ABSTRACT
This study analyzed the impact of macroeconomic dynamics on real economy of three sub-Saharan African economies (SSA), for a period of forty years; from 1981 to 2020. These countries were selected based on a troika of shared similarities relating to the economy, colonial history, and pattern of business. Exchange rate, inflation rate, discount rate and unemployment were used as the key macroeconomic variables while the real economy was measured by nominal GDP. Ex post facto research design was used in a multiple regression analysis framework to determine the partial coefficients of the endogenous variables. First, diagnostic tests involving pretesting of data for unit root based on the Augmented Dickey-Fuller (ADF) approach was carried out. The ADF test showed that the series of data were of mixed integration, that a combination of levels and first difference variables which necessitated the application of Autoregressive Distributed Lag (ARDL) model. The ARDL results shed light on the effect of the macroeconomic variables on economic growth in three SSA economies. Chiefly, the results provide evidence that the impact of macroeconomic variables on GDP varied among Nigeria, South Africa and Ghana. The long-run relationship between GDP and macroeconomic variables was confirmed from the F-statistic of the ARDL bounds test. In the long run, the Nigerian economy was negatively and significantly impacted by the exchange rate and discount rate, but inflation had a negative and insignificant impact while the unemployment rate had a positive and non-significant impact on Nigeria's GDP. South Africa’s GDP was significantly and negatively impacted by the exchange rate and inflation in the long run while the discount rate and unemployment rate had a negative and insignificant impact on South Africa's GDP in the long run. The long-run GDP in Ghana was significantly and negatively impacted by the exchange rate, discount rate and unemployment rate while the inflation rate was negative and insignificant. The error correction mechanism of the ARDL model indicated that GDP for all the countries investigated were impacted in different ways by the selected macroeconomic variables. In the short-run, exchange rate, inflation rate, discount rate and the unemployment rate were significant determinants of Nigeria's GDP; in South Africa, GDP was significantly determined by the exchange rate, discount rate and unemployment rate in the short run while Ghana's GDP was significantly determined by inflation, discount rate and unemployment rate in the short-run. From the policy perspective, the findings are of particular interest to government authorities saddled with the responsibility of managing the economy. Since the results indicated that macroeconomic variables play a significant role in influencing economic growth in SSA countries, the economic management teams of these countries need to support measures that will boost productivity in such a way that they should neither create inflationary pressure in the economy, nor fuel exchange rate and interest rate volatility as well as reduce the unemployment rate to the barest minimum.
TABLE OF CONTENTS
Title
Page i
Declaration ii
Certification iii
Dedication iv
Acknowledgements v
List
of Tables viii
List
of Figures ix
Abstract x
CHAPTER 1: INTRODUCTION
1.1 Background
to the Study 1
1.2 Statement
of the Problem 6
1.3 Objectives
of the Study 8
1.4 Research
Questions 9
1.5 Hypotheses 9
1.6 Scope
of the Study 10
1.7 Significance
of the Study 10
1.8 Limitations
of the Study 11
1.9 Operational
Definition of Terms 11
CHAPTER 2: LITERATURE
REVIEW
2.1 Conceptual
Framework 13
2.1.1 Macroeconomic variables 13
2.1.2 Linkages between macroeconomic dynamics and the
real economy 15
2.1.3 The real economy 30
2.1.4 Concept of economic growth 33
2.1.5 Nigerian economy 34
2.1.6 South African economy 41
2.1.7 Ghanaian economy 46
2.1.8 Historical
overview of macroeconomic models 50
2.2 Theoretical Framework 54
2.2.1 Endogenous
growth model 54
2.2.2 Keynesian
economic theory 57
2.2.3 Financial
repression theory 60
2.2.4 Quantity
theory of money 61
2.2.5 The
classical growth model 63
2.3 Empirical Framework 64
2.3.1 Empirical
studies for Nigeria 64
2.3.2 Empirical
studies for South Africa 94
2.3.3 Empirical
studies for Ghana 102
2.3.4 Comparative studies 111
2.3.5 Foreign
studies 119
2.3.6 Other
related studies 138
2.4 Summary
of Empirical Literature 145
2.5 Gap in Empirical Literature 157
CHAPTER 3: METHODOLOGY
3.1 Research Design 159
3.2 Nature and Sources of Data 159
3.3 Model Specification 159
3.4 Description of Model Variables 161
3.5 Techniques of Data Analysis 163
CHAPTER 4: PRESENTATION
OF DATA, ANALYSIS AND DICUSSIONS
4.1 Presentation
of Data 166
