Inflation and economic growth nexus in the SADC

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INTRODUCTION

Central banks across the world are concerned with high levels of prices and strive for achievement and maintenance of price stability. Therefore, the common objective of macroeconomic policy is a low inflation rate which usually creates an environment conducive to rapid economic growth (Fischer, 1993). Hence policy makers find it important to understand this relationship so that sound policies can be developed. For instance, adoption of an inflation targeting monetary policy framework by countries such as New Zealand and United Kingdom, has been proven to work quiet well in curbing inflation. If inflation is detrimetal to economic growth, it follows that policy-makers should aim for low rates of inflation.

This can be achieved by increasing the interest rates which will inturn reduce investment and consumption spending and this could cool down an overheating economy. However, macroeconomic stability, defined as a low inflation rate is a necessary although not a sufficient condition for sustained economic growth. This is evidenced by the fact that most countries have grown slowly despite low inflation, for instance, this transpired in the Franc zone during the 1980s (Fischer, 1983). Many cross-country studies suggest the existence of a negative relationship between these two variables and the magnitude of this relationship is envisaged to vary from region to region depending on the level of development and other factors. This is because many developed countries have well-established and independent central banks with a clear mandate to keep inflation level within a particular target range.

As highlighted by (Hineline, 2003) the effects that inflation has on growth has been questioned since the early 1990s. From the various time-series and panel data studies, a stylized fact emerged, namely that there are substantial differences across countries. On the one hand, some studies used linear techniques and just investigated the nature of the inflation-growth nexus. The literature on inflation- growth relationships is quite extensive, starting with the work of De Gregorio (1993) and Fischer (1993) who, respectively found the existence of a negative relationship between inflation and economic growth.

On the other hand, other studies used non- linear techniques and argued that there exists a threshold or optimal level of inflation below which inflation may have no or even a positive effect on growth, and above which inflation may be detrimental to economic growth. Therefore, this body of research investigated the nonlinearities in the inflation-growth relationship. Such studies include, among others; Sarel, 1996; Bruno and Easterly, 1998; Ghosh and Phillips, 1998; Khan and Senhadji, 2001; Moshiri and Sepehri, 2004; Mubarik, 2005; Lee and Wong, 2005; Drukker et al., 2005; Pollin and Zhu, 2006; Li, 2006; Hineline, 2007; Schiavo and Vaona, 2007; Espinoza et al., 2010; Kan and Omay, 2010; Ibarra and Trupkin, 2011; and Mignon and Villavicencio, 2011, who all used cross-country data for both developing and developed countries to find that the negative relationship between inflation and economic growth exists after certain threshold level(s). Detailed methodological issues, data sets and findings are discussed in Chapter three of the thesis. Therefore, this leads to the question; how low should the inflation rate be? That is, at what level of inflation does the relationship between inflation and economic growth become negative (Furuoka et al., 2009).

HISTORY AND OBJECTIVES OF SADC

In 1980, nine Southern African countries, namely; Angola, Botswana, Lesotho, Malawi, Mozambique, Swaziland, Tanzania, Zambia and Zimbabwe formed the Southern African Development Coordination Conference (SADCC) in an attempt to decrease member countries’ external economic dependence on South Africa and to promote regional co-operation in development projects (Ligthelm, 2006). Namibia joined shortly after its independence in 1990 and these ten countries established the Southern African Development Community (SADC) in August 1992 when these countries signed the SADC Treaty. According to Oosthuizen (2006), technically the organisation came into being on the 30 September 1993 when the Treaty entered into force. The Republic of South Africa joined later in August 1994 after all-race elections and Mauritius became the twelveth member in August 1995.

