Applied Econometrics and International Development.AEID. Vol.

4-4 (2004)
43
DO WAEMU COUNTRIES EXHIBIT A BUSINESS CYCLE?
A SIMULATED MARKOV SWITCHING MODEL FOR A
WESTERN AFRICA AREA
AKA, Bdia F
1*


Abstract
This paper examines the issue of existence and identification of a
regional business or economic cycle in aggregated West African
economic and monetary union (WAEMU) economy and single
member countries real GDP as well, by using a Markov regime
switching model and the Gibbs Sampling simulation method. We
found similarities of business cycle among individual countries.
Comparing countries cycles to the aggregated one, the chronology
and amplitude of Cte dIvoires business cycle appears to be closer
to the unions cycle. Using the real GDP data the aggregated
WAEMU business cycle can be characterized, according to its mean
duration (8 years), as a Juglar type cycle.

JEL Classification: C11; C22; E32
Keywords: Growth, Business cycles; Non-linear Time series;
Markov Switching model; Gibbs sampling.

1. Introduction

The constitution of West African Economic and Monetary Union
(WAEMU) launched 10-1-1994 in place of the former West African
Monetary Union (WAMU) created in 1962 has raised several
interesting issues. Among them, one of the important concerns the
existence and identification of business or economic cycle among the
member countries and in aggregated WAEMUs economy. The

1
Assistant Professor, Department of Economics, University of Bouak, Cte
d'Ivoire, & Researcher, University of Luxembourg, CREA, 162A, avenue
de la Faencerie, L-1511 Luxembourg, & Research Associate, DIAL,
Paris.e-mail: aka@cu.lu or akbdia@yahoo.fr
*
I am very grateful for the comments provided by the Editor. All remaining
errors are mine.
Applied Econometrics and International Development. AEID. Vol. 4-4 (2004)

44
union is composed of 8 countries including Benin, Burkina Faso,
Cte dIvoire, Guinea Bissau, Mali, Niger, Senegal, and Togo.

WAEMU is a part of the Franc zone, which is the monetary
cooperative instrument between France and its former African
colonies. The central bank of WAEMU is BCEAO (Banque centrale
des tats de lAfrique de lOuest), while BEAC (Banque des tats de
lAfrique centrale) is the central bank of Central Africa Economic
Union (CAEU) including 7 countries (Cameroon, Congo, Gabon,
Guinea equatorial, Centre African Republic and Chad). WAEMU is
an additional step in economic integration of West African countries
having the CFA franc as same currency. The new environment raised
questions as dissymmetry of cycles in individual countries and in the
union or common cycle among member countries.

In effect the common monetary policy applied independently by
the central bank from member state governments in the union (see
Aka (2002)) may cause similarities among national cycles and
between aggregated regional cycle and countries individual cycles.
But various other reasons like variation in industries and long run
growth rate across countries, differences in internal fiscal policies,
and in consumer sentiment from one country to another can
contribute to differences in cyclical movement among national cycles
and between national cycles and the regional one in a zone where the
industrial development faces several structural problems. Guisan,
Aguayo, and Exposito (2001), have exposed the growth
performances of the zone and demonstrated that other African areas
have performed generally much better than the western region.

Within the union, the contribution of the industrial sector to the
GDP ranges from 12% to 27%. Most of the resources in the zone are
not manufactured, and exports are mainly composed of raw material.
While only 25% of industrial activities are export-oriented, industrial
imports account for almost 80% of total imports of the union.
Moreover, industrial activities are concentrated in food and textile
industries, both representing 2/3 of manufactured value-added of the
zone. As exemplified by Guisan and Exposito (2001) for most
African countries, WAEMU countries are also concerned by lower
Aka, B. Do WAEMU countries exhibit a business cycle


45
performance of GDP per capita growth rate due to the higher growth
rate in population from 1960 to 2003 mitigating the rate of growth of
real GDP.

Examining the share of countries GDP in the aggregated
WAEMUs GDP we could see that Cte dIvoire is the major
contributor to the unions GDP, with a GDP representing more than
40% of the GDP of the zone during the period under study, making
this country the economic leader of the union. In fact Cte dIvoire is
the most industrialized country in the zone although the economic
growth of this country has been based on agricultural exports. The
specialisation in agriculture has profoundly determined the evolution
of its economy.

