5.3 Analysis And Results
5.3.6 ARDL Cointegration And Long-Run Form
Table 5.9 summarizes the results of the Error Correction Model.
Table 5. 9: Cointegration form (error correction model)
Variable Coefficient Std. Error t-Statistic Prob.
D(YG(-1)) -0.38163** 0.116438 -3.27756 0.0220 D(YG(-2)) -0.07105 0.050039 -1.4199 0.2149 D(PCP) 2.719462*** 0.309624 8.7831 0.0003 D(EPP) 14.13375*** 2.314181 6.107451 0.0017 D(ECHP) 0.005395 0.015646 0.344807 0.7443 D(INF) 0.123008*** 0.019894 6.183301 0.0016 D(GP) 0.070887*** 0.015244 4.649998 0.0056 D(TXP) 0.025643 0.015339 1.671688 0.1554 D(COP) 0.005791** 0.001876 3.086978 0.0273
D(OP) 0.071652 0.107042 0.669379 0.5329
D(AG) 0.300090*** 0.05236 5.731234 0.0023 D(TREND) -0.46476** 0.159827 -2.90791 0.0335 ECM(-1) -1.04490*** 0.222498 -4.69624 0.0054
Table 5. 10: Long-run form
Variable Coefficient Std. Error t-Statistic Prob.
PCP 1.665170*** 0.374154 4.450489 0.0067
EPP 2.948517 1.845754 1.597459 0.1711
ECHP 0.057887** 0.022449 2.578579 0.0495
INF 0.117722** 0.030847 3.816242 0.0124
P-values of Coefficients: ***p<0.01 and ** p<0.05 5.4 Discussion of results
5.4.1 Economic growth dynamics
The results from the error correction model imply that Zambia’s economic growth is stable and has a long-run equilibrium. This is because the error correction term (ECM(-1)) is both statistically significant and negative. Furthermore, since the coefficient of the error correction term is -1.044, it can be inferred that; when economic growth deviates from its long-run equilibrium path, there exists a rapid correction mechanism which will correct the growth path back to equilibrium within 1 year. Thus its take less than 1 year for the Zambian economy to fully stabilize after a sudden disturbance attributed to either external or internal factors. However, it should also be noted that Zambia’s economic growth is currently following a negative long-run trend to the extent that economic growth will continue to reduce by 0.44 percent each year if there is no intervention
taken. This reemphasizes the need to identify the macroeconomic factors of growth in order to quickly intervene in the economy.
5.4.2 Determinants of growth
This section considers the results of the ARDL model and corresponding long-run model to indentify the determinants of economic growth in Zambia.
A: Economic growth and factors of production
H1: Physical capital positively influences economic growth
Short-run: ( t = 8.783, p < 0.05) Long-run: ( t = 4.451, p < 0.05) H2: Employment positively influences economic growth
Short-run: ( t = 6.107, p < 0.05) Long-run: ( t = 1.597, p > 0.05)
It has been found that both physical capital and employment positively influence economic growth in the short-run and that physical capital is also a long-run positive determinant of economic growth in Zambia. Holding all other factors constant, if Zambia increases its physical capital stock by 1 percent annually economic growth would increase by 1.67 percent. The fact that employment is not a long-run determinant of economic growth does not downplay its important for growth. Moreover, the results actually indicate that the marginal effectiveness of employment is greater than that of physical capital in the shut-run.
The finding that physical capital stock positively influences economic growth is consistent with exiting empirical work. Ndambiri, et al. (2012) found that physical capital formation positively influences economic growth in sub-Saharan countries and Mbulawa (2015) found that increased Gross Capital formation leads to higher economic growth in SADC countries. The established short-run positive impact of employment on growth is also not contradictory to exiting research. Biswas and Saha (2014) and Arratibel, et al., (2007), found employment to positively impact economic growth.
B: Economic growth and macroeconomic stability
H3: Exchange rate positively influences economic growth
Short-run: ( t = 0.345, p >0.05 ) Long-run: ( t = 2.579, p < 0.05)
H4: Inflation negatively influences Zambia’s economic growth
Short-run: ( t = 6.183, p >0.05) Long-run: ( t = 3.816, p > 0.05)
The hypothesis test results indicate that H3 has been rejected only for the short-run while H4 has been rejected for both the short-run and long-run at 5 percent level of significance. This is because it has been found that the exchange rate is only a positive determinant of economic growth in the long-run while the inflation rate is a positive, and not a negative, determinant of growth in both the short and long run. A one percent decrease in the value of the kwacha against the US dollar will increase economic growth by 0.06 percent while a percentage increase in inflation will increase economic growth by 0.12 percent. Thus Zambia needs to maintain a moderate amount of inflation in order
to stimulate economic growth. There was no estimation of the actual limit of inflation upon which its effect may become negative.
Rodrik and Kennedy (2007) provide both theoretical and empirical evidence that devaluation leads to higher economic growth-a finding which is consist with the long-run effect of exchange rate on economic growth in Zambia. When it comes to the inflation rate, many studies have established that the inflation rate influences economic growth but there is no general consensus on whether its impact is positive or negative.
