Intra‐regional spillovers from Nigeria and South Africa to the rest of Africa: New evidence from a FAVAR model

Abstract

AbstractThe dominance of large resource‐rich hegemonic economies, most notably Nigeria and South Africa, with extensive trade and possible financial linkages, exposes other Africa countries to intra‐regional spillovers. However, this strand of empirical analysis remains largely unstudied, as extant studies are mostly devoted to investigating the implications of external (global) shocks. This paper contributes to the existing literature by investigating the extent to which shocks to economic growth in Nigeria and South Africa spillover to three regional bodies, namely Central African Economic and Monetary Union (CEMAC), Southern African Development Community (SADC) and Economic Community of West African States (ECOWAS). The paper distinguishes between trade and financial channels to identify these growth spillovers by using a two‐step FAVAR model. The results of the empirical analysis show that the trade channel is effective for growth spillovers from Nigeria and South Africa to the three regional blocs. However, we find no evidence of growth spillover from the financial channel, except between South Africa and the SADC region. The paper postulates that although the total intra‐African trade remains low, it remains an important channel for growth spillover in the continent. Thus, any initiative, such as the African Continental Free Trade Area (AfCFTA) should be encouraged, to expand trade in the continent.