The economic growth of Cte dIvoire the major economy in the
zone, mainly based on exports of cocoa and coffee, has been
relatively high from 1960 to 1979 with the GDP per capita mean
growth rate being around 5.7%. During this period qualified by
Miracle conomique ivoirien , the shares of value added in GDP
were 34% for agriculture, 15% for industry and 51% for services.
This structure leads to growth in exports and increase in agricultural
income and surplus managed by CAISTAB
2
(a public marketing
boards), and in investment in all economic sectors. By the end of
1979, there was a slow down of growth due to the drop in
international price of agricultural products and oil crises. Cte
dIvoire was not the only one country concerned by these
international chocks.

During the 1980s the macroeconomic situation in all the countries
of WAEMU zone was worsened and governments adopted Structural
Adjustment Programmes (SAP) financed by international
institutional partners (mainly International Monetary Fund and
World Bank) in order to improve the efficiency of their economies
and enhance growth of all member countries in the zone. The
structural adjustment programs were combined next with
privatisations of public enterprises and liberalization policies at the

2
Caisse de Stabilisation et de Soutien du prix des produits agricoles.
Applied Econometrics and International Development. AEID. Vol. 4-4 (2004)

46
beginning of 1990s. As these macroeconomic policies outcomes
were not sufficiently growth improving, WAEMUs economy
experienced the devaluation of CFA franc in 1994. The combination
of these various macroeconomic policies results unfortunately in an
increase of poverty in the zone.

The current situation in the union is characterized by a social and
political crisis since 2002 in Cte dIvoire, which is the economic
leading country of the union, and no solution have yet been found to
definitely overcome this crisis since the political Marcoussis
agreements in France analysed by De Gaudusson (2003). Various
other analyses trying to understand and explain the origin of the
situation including Cogneau and Mesple Somps (2003), Lepape
(2003), Roubaud (2003), Hugon (2003) have shown that the crisis in
Cte dIvoire has important impacts on external and intra zone trade,
transport, manufactured goods, prices and employment for all
member countries. As a result, the GDP growth rate of the zone,
which was about 5.7% in 1998 dropped to 2.7% in 2000 and to 0.5%
in 2003 as presented in Bossard (2003) and Jumbo (2003). Thus its
of interest to study WAEMU zone business cycle, which behaviour
can shed light on differences or similarities between the aggregated
business cycle and the individual states specific ones.

To analyse business cycles various methods exist in the literature
and have diversified since the pioneering work of Burns and Mitchell
(1946). Most of the contributions are concerned with linear processes
of time series, among them the ARMA and ARIMA models of
Beveridge and Nelson (1981), the unobservable components models
of Harvey (1985), Watson (1986), Clark (1987), the cointegration
approach of King, Plosser, Stock and Watson (1991), and fail at
explaining business cycles features about duration of recessions and
expansions.

Hamilton (1989) has proposed an innovative more general non-
linear Markov regime-switching model (MRSM) to analyse
economic fluctuations, which has been widely used in recent years.
But this model has been mainly applied on quarterly or monthly data
in developed economies recently by Clements and Krolzig (2003),
Aka, B. Do WAEMU countries exhibit a business cycle


47
Krolzig and Toro (1999 and 2001), Krolzig (2001) and thus, no
application exists for developing countries, especially in African
countries where only short-range yearly data are available, a problem
also point out by Holmes (2003). This paper uses the modern version
of business cycles analysis, namely the Markov regime-switching
model (MRSM) to investigate the issues of existence and
identification of West African Economic and Monetary Union
aggregated business cycle and member countries cycle.

The remainder of the paper is organized as follows. Section 2
introduces the MRS model innovated by Hamilton (1989). Section 3
presents the Gibbs Sampling simulation method. Section 4 presents
the data used in this paper and gives simulation results from the
Gibbs Sampling outputs. The last section concludes.

2. The model

The non-linear specification introduced by Hamilton is the
following Markov switching model:

) , 0 ( ,
2
, ,
t
t t t
s
s t s t s t NID y + (1)

where s
t
is an unobserved state variable, which can take the value 1
or 0 depending on whether the economy is in a low growth phase
(recession) or a high growth phase (expansion). This unobserved
process s
t
follows a two states first-order Markov process with
transition probabilities:

1
]
1

1
]
1

1
]
1

q p
q p
p p
p p
s s p s s p
s s p s s p
t t t t
t t t t
1
1
) 1 1 ( ) 1 0 (
) 0 1 ( ) 0 0 (
11 01
10 00
1 1
1 1
(2)

These transition probabilities are restricted so that P
ij
=P[s=j|s=i],
with
1
j=0
P
ij
=1 for all i. P
ij
gives the transition probability that the
state i will be followed by state j.