Barro (1996), Biswas and Saha (2014) and others found a negative relationship between inflation and growth while Phiri (2013) actually found that inflation positively influences Zambia’s economic growth when it is kept below 22.5 percent. Therefore, the findings by Phiri (2013) have been validated by this research.
C. Economic growth and external factors
H5: Copper prices positively affect Zambia’s economic growth
Short-run: ( t = 3.087, p <0.05) Long-run: ( t = -0.975, p > 0.05) H6: Crude oil prices negatively affect Zambia’s economic growth.
Short-run: ( t = 0.669, p >0.05) Long-run: ( t = 4.080, p < 0.05)
It has been established at 5 percent level of significance that among the two external factors investigated; copper prices only positively influence economic growth in the short-run while oil prices are only a long-run positive determinant of economic growth in Zambia. Ceteris paribus, a 1 US Dollar increase in oil price per barrel will lead to 0.42
percent increase in economic growth in the long-run. This means that increasing international crude oil prices do not adversely impact the Zambia economy. On the contrary, when crude oil becomes more expensive there is an increase in domestic aggregate spending and thus stimulating economic growth.
Shwilima (2015) found that the export of nonrenewable resources like copper positively impacts economic growth while Jain and Patil (2015) found that crude oil prices negatively impact India’s economic growth. Therefore, the finding that copper prices positively impact economic growth in Zambia is empirically supported because quantity exported is directly related to price. In contrast, the finding that crude oil prices positively impact growth is not empirically substantiated. Contrary to the results in this research, it has widely been found that crude oil price negatively influence both GDP and growth. It seems logical to conclude that most investigations did not sufficiently lag the crude oil price variable and this made the negative contemporaneous effect significant and dominant.
D. Economic growth and government intervention
H7: Government spending positively impacts economic growth in Zambia
Short-run: ( t = 4.650, p <0.05) Long-run: ( t = 2.786, p <0.05)
H8: Government taxes negatively impact economic growth in Zambia
Short-run: ( t = 1.671, p >0.05) Long-run: ( t =0.116, p > 0.05)
Government spending is a positive determinant of economic growth in both the short and long-run while government taxes do not impact economic growth. This is because H7 has not been rejected while H8 has been rejected at 5 percent level of significance for both the short and long-run. Holding all other factors constant, a 1 percent increase in governments spending will increase economic growth by 0.19 percent. On the other hand, moderate increase in government taxes will have no impact on economic growth in both the short and long-run.
Government spending and taxes have been found to be key determinants of growth in many countries. Ismaila and Imoughele (2015) found a positive relationship between government spending and economic growth in Nigeria while Johansson, et al., (2008) found that all types of taxes negatively impact economic growth in OCED Countries.
Therefore, the positive impact of government spending on growth is consistent with both economic theory and empirical work. It is however surprising that government taxes do not impact economic growth in Zambia. This may be because, unlike the developed nations, governments in the developing world do not fully exploit the tax system to the level that it can negative influence growth.
E. Economic Growth and Agricultural Sector
H9: The agricultural sector positively influences Zambia’s economic growth
Short-run: ( t = 5.731, p < 0.05) Long-run: ( t = 3.618, p <0.05)
The agricultural growth has been found to be both a short-run and long-run determinant of economic growth in Zambia. At 5 percent level of significance, H9 could not be rejected. If Zambia experiences 1 percent increase in agricultural contribution, ceteris paribus, there will be 0.47 percent increase in economic growth. This finding implies that Zambia is still very dependent on agricultural production and thus there is need to further develop the sector.
The positive impact of agricultural productivity on economic growth is common in the developing world. This is because most developing economies are heavily dependent on the agricultural sector. Oyakhilomen and Zibah (2014) conclude that agricultural sector productivity positively impacts economic growth in the Nigerian economy. Thus Oyakhilomen and Zibah (2014) support the positive impact of the agricultural sector on growth in Zambia.
5.5 Conclusion
The search for the macroeconomic determinants of economic growth in Zambia has been very fruitful. It has been discovered that physical capital, employment, inflation, government spending, copper prices and agricultural productivity are all positive short-run determinants of economic growth in Zambia. This means that these factors are behind the swings in economic growth. The constant variations in economic growth can directly be attributed to changes in these macroeconomic variables. Furthermore, it has also been established that the major long-run determinants of economic growth in
Zambia are physical capital, exchange rate, inflation, government spending, crude oil prices and agricultural productively. Notably, factors such as physical capital, government spending and inflation fall in both categories and are thus the most important determinants of growth. The long-run determinants of economic growth significantly influence the trend of economic growth.
CHAPTER SIX
CONCLUSION, POLICY IMPLICATIONS AND RECOMMENDATIONS
6.1 Introduction
This chapter presents a summary of all the major findings and policy implications of the results. It has been organized into two sections: section 6.2 offers policy implications and section 6.3 is the conclusion section. In fostering economic growth in Zambia, there is need to both plan for economic growth and strategically respond to external factors so as to achieve that needed growth.
6.2 Policy implications
It has been established in this research that Zambia’s Economic growth is following a negative trend in both the short and long-run. This means that without adequate policy action and strategic intervention, the nation will continue registering lower growth rate in the future. Policy makers are expected to plan for economic growth in the long-run and also take short-run interventions in order to remedy the situation.
