Macroeconomic determinants of economic growth in Ghana (1970-2007).
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Date
September, 2009.
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Abstract
The problem of the study is ascertaining the major macroeconomic determinants of economic growth that would drive Ghana’s real per capita GDP growth (economic growth) towards the attainment of the targeted middle income status by the year 2015 and also determine which ways these determinants influence economic policy formulation and implementation.
As a result, this study examines the long-run macroeconomic determinants of economic growth in Ghana using Johansen approach to cointegration which is more appropriate and efficient for determining the number of cointegrating vectors without relying on an arbitrary normalization. The study period spanned from 1970 to 2007. The time series properties of the data were, first, analyzed using the Augmented Dickey Fuller (ADF) test.
The empirical results derived indicate that all the variables of interest were stationary after their first differencing. The study found cointegration relationship between real GDP per capita (economic growth) and its macroeconomic determinants. The results indicated that the major macroeconomic determinants of economic growth in Ghana are physical capital (+), foreign direct investment (-), foreign aid (-), inflation (+) and government expenditure (-).
In order to achieve the desired rate of economic growth and hence, the attainment of the millennium development goals by 2015, the following policies are suggested.
Physical Capital was found to have a positive impact on economic growth. The policy recommendation is that there should be continuous investment in physical capital including plants, machinery, raw materials, industrial buildings, road network, technology (research and development) and other capital stock that are central to production and other economic activities in the economy.
More resources should be devoted to expanding technical and vocational education. The reform of the pre-university educational system is in the right direction. The government needs to devote more resources to enhance non-formal education with strong emphasis on basic literacy and skills training.
Labour force was found to have a positive impact on economic growth. The policy recommendation is that the government should come out with an attractive policy that will attract more foreign direct investment into the manufacturing sector as well as the agricultural sector which is the back bone of the Ghanaian economy.
Foreign aid had a negative effect on economic growth. The policy recommendation is that the government should be able to generate more revenue domestically than relying on foreign aid. The government can do this by widening its tax net to include a greater proportion of the informal sectors of the Ghanaian economy and then spend the revenue generated on developmental projects that will crowd in the private sector which is considered as the engine of growth and hence accelerate Ghana’s economic growth.
Inflation had a positive impact on economic growth in Ghana. The policy recommendation is that the monetary policy authorities should continue to pursue the objective of maintaining inflation rate to single digit. This will force commercial banks to reduce its lending rate. This will cause investors to go borrow and invest in the private sector, increase output and hence increase economic growth, all things being equal.
Finally, government expenditure was found to have a negative impact on growth. The policy recommendation is that the government should spend on the productive sectors of the economy such as provision of safe water, primary health care, education, roads, electricity, waste management, telecommunication, security etc which will crowd in the private sector.
Description
A thesis submitted to the Department of Economics, Kwame Nkrumah University of Science and Technology, in partial fulfillment of the requirements for the award of the Master of Art (M.A.) degree in Economics .