More dynamic pattern for y
t
can be introduced by replacing
t
with
u
t
in equation (1), with u
t
following an autoregressive process:
Applied Econometrics and International Development. AEID. Vol. 4-4 (2004)

48

+
k
i
s s t s t i t i t
t t t
NID u u
1
2
, ,
) , 0 ( ~ ,
(3)

Then the Markov switching model becomes:

k
i
s t s i t i s t
t i t t
y y
1
,
) (
(4)

with
i
indicating the autoregressive parameters
3
, and the regime
shift in the mean of the time series is:

'

.
, 1
1
M s if
s if
t M
t
s
t

(5)

An algorithm has been proposed by Hamilton (1989 and 1991) to
estimate the parameters = (
0
,
1
,
i
,
0
,
1
,p,q) of the model. The
1991 algorithm is a Quasi Bayesian Maximum Likelihood including
the algorithm of 1989 as a special case with diffuse priors. The
parameters
0
and
1
,
0
and
1
, denote the means, the variances in
low growth and high growth state respectively. The transition
probabilities p and q determine the business cycle characteristics for
dating, thus from this model, the expected duration of an expansion
(recession) can be evaluated as follows:

1
1 1
) 1 (
~ ) 1 (
k
k
p p
p k
,

,
_

1
1 1
) 1 (
~ ) 1 (
k
k
q q
q k
(6)

The regime switching from expansion (recession) to recession
(expansion) state is given by:

( ) ( ) ( ) 5 . 0 1 , 5 . 0 1 > <
T t T t
Y s P Y s P
(7)


3
In Hamilton (1989) an AR(4) model is specified for quarterly data of the
USA.
Aka, B. Do WAEMU countries exhibit a business cycle


49
This simple decision rule allows determining the business cycle
turning points and requires no prior information on turning points,
and conditional probabilities of the regime (expansion and
contraction) are constructed post-estimation to suggest turning
points. This model can be estimated in various ways but here we
proceed by using the simulation method of Gibbs sampling (GS)
presented in the next section, which is an alternative to the maximum
likelihood estimation method.

3. The Gibbs Sampling simulation method

Albert and Chib (1993) have shown that the results from the Gibbs
sampling output are quite similar to the output of the maximum
likelihood estimation method. The Gibbs sampling tool for
estimation presented in Casella and George (1992) is as follows.

Suppose we want to simulate the posterior distribution of the
parameters
k
, if we arbitrarily set
i
, we can obtain the conditional
distribution of all parameters according to the following steps:
(i) Arbitrarily specify initial values, for
example, [ ]

) 0 ( ) 0 (
2
) 0 (
1
) 0 (
,..., ,
k

, and set i=1;

(ii) Repeat the following sampling scheme:
a) for
) (
1
i
from [
1
|
2
( i-1)
,,
k
( i-1)
]
b) for
) (
2
i
from [
2
|
1
(i)
,
3
( i-1)
,
k
( i-1)
]
until k) for
) (i
k
from [
k
|
1
(i)
,,
k-1
(i)
]
(iii) Set i=i+1 and go to step (ii).

After iterating on this cycle N times, we
obtain [ ]

) ( ) (
2
) (
1
) (
,..., ,
N
k
N N
N

, and Geman and Geman (1984)

have shown that for high values of N, the distribution of
(N)
converges in distribution towards Once we obtain the simulated
sample, we can get the marginal posterior moments of all
parameters:

Applied Econometrics and International Development. AEID. Vol. 4-4 (2004)

50
[ ]

N
i
i
k
i
N
1
) ( ) (
2 1
1
1 ,...,
(8)

4. Empirical results

The results are based on WAEMU countries yearly real GDP data
(millions dollars at 1995 prices) and GDP deflator from World
Development Indicators database covering the period 1960-2002. We
first proceed with the individual countries real GDP to analyse the
stylised facts of business cycle in each country separately and second
we deal with the aggregated 6-countries regional business cycle
composed of Benin, Burkina Faso, Cte dIvoire, Niger, Senegal,
and Togo and finally compare the individual cycles to the aggregated
one. We excluded the new members Guinea Bissau and Mali because
of the data availability and consistency. The retained 6 countries
aggregated real GDP represents more than 76% of the real GDP of
the zone.