4.1.1 Trend analysis of data 169
4.1.2 Descriptive
statistic 174
4.2 Empirical Analysis 177
4.2.1 Stationarity test 177
4.2.2 Diagnostic tests 179
4.2.3 Bounds testing 182
4.2.4 Error
correction mechanism (ECM) and short-run estimates 185
4.2.5 Hypotheses
testing 187
4.2.6 Discussion of findings 188
CHAPTER 5: SUMMARY,
CONCLUSIONS AND RECOMMENDATIONS
5.1 Summary of findings 192
5.2 Conclusion 193
5.3 Recommendations 193
5.4 Contribution to Knowledge 194
REFERENCES
APPENDIXES
LIST OF TABLES
2.1 Components
of real economy and gross domestic product 31
2.2 Summary of literature review 146
3.1 Sources of data 159
3.2 Operationalization of variables 163
4.1(A) Presentation of data for Nigeria 166
4.1(B) Presentation of data for South Africa 167
4.1(C) Presentation of data for Ghana 161
4.2 Descriptive statistic 175
4.3 Unit root test results 178
4.4 Diagnostic tests results 180
4.5 Bounds tests 182
4.6 Long-run estimates 183
4.7 Error correction model (ECM) 185
4.8(A) Summary of hypotheses for the long-run model 187
4.8(B) Summary of hypotheses for the short-run model 188
LIST OF FIGURES
2.1 Conceptual framework 14
2.2 Link between exchange rate and
economic growth 19
2.3 Link between
inflation and economic growth 21
2.4 Link
between discount rate and economic growth 26
2.5 Map of Nigeria 36
2.6 GDP growth
rate of Nigeria 38
2.7 Map of South
Africa 44
2.8 Economic
growth of South Africa 45
2.9 Map of Ghana 47
2.10 Economic growth
in Ghana 49
4.1 Trend of GDP 169
4.2 Trend of
exchange rate 171
4.3 Trend
of inflation rate 172
4.4 Trend of discount rate 173
4.5 Trend of unemployment rate 174
4.6 CUSUM test for Nigeria 181
4.7 CUSUMSQ test for Nigeria 181
4.8 CUSUM Test for South Africa 181
4.9 CUSUMSQ test for South Africa 181
4.10 CUSUM test for Ghana 181
4.11 CUSUMSQ test for Ghana 181
CHAPTER
1
INTRODUCTION
1.1 BACKGROUND TO THE STUDY
In
recent times, there have been overriding evidence of the shift of economic
power from developed countries to emerging countries. Reports from Price-Water
House Cooper (2015) estimated that purchasing power of emerging markets would
exceed those of the G7 (Canada, France, Germany, Italy, Japan,
the UK and the US) in the near future. Sullivan
(2012) also reported that the willingness of international investors to invest
in developing markets increased following the global financial crisis that hit
the developed economies and caused a significant downturn in the macroeconomic
environment of the developed countries. According to the International Monetary
Funds (IMF), the persistent shift to emerging markets has heightened the focus
on the Sub-Sahara Africa (SSA) region which is next to the Asian Pacific region
in terms of the fastest-growing region and Real Gross Domestic Product (IMF,
2019). The SSA region is well-known to have attracted a lot of interest due to
the abundance of natural resources, the rising cost of living and rising
Foreign Direct Investment (FDI) from other developing nations looking to invest
in emerging markets (Adebayo, Onyibor and Akinsola, 2021). This is because the
SSA region has a demographic advantage which is the key to long term growth,
other than the growing middle-class population, the region is expected to grow
by 17% by 2030 making it the fastest growing and labour population as opposed
to the global ageing population with urbanization rate expected to increase at
28% by 2030 (IMF, 2019). Notwithstanding, there have been bottlenecks to
investing in the SSA region as a result of insecurity, corruption, and most
especially, governments inability to create a good macroeconomic environment
for investments in the real economy to thrive.
The
real economy is the engine for a nations; economic transformation and
development. According to the Central Bank of Nigeria (CBN), the real economy comprises
production in agriculture, industrial and service sectors (CBN, 2014). It
confers numerous benefits to a nation as it has been seen to mirror the state
of employment generation and economic prosperity (Neiburg, 2017).
In fact, in many economies, the effectiveness of macroeconomic aggregates is
gauged by the performance of the real economy (Mordi, 2016). Government
policies aimed at macroeconomic stabilization can only be deemed successful if
they positively influence the production and distribution of goods and services
(Gottschalk, 2015). It then
implies that a productive and vibrant real economy would promote internal and
external balances and create more linkages in the domestic economy (CBN, 2014; Batko,
2013). As such, economic policies in developing countries in the SSA region
must address issues concerning the enhancement of the real economy in terms of
its productive capacity to achieve higher growth levels.