6.2.1 Economic growth policies
A: Infrastructure and agricultural development
The starting point to propelling Zambia towards positive sustainable economic growth is the development of long term economic growth oriented policies. In light of the findings of this research, the long-term plan should focus on growing the nation’s physical capital
stock and encouraging agricultural growth. The Government of Zambia has in the recent past done a commendable job in upgrading the Nation’s physical capital and expanding agricultural productivity. These two developmental areas have traditionally been the focus of government action and thus there is need to continue infrastructural development projects and farmer input support programmes.
B: Exchange rate policy
The finding that the depreciation of the local currency is positively related to long-run economic growth adds credence to the fact that Zambia is dependent on export earnings primarily from copper. Contrary to popular opinion, the depreciation of the Kwacha does not harm Zambia’s long-term growth prospects. There is therefore absolutely no need for the central Bank to intervene when the Kwacha is marginally depreciating against major convertible currencies because the loss of value encourages exports and growth of the mining sector. Furthermore, since most of Zambia’s imports are consumer goods; devaluation of the kwacha would actually encourage the development of the local manufacturing sector and lead to economic growth in the long-run.
C: Fiscal policy
Government spending has been found to positively impact long-run economic growth in Zambia. If the government engages in public investment, there will be an increase in private investment and consequently higher GDP, growth and taxes. The increased taxes can then be used to finance further increased public investment. Government spending
needs not be increased by seeking increased government external debt. If the public spending is investment focused it will stimulate economic growth and generate its own capacity for increase. Since it has been found that government taxes do not negatively influence economic growth in the long and short-run, there is need to increase corporate taxes in order to maximize government taxes and reduce external debt. An increase in corporate taxes will not adversely affect Zambia’s economic growth prospects and can thus help reduce government external borrowing.
D: Monetary policy
The positive relationship between inflation and economic growth in the long-run suggests that monetary policy can be employed to generate higher growth in the long-run. This research recommends a constant money growth policy in the long-long-run. The Bank of Zambia should make use of monetary policy to stimulate the economy through increased aggregate demand. However, there is need to properly optimize the money growth policy in order to avoid hyper-inflation. Since this research did not employ a threshold analysis on inflation and economic growth, the estimated positive relationship between the dual may only hold at lower levels of inflation.
6.2.2 Economic Growth Interventions
Planning for economic growth using long term economic growth oriented policies is not enough to achieve sustainable growth. There is need to establish short-term interventions. In other words; planning happens in the long-run but the realization of the
needed growth is a short-term phenomenon. Macroeconomic situations are such that there is great need to properly respond to prevailing circumstances so as to achieve long-term goals. When the Zambian economy experiences negative external shocks and economic growth falls below its long-run target; policy makers can respond by increasing Government spending, employment and money supply. Increased government spending and money supply will increase aggregate demand while increased employment in other sectors will lead to higher GDP. These will therefore counteract the influence of the external shock on the Zambian economy.
6.3 Do copper prices Matter?
Zambian governments and policy makers have traditionally theorized that changing copper prices are responsible for economic growth fluctuations. Whenever the nation’s economic situation takes a negative turn, analysts often blame falling copper prices and thus been offering a perfect scapegoat for government economic mismanagement. This investigation into the determinants of economic growth in Zambia has established that international copper prices only influence economic growth in the short-run. This means copper prices do not have a long-run impact on economic growth. With proper policy action and strategy, Zambia can achieve higher economic growth in the long-run even in the presence of falling copper prices.
The fall in copper prices only causes a short-run shock which deviates economic growth from its long run target. Since economic growth is responsive to both fiscal and
monetary policies in the short run; the effect of falling copper prices on economic growth can be fully counteracted. Policy makers in Zambia can strategically respond to eliminate the negative influence of lower copper prices on the economy by implementing expansionary fiscal and monetary policy. It is apparent therefore, that blaming international copper prices for Zambia’s economic mishaps cannot be empirically substantiated. It is poor planning and policies for economic growth and poor responsive action in the short-run which have historically generated low levels of growth in Zambia.
6.4 Conclusion
Zambia is a democratically stable and resource rich land locked nation located in Southern Africa. Due to the fact that the country is one of the world’s leading exporters of copper, many analysts have theorized that Zambia’s economic growth in directly influenced by international copper prices. This supposition has lead to government laxity as most of the economic problems of the country are blamed on external shocks which are beyond government intervention. It has however, been established in this research that the major determinants of economic growth in Zambia include government spending, inflation, exchange rate and agricultural development. Copper prices have been found to only influence economic growth fluctuations in the short-run.
The spotlight needs to turn away from international copper prices to proper economic management. If the nation is to achieve higher sustainable growth in the future, it should focus on increased public investment, agricultural development and currency devaluation. The unmerited focus on external factors is not the source of economic growth but a hindrance to proper goal oriented planning. With sound fiscal and monetary responsiveness, the influence of external shock generated by copper price fluctuations can be managed and Zambia can achieve higher sustainable economic growth.
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