Abstract
The modern global economy operates as an intricate network of interconnected production activities spanning many countries. Consequently, a disruption in one activity in an advanced nation sets off a chain reaction affecting the macro-economic stability not only of advanced economies but also emerging and less developed ones, along with their production sectors. These disruptions impede macro-economic stability, growth and welfare significantly in vulnerable regions, particularly sub-Saharan African countries. This thesis explores the complex dynamics of external shocks and their ramifications on macro-economic fluctuations in the SSA region. While numerous empirical studies have addressed this topic and its related aspects, a notable gap in the existing literature concerns these areas: the influence of productivity shocks from vital trading partners on macro-economic fluctuations, the role of commodity prices in these fluctuations, the effects of foreign capital shocks on key macro-economic indicators, and the cumulative effect of these various external shocks on macro-economic dynamics in the region while considering the resource endowment of countries. With the exception of the first, second and last chapters, which contain the general introduction, theoretical review and conclusion with policy recommendations, this thesis comprises four empirical essays. The first essay (Chapter 3) provides new insights into how external shocks from key trading partners affect macro-economic fluctuations in sub-Saharan African countries. Using the global vector auto-regressive (GVAR) model, 21 sub-Saharan African countries grouped into oil-rich, other resource-dependent and non-resource countries are analysed. The analysis considers output and inflation shocks from major trading partners – the United States, the United Kingdom, China and Europe. By offering country-level estimates, the effects of these shocks on different types of economies are detailed. Empirical findings, as revealed by generalised forecast error variance decompositions (GFEVDs), highlight that output and inflationary shocks from global economies influence key macro-economic indicators significantly – including real gross domestic product (rGDP), inflation and exchange rates in the SSA region. Further, generalised impulse response functions (GIRFs) indicate a stronger effect on oil-rich countries compared with other groups. This study underscores the importance for sub-Saharan African countries, especially those reliant on resources, of diversifying their economic structures and trade portfolios to mitigate the adverse effects of external shocks and bolster economic resilience.
The second essay (Chapter 4) studies the role of shifts in commodity prices in persistent cyclical and macro-economic challenges, including fluctuations in economic growth, high inflation rates and unstable exchange rates, faced by sub-Saharan African economies. Despite the critical importance of this relationship – the co-movement of macro-economic performance and commodity prices in the sub-Saharan African region –
many studies overlook it, leaving a significant research gap. To address this gap, this study employs rigorous analytical tools, revealing a long-term connection between selected commodities and various macro-economic variables, highlighting the enduring effect of commodity price fluctuations on economic stability. The study also finds that spillover effects from commodity price shocks vary, based on the country’s resource status, with oil-rich nations experiencing more pronounced effects. This research underscores the importance of considering structural characteristics and resource endowments when de-vising strategies to mitigate the effects of commodity price shocks, especially in oil-rich countries. Ulti-mately, this study provides policymakers and analysts with valuable insights to better understand these economies’ dynamics and formulate effective strategies.
The third essay (Chapter 5) examines the experience of sub-Saharan African countries, as empirical studies and stylised facts have noted varied effects from increased foreign direct investment (FDI) from advanced economies on macro-economic performance. Understanding the origins of FDI and the characteristics of host nations is crucial. This study uses the Diebold and Yilmaz spillover index, the fixed effects model and the Juodis-Karavias-Sarafidis (JKS) Granger non-causality test to shed light on these complexities. The study uncovers three key findings: Firstly, the origin of FDI has a significant influence economic growth and inflation in sub-Saharan African countries. Secondly, the motives and characteristics of investing countries dictate FDI outcomes, with certain sources promoting growth and effective management of inflation. Thirdly, the resource status of host countries shapes FDI momentum and outcome, requiring tailored strategies for resource-rich economies to harness its benefits. The study also identifies concerns with regard to FDI contagion, the influence of the origin of FDIs and host nation qualities potentially im-peding the region’s economic growth and inflation management. This underscores the intricate nature of FDI management. The study also highlights the multi-dimensional effect of FDI on sub-Saharan economies, emphasising the importance of origin, objectives and host nation characteristics. As FDI continues to flow into the region, understanding these intricacies becomes paramount for maximising benefits and fostering economic growth and stability. Given the greater positive effects of non-resource-based FDI, sub-Saharan African countries are encouraged to pursue it actively.
Chapter 6 (the fourth essay) consolidates the preceding essays and provides fresh insights into how external shocks affect macro-economic fluctuations in sub-Saharan African countries, but focuses on economic growth only. Beyond traditional sources like commodity and financial fluctuations, this study examines the effect of productivity shocks from key trade partners within the SSA region. Using a GVAR model covering 21 sub-Saharan African countries from 1990 to 2022, the study categorises nations into oil-rich, other-resource and non-resource groups, while considering shocks from commodities, foreign direct investment (FDI) and productivity from major trading partners like the US, the UK, China and Europe. Results indicate
that trade integration is significant in transmitting external shocks, affecting GDP performance regionally and among different resource-feature groups. Specifically, productivity and financial shocks – particularly from China, the US and Europe – emerge as primary drivers of growth performance. There is also notable heterogeneity in the effects of external shocks across different country-resource categories, with non-resource countries experiencing the most significant effect from productivity and financial shocks.
JEL Classification: F23; I30:E24:H54; O43; C31; F15; F42; G15
Keywords: external shocks, macro-economic fluctuations, productivity shocks, gross domestic product (GDP), inflation, exchange rate, economic growth, foreign direct investment (FDI), global vector auto-regressive (GVAR) model, panel structural vector autoregressive (SVAR), Diebold and Yilmaz, commodity prices, sub-Saharan African countries, United States, United Kingdom, China and Europe.