The regional indicator is taken as the aggregated real GDP of
individual countries GDP; state 1 is related to expansion phase and
state 0 to contraction phase. In both cases the variable y
t
is computed
as y
t
=100*ln(GDP
t
/GDP
t-1
), thus in the case of Markov switching
autoregressive of order p models (MS-AR(p)), the parameter
0

indicates the real GDP mean yearly growth rate in the contraction
regime, and (
0
+
1
) represents the mean yearly growth rate in the
expansionary regime. The yearly growth rates of the real GDP and
Deflator of GDP are plotted in right panel of Figure 1 while left
panel depicts the log level of the variables for each of the 6 countries.
From Figure 1 we could see that the level of Cte dIvoires real
GDP is higher compare to other countries real GDP. We can notice
according to the Deflator of GDP that there is a higher correlation
among prices in the countries of the WAEMU zone than in their real
GDP.




Aka, B. Do WAEMU countries exhibit a business cycle


51
Figure 1: Log of Real GDP and Deflator of GDP in WAEMUs
economy
1960 1970 1980 1990 2000
6
7
8
9
LGDP95BENIN
LGDP95CIV
LGDP95SENE
LGDP95BFASO
LGDP95NIGER
LGDP95TOGO
1960 1970 1980 1990 2000
-10
0
10
20
DLGDP95CIV2
DLGDP95BFASO2
DLGDP95SENE2
DLGDP95BENIN2
DLGDP95NIGER2
DLGDP95TOGO2
1960 1970 1980 1990 2000
3
4
5
LIPBenin
LIPCiv
LIPSenegal
LIPBFaso
LIPNiger
LIPTogo
1960 1970 1980 1990 2000
0.0
0.2
0.4
DLIPBenin
DLIPCiv
DLIPSenegal
DLIPBFaso
DLIPNiger
DLIPTogo


4.1 Business cycles for individual countries

The investigations are performed using the Gibbs sampling
simulations and the stylised facts of the business cycle in each
country from 1960 to 2002 are presented in the following.
Simulations results are summarized in Table 1. We use the Gauss
code by Kim and Nelson (1999) based on the original code written
by Albert and Chib (1993) and incorporating a multi-move Gibbs
Sampling. Out of 11,000 Gibbs Sampling simulations, the first 1,000
are discarded; inferences are based on the remaining 10,000. The
variable (
0 +

1
) indicates growth rate during expansion; (p
00
=p)
indicates the probability of staying in a recession state; (p
11
=q)
indicates the probability of staying in an expansion state; (=(1-
q)/(2-q-p)) indicates the probability to converge in long run towards
a high growth rate; (1/(1-q)) represents the expected duration of
expansion and (1/(1-p)) the expected duration of recession.
Applied Econometrics and International Development. AEID. Vol. 4-4 (2004)

52
We observe similarities of business cycle pattern among the
member countries. The conditional mean of the growth rate in the
recession regime (
0
) ranges from the lowest 0.32% (Niger) to 1.4%
(Burkina Faso). The growth rate in expansion regime (
0
+
1
) ranges
from 1.7% (Niger) to 3.9% (Cte dIvoire) the highest. For each
individual country, the duration of expansion is long compared to the
duration of recession (see Table 1). These lengths of expansions and
recessions found here are consistent with the traditional view of
business cycle theory about phases duration. The average mean
duration of cycles is quite similar among member countries.

Table 1. Gibbs Sampling Simulations Results for Real GDP growth
rate
Parameters Prior
Means
Posterior Mean
WAEMU Benin Burkina
Faso
Cte
dIvoire
Niger Senegal Togo

0
0.50 1.3 1.3 1.4 1.4 0.32 0.88 1.05

1
0.50 2.5 2.02 1.9 2.5 1.4 1.5 1.9
p
00
0.50 0.82 0.77 0.77 0.83 0.79 0.77 0.79
p
11
0.50 0.91 0.93 0.94 0.92 0.90 0.92 0.91

2
--- 8.06 10.71 0.18 0.2 0.07 0.17 0.21

0 +

1
3.8 3.3 3.3 3.9 1.7 2.4 2.9
p
00
=p 0.82 0.77 0.77 0.83 0.80 0.78 0.80
p
11
=q 0.91 0.93 0.94 0.92 0.90 0.92 0.91
1-p
00
=1-p 0.18 0.23 0.23 0.16 0.20 0.22 0.20
1-p
11
=1-q 0.09 0.06 0.06 0.08 0.09 0.08 0.09

0.34 0.23 0.21 0.33 0.33 0.26 0.30
1/ (1-q) 10.81 14.47 16.26 11.98 10.29 15.59 11.61
1/ (1-p) 5.55 4.30 4.34 6.01 4.96 4.47 4.88
Cycle average
mean duration
8.18 9.39 10.30 8.99 7.62 8.53 8.25