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The Democratic Republic of Congo and Sychelles joined in 1997 and Madagascar also became a member in 2005. Therefore, SADC currently consists of fifteen member states, namely; Angola, Botswana, Democratic Republic of Congo (DRC), Lesotho, Madagascar, Malawi, Mauritius, Mozambique, Namibia, Seychelles, South Africa (SA), Swaziland, Tanzania, Zambia and Zimbabwe, and its headquarters are in Gaborone, Botswana. The member countries have differing levels of education, health provisions and other socio-economic development. However, they have similar trade patterns and trade between themselves (Nel, 2004). Figure 1 depicts the map of the SADC region. The Article 5 of the SADC Treaty highlights the overall objectives of the Treaty, as the promotion of economic growth and socio-economic development that will eventually eradicate poverty, and promote and maintain peace, security and democracy, through regional cooperation and integration (SADC, 2011). Table 1 depicts that both Sub-Saharan Africa (SSA) and SADC have an insignificant contribution to the world’s GDP. Furthermore, as a share of world’s population, these two regions constitute 11.6 per cent and 4 per cent for SSA and SADC, respectively. In general, Table 1 shows that although this thesis uses the SADC region as a case study, the contribution of this region towards the world GDP at large is very marginal, hence the findings derived from this region may not necessarily be a true reflection of the world at large. Nevertheless, it is important to understand what is happening in the SADC region in terms of inflation and economic growth.

TABLE OF CONTENTS

  • CHAPTER ONE
    • BACKGROUND AND INTRODUCTION
    • 1.1 INTRODUCTION
    • 1.2 HISTORY AND OBJECTIVES OF SADC
    • 1.3 SADC ECONOMIC PERFORMANCE
    • 1.4 PROBLEM STATEMENT
    • 1.5 OBJECTIVE OF THE STUDY
    • 1.6 CONTRIBUTIONS OF THE STUDY
    • 1.7 OUTLINE OF THE STUDY
  • CHAPTER TWO
    • INFLATION AND ECONOMIC GROWTH NEXUS IN THE SADC
    • A PANEL DATA INVESTIGATION
    • 2.1 INTRODUCTION AND MOTIVATION
    • 2.2 LITERATURE REVIEW
    • 2.3 DATA DESCRIPTION
    • 2.4 METHODOLOGY
      • 2.4.1 Unit Root Testing
      • 2.4.2 Fixed Effects Estimator
      • 2.4.3 Difference and System GMM Estimators
      • 2.4.4 Seeminlgy Unrelated Regression (SUR) Estimator
    • 2.5 EMPIRICAL RESULTS
      • 2.5.1 Regression Results from Annual Data
      • 2.5.2 Diagnostic Tests Results
    • 2.6 CONCLUSION
  • CHAPTER THREE
    • NON-LINEARITIES IN INFLATION-GROWTH NEXUS IN THE SADC REGION: A PANEL SMOOTH TRANSITION REGRESSION APPROACH
    • 3.1 INTRODUCTION
      • 3.3.1.1 Testing for Linearity
      • 3.3.1.2 Testing for the Number of Transition Functions
    • 3.3.2 The Data
  • 3.4 EMPIRICAL RESULTS
    • 3.4.1 Linearity and No Remaining Non-Linearity Results
    • 3.4.2 Model Estimation Results
  • 3.5 CONCLUSION
  • CHAPTER FOUR
    • EFFECTS OF SOUTH AFRICAN INFLATION ON THE SADC REGION: A PANEL VECTOR AUTOREGRESSION APPROACH
    • 4.1 INTRODUCTION
    • 4.2 LITERATURE REVIEW AND STYLIZED FACTS
      • 4.2.1 Inflation and Economic Growth Trends in the SADC Region
      • 4.2.2 Trade Flows Within the Region
      • 4.2.3 Literature Review
    • 4.3 METHODOLOGY AND DATA
      • 4.3.1 The Data
      • 4.3.2 Unit Root Testing
      • 4.3.3 Panel Vector Autoregression Model
    • 4.4 EMPIRICAL RESULTS
    • 4.5 CONCLUSION
  • CHAPTER FIVE
    • CONCLUSION
    • REFERENCES

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