geographical proximity are taken into account.
Our own research employed a different methodology to that of Lundan and Jones, so is not directly comparable, but, like them, we discovered a considerable trade advantage within the Commonwealth. Using data from the UN’s COMTRADE database for the years 1990 to 2008 inclusive and a regression model where the dependent variable is the value of trade in a calendar year between each pair of countries, we found that a Commonwealth country’s trade with another member is likely to be a third to a half more than with a non-member. This effect remains even after taking into account other possible contributory factors such as proximity, level of development and language.
Our research also revealed that, contrary to expectations (and the predictions of Lundan and Jones), the importance of Commonwealth members to each other as sources of imports and destinations for exports has grown by around a quarter and third respectively over the last two decades. Intra-Commonwealth trade now accounts for one-sixth of total Commonwealth members’ trade, with an average for each member of around one-third.
All of this provides persuasive evidence that Commonwealth membership does offer some significant and tangible benefits. Clearly, this is good news for the association, particularly at a time when questions are being raised about its continued relevance. But of course, explaining causality remains a challenge. Lundan and Jones suggested that the ‘Commonwealth effect’ can be partially explained by a reduction in ‘psychic distance’ achieved between Commonwealth member nations. While the regressions we employed do account for factors such as language commonalities, they do not control for all factors that may favourably dispose the Commonwealth to trade and investment. These include attributes that are relatively prevalent in Commonwealth countries, such as multiparty democracy, human rights, the rule of law, good governance, similar legal and administrative systems, an open media and market-orientated economic policies.
Too often, these features of the Commonwealth have been directly linked to increased trade levels – a simple, but misguided conclusion to draw. It is impossible to say for sure what impact these political, legal and cultural factors have without further, more sophisticated, analysis. If future research could show that the ‘Commonwealth effect’ does not just reflect past relationships, but implies an under-utilised resource, then the possibilities of realising growth potential could be greatly improved.
The relatively minor importance attributed to economic and trade issues among Commonwealth institutions at present could well suggest that the ‘Commonwealth effect’ accrues without significant intervention. Yet, it also suggests that the potential for the association to nurture these links is significant. If promoted effectively, it could well be the association’s economic ties, rather than its political bonds, that become its driving feature in the 21st century.
The author is grateful to the Worshipful Company of World Traders for financial support of the research on which this article is based
