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Comment: Business cycle co-movement between Africa and advanced

economies: 1980‒2011

Article  in  Journal for Studies in Economics and Econometrics · January 2017

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 COMMENT:
BUSINESS CYCLE CO-MOVEMENT BETWEEN
AFRICA AND ADVANCED ECONOMIES: 1980‒2011

I. Botha**

Integration of the world economy has prompted research on the impact of

globalisation on business cycle co-movement. Globalisation resulted in increased
financial and trade linkages which culminated in more synchronised business
cycles. This co-movement increased global risks of country-specific shock
spillovers to other countries. Over time the degree of co-movement changed due to
regulations, trade agreements and economic changes. Hence, due to emerging
markets’ growing importance as contributors to global economic growth, the global
factor started to decline. Findings in the literature focus not only on industrial
countries and emerging market economies showing convergence of business cycles,
but also on decoupling of business cycles between these two groups of countries,
signifying the emergence of group-specific or regional cycles (Kose, Otrok &
Prasad, 2008; Mumtaz, Simonelli & Surico, 2011). This setting emphasises the
importance of the paper by Claassen, Loots, Kabundi and Viviers (2017), since this
research focuses on business cycle co-movement of African countries with
advanced economies (AEs).

This article focuses on business cycle co-movement between African countries and
advanced economies from 1980 to 2011. The period includes the years before,
during and immediately after the global financial crisis (GFC). Due to the diverse
development stages of the countries on the African continent, countries were
classified according to the size of their economy, rather than by region. Included
are low-income countries, middle-income countries, oil-producing countries and
fragile states. The dynamic factor model (DFM) was appropriately employed on
this large cross- section of time series to assess the degree of co-movement among
these African countries, as well as the co-movement of these African countries with
the advanced economies.

The analysis is comprised of two parts, the first being a graphical presentation
comparing the growth rate on the African continent to the growth rate of the world
and advanced economies. Further to this, a comparison was presented between
African countries classified according to regions and the size of their economies.
The results were presented for two time periods, 2000-2007 and 2008-2011,
signalling the pre- and during/post- GFC periods. The results showed that growth
*
University of Johannesburg, Auckland Park Kingsway Campus, PO Box 524, Auckland Park, 2006
Email: ilseb@uj.ac.za

J.STUD.ECON.ECONOMETRICS, 2017, 41(3) 113

declined during the GFC on the African continent, but not as steeply as in the AEs.
Most regions showed lower growth after the GFC, except for West and East Africa.
According to the size of the economy classification, the low income countries and
fragile states have recorded higher growth rates since the GFC.

The second part of the analysis presented the DFM results. Firstly, a common
factor was extracted for the whole sample, including the African and G7 countries.
Secondly, by controlling for the G7 factor, an African factor was extracted.

The results showed that middle-income African countries have coupled among
themselves and the G7 business cycle since the 1980s. Before controlling for the
G7 factor, low-income economies showed high variance shares for imports and
exports, pointing towards the increasing trade linkages that are emerging.
Controlling for the G7 factor resulted in decreased business cycle variance shares
and increased variance shares in GDP and imports for fragile states, suggesting
more reliance on trade with other African groups than on trade with the G7.
Idiosyncratic disturbances in the Oil-exporting economies are most important in
both instances – including and excluding the G7 factor. Overall, the findings are
that trade with the G7 dominates for the African groups studied in this research and
therefore trade linkages are the transmission channel that fosters co-movement.
Policymakers should consequently manage trade policies in order to diversify trade
to shield economies from future advanced economic crises.

Taking cognisance of possible data restrictions, the current research sample can be
expanded to include the individual countries in order to determine which countries
co-move with the G7 and African factors rather than with the collective groups.
Although this article did allude to coupling and decoupling, the evolution of
business-cycle co-movement in Africa pre- and post- the GFC was not tested per
se. Rolling windows should be considered to capture the change in co-movement
over time; this could also circumvent sample problems.

As rightly stated in the article, several methods can accommodate large cross-
sections of time series such as the Global VAR, Panel VAR and large Bayesian
VAR, but these methods focus more on reaction to shocks or spillovers. The DFM
is appropriate to assess the degree of co-movement in large cross- sections of time
series. An important characteristic of business cycles is their asymmetric
behaviour, where the degree and speed of shocks transmission depend on the
economic phase of the country. Future research should account for these nonlinear
dynamics, considering methods such as the time-varying DFM (Del Negro &
Otrok, 2008; Lee, 2012) or Markov switching autoregressive models looking at
business cycle synchronisation between expansionary and recession regimes and
independent business cycles (Di Giorgio, 2016; Leiva-Leon, 2017). Another
important methodological consideration is the wavelet-based measure of co-
movement to quantify the strength of business cycle synchronisation within the

114 J.STUD.ECON.ECONOMETRICS, 2017, 41(3)

 time-frequency framework in order to assess in which period of time
synchronisation is higher (Berdiev & Chang, 2015; Albulescu, 2017). These
methods take the importance of time dependency of co-movement into
consideration.

In the literature the focus is rarely on Africa; however, due to the continent’s
growing importance in the world economy, it is important to position it in terms of
international business cycle theory and the decoupling hypothesis. Decoupling has
implications for economic policies and business strategies aimed at investment
diversification and risk management.

References
Albulescu, C. 2017. ‘UK business cycle synchronization with Germany and the US: New
evidence from time-frequency domain and structure of economic growth’, Applied Economics
Letters, 24(1): 67-71.

Berdiev, A. & Chang, C. 2015. ‘Business cycle synchronization in Asia-Pacific: New evidence
from wavelet analysis’, Journal of Asian Economics, 37: 20-33.

Claassen, C., Loots, E., Kabundi, A. & Viviers, W. 2017. ‘Business cycle co-movement between
Africa and advanced economies: 1980-2011’, Journal for Studies in Economics and
Econometrics, 43(1): 93-112.

Del Negro, M. & Otrok, C. 2008. Dynamic factor models with time-varying parameters:
measuring changes in international business cycles. Federal Reserve Bank of New York Staff
report, 326, May.

Di Giorgio, C. 2016. ‘Business cyle synchronization of CEECs with the Euro Area: A regime
switching approach’, Journal of Common Market Studies, 54(2): 284-300.

Kose, M., Otrok, C. & Prasad, E. 2008. ‘How much decoupling? How much converging?’,
Finance and Development, June: 36-40.

Lee, J. 2012. ‘Measuring business cycle comovements in Europe: Evidence from a dynamic
factor model with time-varying parameters’, Economics Letters, 115: 438-440.

Leiva-Leon, D. 2017. ‘Measuring business cycles intra-synchronisation in US: A regime-

switching interdependence framework’, Oxford Bulletin of Economics and Statistics, 79(4): 513-
545.

Mumtaz, H., Simonelli, S. & Surico, P. 2011. ‘International comovements, business cycle and
inflation: A historical perspective’, Review of Economic Dynamics, 14: 176-198.

J.STUD.ECON.ECONOMETRICS, 2017, 41(3) 115

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