Co-movement between South Africa and the Southern African Development Community: An empirical analysis

Abstract

This paper uses a novel dynamic factor model à la Forni et al. [Forni, M., Hallin, M., Lippi, M., Reichlin, L., 2003. The Generalized Factor Model: One-Sided Estimation and Forecasting. ECARES–ULB Working Paper. www.dynfactors.org] to investigate the nature and extent of co-movement of the South African business cycle with those of eleven of the Southern African Development Community (SADC) countries, covering the period 1980–2002. The results show strong and significant evidence of co-movement or synchronization of the South African business cycle with those of Swaziland, Botswana, Zimbabwe, the DRC, Lesotho and Angola. A moderate but still significant synchronization with Mozambique, Mauritius and Namibia is also evident, while no significant co-movement exists between the South African business cycle and those of Malawi and Zambia, respectively. In isolating the regional common component, the results show that such a component significantly explains growth in less than a third of SADC economies, implying that global and/or country specific common components still outweighs regional common components. The striking result is that South Africa, justified by its geographical location and increased participation in the global economy, cannot isolate itself from its SADC neighbours, and that regional policy coordination is of the utmost importance.