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Regional growth spillovers in sub-Saharan Africa

Regional growth spillovers in sub-Saharan Africa
Photo credit: James Anderson | Flickr

26 Jul 2019

After close to two decades of strong economic activity, growth in sub-Saharan Africa (SSA) decelerated markedly from 2015-16, to its lowest level in more than 20 years at 1.4 percent in 2016.

Nonetheless, this average mask substantial heterogeneity across the region. While the largest economies (i.e., Nigeria and South Africa) experienced negative or very low growth, a third of countries in the region continued to grow at 5 percent or more during the period. While these trends have been well documented, little is known about how they are interlinked.

This paper attempts to shed light on this question and fill a gap in the literature that has largely overlooked integration and its implications within sub-Saharan Africa. Namely, the authors ask how has intraregional integration evolved in sub-Saharan Africa in recent decades and how has this affected growth spillovers on the continent? They focus on trade linkages, which are the strongest in the region (Arizala et al., 2018). They first present a novel set of stylized facts that document that intraregional integration in sub-Saharan Africa is significantly greater than is widely believed and is indeed inline or greater than in developing and emerging economies in other regions. With this, they identify the countries in sub-Saharan Africa that are more likely to generate regional growth spillovers through trade, as well as the countries that are more likely to suffer from growth spillovers from their regional trading partners. We then estimate and quantify growth spillovers between trading partners in subSaharan Africa, in both the short run and in the long run.

The growth spillover literature is broadly based on the idea that domestic growth in any country is determined by three main drivers: domestic shocks, global shocks, and shocks to a foreign country or region(s) that are transmitted through various channels to the domestic country. While evidence on the comparative importance of each driver varies, it is widely accepted that growth co-moves across countries in the long term in countries who have large bi-lateral trade flows or coordinated fiscal policy, and especially in advanced economies. The presence of growth spillovers in the shorter-term within and between low income and emerging market countries has also been documented. And others bridge the gap between these literatures and show that shocks to long-term growth (trend growth) have larger cross-country spillovers than shocks to short-term growth (cyclical growth).

Yet, whether longer term growth spillovers exist within groups of low-income countries, particularly in sub-Saharan Africa, is less evident. Indeed, it could be argued, a priori, that given the nature of their trade relationships and the structure of their economies, these countries may experience growth spillovers differently than advanced or emerging countries. Structural barriers to regional spillovers in these countries may include their position in global value chains, the absence of widespread multinationals, their reliance on imports for most consumption goods and their historically limited regional integration.

Intraregional Trade Linkages are Steadily Gaining Strength

Though often thought of as silos that are linked to the rest of the world but not each other, sub-Saharan African economies have become much more intertwined in the last 35 years. This trend is particularly well illustrated by the increase in regional trade as a share of total trade, which represented 6 percent in 1980 before taking-off in the early 1990s, and eventually reaching 20 percent in 2016. This increase in regional trade was significant relative to the size of sub-Saharan African economies, and it was faster for small countries in the region, as reflected by the faster growth in the simple average level of trade integration.

Tighter regional trade integration, which coincided with a rise in global integration, is the result of both global developments and of a strengthening of institutional and macroeconomic conditions in the region. The rise in trade with the rest of the World was driven in part by a two-fold increase in the relative price of commodity exports over the period 1995-2013 and in part by a rise of two and a half times in volume of exported commodities (Allard and others, 2016). In addition to these supporting conditions, countries in sub-Saharan Africa substantially strengthened their macroeconomic policies and political and economic institutions over the last 20 years, and experienced abating of internal and external conflicts. These elements all contributed to improving the business environment, which lead to faster growth than in the rest of the World and thereby supported the deepening of regional trade (IMF, 2015). Furthermore, the establishment of regional trade agreements in different subregions also contributed to regional and bilateral reductions in tariffs which further supported regional trade integration (ODI, 2010).

The average level of regional trade integration in sub-Saharan Africa, and hence the potential for regional spillovers, is broadly in line with other developing and emerging market economies in other regions. Measured as a share of total exports, sub-Saharan Africa exhibits the highest share of intra-regional trade integration among emerging and developing economics, followed by Middle-East and North Africa and emerging and developing Asia. Relative to the size of the economy, sub-Saharan Africa is in the middle of the pack.

Many sub-Saharan Africa countries are highly integrated to other countries in the region, as measured by intra-regional trade, and integration is particularly strong within sub-regions. For example, in small and very open economies in the SACU and the Economic Community of West African States (ECOWAS), like Swaziland, Lesotho, Togo and The Gambia, intraregional exports represent more than 65 percent of these countries’ total global exports (IMF, 2012). In many countries intra-regional exports are also large relative to the size of the economy. This is the case for certain countries in the Southern African Development Community (SADC) (Zimbabwe, Botswana, Lesotho, and Namibia) where intra-regional exports represent about 20 percent of GDP, and some Western Africa Economic and Monetary Union (WAEMU) countries (Côte d’Ivoire, Guinea, Senegal), where they constitute close to 10 percent of GDP.

One can also see a concentration of integration from the opposite perspective: demand for regional exports is concentrated in very few countries. Ten sub-Saharan countries represent 65 percent of total regional demand for intra-regional exports, with South Africa, Botswana and Namibia accounting for the largest shares of total regional demand, and South Africa alone importing 15 percent of total regional exports. When countries trade significantly among themselves an economic deceleration in any one country has the potential to weaken demand for intra-regional exports and may constitute a source of wider negative spillovers.

The value of the regional imports purchased by the top 10 regional importers represents significant shares of the economies of the exporting countries, setting the stage for potentially large spillovers. For instance, South African imports from Swaziland, Lesotho, Zimbabwe and Mozambique represent between 4 and 11 percent of these economies’ GDP. Zimbabwe’s total demand for goods from Zambia, Malawi and Botswana constitutes between 1 and 4 percent of these countries’ GDP. Other countries also import in amounts that are non-negligible shares of their neighbors’ GDP, even though they do not constitute substantial shares of total sub-Saharan African intra-regional imports. This is the case of Nigeria, Mali, Ghana, and Burkina Faso, who’s imports amount to more than 1 percent of GDP of their sub-regional trading partners. In these cases, any reduction in import demand, caused by an economic downturn in the importing country, could have significant consequences for GDP growth in their trading partners.

The authors estimate gravity equations to illustrate and quantify the above stylized facts on regional integration (see Annex I). As expected, empirical estimates suggest that trade in the region is larger between closer countries (culturally and geographically) and that regional trade growth over the last four decades was supported by favorable macro-conditions (proxied by GDP per capita and population growth). The authors modify the standard equation to perform cross-region comparisons, and find that distance is a greater barrier to trade in sub-Saharan Africa, possibly because of the well-known infrastructure gaps in the region. Results also show that sub-regional trade agreements played a major role in strengthening bilateral trade in the region, in particular in the cases of the SADC and the EAC.

This Working Paper was prepared by Francisco Arizala, Matthieu Bellon and Margaux MacDonald.

Source International Monetary Fund
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Date 26 Jul 2019
 
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