Income Convergence in Southern Africa: A Nonlinear Time-Varying Framework

Abstract

ABSTRACT: Convergence is considered a fundamental economic mechanism and a necessary condition for achieving industrial development and market integration as well as socio-economic cohesion in the Southern African Development (SADC) region. The former is the explicit objective of the SADC, as formulated in its Regional Indicative Strategic Development Plan (RISDP). "[A] key priority under this pillar will be ensuring macroeconomic convergence, increased cooperation, and investment". Despite convergence being a crucial ingredient for the proposed integration in the region, there has been limited research on the subject in Africa, particularly, SADC. To bridge this gap, this study sought to investigate per capita income convergence or lack thereof, in the SADC region over the period 1980 to 2017. To this end, we employed the approach proposed by Phillips and Sul (2008), which not only tests for overall convergence but for the possibility of multiple equilibria as well. Relative to the conventional approaches, this approach is superior in many respects. For instance, this technique requires no prior knowledge about possible convergence clusters, that is, the clusters are endogenously determined. Moreover, it imposes no restraints regarding trend stationarity or stochastic non-stationarity. Consequently, our findings are immune from the inefficiencies linked to unit roots or cointegration tests. The findings of the study suggested no overall convergence in the SADC region, but evidence supporting the existence of five convergence clubs, with each cluster converging to its steady-state equilibrium, and one divergent country, Angola. The first club consisted of only the high-income countries in the region, Seychelles, and Mauritius. The second convergence club had two members as well, South Africa and Botswana, whereas the third club consisted of the Kingdom of Eswatini and Namibia. In the fourth club, the identified members are Comoros, which is not included in the previous study because it was recently admitted into the bloc, Lesotho, Malawi, Mozambique, Tanzania, Zambia, and Zimbabwe, while in the fifth club, the members are the Democratic Republic of Congo and Madagascar. The findings of this study have in-depth implications for the development policies in the SADC region. These findings suggest that the region should consider adopting and implementing policies that would explicitly target low-income countries to promote convergence, and thus, create a conducive environment for the proposed monetary union in the SADC bloc.