Analysis of Income Convergence between Sub-Saharan Africa and High-Income Economies: Role of the Components of Trade

Abstract

The issue of income convergence among regional blocs has been considered, mostly ignoring international trade. This work set to find out whether sub-Saharan African (SSA) countries are converging with High Income Economies with international trade as a source of convergence. Secondly, the study investigated the causal relationship between convergence and trade. That is whether trade causes convergence or convergence causes trade. Lastly, the study investigated the various components of trade such as merchandise export to high-income economies, merchandise import from high-income economies, merchandise export to developing economies in sub-Sahara Africa, merchandise import to developing economies in sub-Sahara Africa, import of service and export of service. The study used Arellano-Bond and Arellano-Bover and also included both difference and system GMM. Because the data was unbalanced panel, the study also included one-way error component unbalanced model estimation and the results were compared. The results found that trade causes convergence but convergence does not cause trade. The study also revealed that all import components of trade have negative effects on growth and export component of trade has positive effects. This means that SSA should increase the export components of trade especially, services to ensure that gains from trading with high income economies are maximized. Because the trade agreements seek to increase trade between SSA and High Income economies, SSA can fully benefit when they concentrate on export of services.

Keywords: Convergence, International Trade, Trade Agreement