4.2 Business cycles in the aggregated economy

For the aggregated economy composed of the 6 countries, the
growth rate of real GDP in the low growth state (
0
) is 1.27%, while
the growth rate in the high growth rate state (
0
+
1
) is 3.8%. Phases
duration are 10.8 years during expansions, and 5.5 years for
Aka, B. Do WAEMU countries exhibit a business cycle


53
recessions, meaning that the aggregated WAEMUs business cycle
average duration is almost 8 years, which can be characterized in
business cycle literature as a Juglar type cycle (lasting from 7 to 11
years, with 8.8 years mean duration) which is called the business
cycle in the literature and associated with increases in productivity,
aggregate demand and fluctuations in fixed investment. For
aggregated WAEMUs economy the probability for the growth
process of remaining in an expansionary (recessionary) state is
90.75% (81.97%), meaning that the different phases are persistent.

The probability [ =(1-q)/(2-q-p)] of the growth process to
converge in long run towards a high growth rate is 34% indicating
little potential real growth of the aggregate economy, and the
probability of an expansionary state to be followed by a recession
state is 9.25%, while the probability of a recession to be followed by
an expansion is almost 18.03%. The resulting regime probabilities of
expansion regime are plotted in Figure 2. The state probabilities can
be used to date the business cycle.

Finally, comparing individual countries cycles to the union
aggregated one, we could find that only Cte d'Ivoire has
experienced economic growth rate (3.9%) much closer and even
exceeds the aggregated WAEMUs economy growth rate (3.8%). All
other countries growth rates are bellow the aggregated one, the
lowest being Niger (1.70%) and Senegal (2.41%). The average mean
duration of cycle for Cte dIvoire (9), Benin (9), Burkina Faso (10)
and Senegal (9) appears to be longer than the mean duration of the
aggregated zone business cycle (8), the mean duration for Niger and
Togo being similar to the aggregated one. These results confirm the
fact that Cte dIvoire is the central economy in the zone and its
business cycles could impact those of member countries cycles and
the aggregate cycle as well.





Applied Econometrics and International Development. AEID. Vol. 4-4 (2004)

54
Figure 2: Expansion State probabilities in the WAEMU economy

1960 1970 1980 1990 2000
0.5
1.0
Pr(S
t
=1)
BENIN
1960 1970 1980 1990 2000
0.25
0.50
0.75
BFASO
Pr(S
t
=1)
1960 1970 1980 1990 2000
0.5
1.0
Pr(S
t
=1) CIV
Pr(S
t
=1)
1960 1970 1980 1990 2000
0.4
0.6
Pr(S
t
=1)
NIGER
1960 1970 1980 1990 2000
0.25
0.50
0.75
1.00
Pr(S
t
=1)
SENE
1960 1970 1980 1990 2000
0.4
0.6
0.8
TOGO
Pr(S
t
=1)
1960 1970 1980 1990 2000
0.5
1.0
WAEMU


5. Conclusion

This paper has investigated the issues of existence and
identification of a regional WAEMU-zone business cycle and
member countries individual economic cycles using the Hamiltons
Markov regime-switching model, which we estimated by the Gibbs
sampling simulations. We found that the aggregated WAEMUs
business cycle mean duration, which is almost 8 years, suggests a
Juglar type cycle characterizing the economy of the zone.

We found similarities of business cycles pattern between member
countries, and more importantly the chronology and amplitude of
Cte dIvoires business cycle appears to be closer to the unions
Aka, B. Do WAEMU countries exhibit a business cycle


55
cycle. In addition to the fact that the state probabilities reveal little
potential convergence towards expansion in future for the union, the
growth rate should be high enough in order to overcome the high
growth rate of the population in the zone.

Furthermore the non linear stochastic characterization adopted here
implies persistence of the different phases of the cycle and thus any
unexpected chock on one individual economy will permanently alter
the future level of activity in the zone, and unfortunately that is the
case since 2002 the 19
th
September with the war in Cte dIvoire,
which is as seen the economic leading country in the WAEMU-zone.

The economic growth perspectives of the zone are actually subject
to a rapid resolution of the crisis in Cte dIvoire, as any
development initiative could not be undertaken without peace in the
region. Its a condition to attract foreign investment and international
cooperation necessary to guarantee industrial development of the
zone. Further research should investigate firstly the precise dating of
the chronology of the economic cycles in the zone, and try to
forecast the business cycles of the zone and in member countries as
well, and secondly extend the study to the whole Franc zone and in
specific sectors of their economies.

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