Enhancing
production in the real economy and macroeconomic stability are the core objectives
of development policy in every country. Less developing countries need more productive
capacity when compared with the developed countries to attain sustainable
development of social and physical infrastructure (Keswani and Wadhwa,
2017). It is noteworthy that the real economy connotes the ability of an
economy to accelerate its productive capacity through the agriculture,
industrial and service sectors which are reflected in the aggregate output (Neiburg,
2017; CBN, 2014). Often time, the unsustainable and low level of output in
developing countries has caused some difficulties for policymakers,
professionals and the Government. Consequently, previous decades has seen rejuvenated
interest in the fundamental variables influencing the real economy in SSA
countries. Developed countries, especially the United States have experienced
an increase in growth of GDP per capita, but other economies such as SSA have
lagged, raising questions as to the role of the macroeconomic dynamics (Balcioglu and Vural, 2017).
In
economic literature, the macroeconomic environment had been one of the key
drivers of the real economy of a country. Broadly, macroeconomic variables
refer to factors that are pertinent to the entire economy at the regional or
national level. Being a key indicator of economic performance, macroeconomic
factors such as economic output, unemployment, inflation, savings and
investment are closely monitored by governments, businesses and consumers
(Swamy, 2017). Consequently, Governments across countries of the world have
made efforts in stabilizing the macroeconomic environment through the use of
discount rates, fiscal policies aimed at controlling macroeconomic variables
such as exchange rate, interest rate, inflation, unemployment, money supply,
etc. (Akinjare, Babajide, Isibor and Okafor, 2016). Specifically, with the
discount rate, the government controls money supply or the monetary base,
inflation, interest rate through the Central Bank, while fiscal policy is often
aimed at adjustment of government spending and the use of taxation to influence
the level of production in the economy while income policy is aimed at the
redistribution of income among the population (Morakinyo, David and Alao,
2018). This implies that frequent fluctuations of macroeconomic variables is
detrimental to growth and development of a country’s real economy.
Globally,
conventional wisdom informs that fluctuations in macroeconomic variables have
driven major swings in economic activities. This has led to numerous academic
studies that sufficiently bond changes in economic growth to macroeconomic
variables. For instance, Cheptot (2014) asserts that macroeconomic policies
could affect the real economy and the poor population by reducing the real
income and consumption of certain population groups in the economy in the
short-term, especially the poor; and disadvantaged groups may not benefit from
changes in the distribution of income induced by the implementation of
adjustment policies in the long-run. Also, government policy targeted at
increasing interest rates may end up reducing the rate of inflation and
achieving price stability but it could also lead to a fall in aggregate demand
and consumption thereby negating economic production (Falade and Folorunso,
2015; Mehrara and Mohaghegh, 2011). Thus, the quest to
achieve increased economic prosperity, in the long run, may often become
hampered by short-run fluctuations which could lead to conflict between
economic output level and price stability (Ismaila and Imoughele, 2015). It is
for this reason that while some governments' macroeconomic policies may have a
positive effect on economically productive sectors, the same policies may harm
other economic sectors. In sub-Saharan Africa (SSA), studies on the subject
have shown that the economies of most countries in the region have been caught
by the snare of volatile macroeconomic indices (Agbarakwe, 2017; Agyapong,
Anokye and Asiamah, 2016; Ashika, 2015). Most of the countries in this region
are heavily indebted and are struggling to manage the high exchange rate,
exorbitant interest rate, rising inflation rate, high unemployment rate, huge
capital flight and low domestic output (Onyele, Okpara and Ikwuagwu, 2017).
Consequently, these countries have been forced by their unfavourable
macroeconomic environment to undertake painful economic adjustments (such as
foreign borrowing) in a bid to stabilize their ailing economies which further
deepens the macroeconomic problem as domestic resources are lost to debt servicing.
It is based on this premise that the World Bank (2016) stated that countries
within the SSA region are more susceptible to the contagion effect of financial
crisis emanating from developed countries. In SSA countries, there is frequent
exchange rate depreciation, making countries within the region less competitive
in the global market. Also, the interest rate on bank loans in the region have
risen significantly up to double digits, accelerating the cost of production
and discouraging effective and efficient financial intermediation for
sustainable growth. The unemployment rate has surged and inflation has also hit
double digits in recent times leading to slow economic output (Worlu and
Omodero, 2017).
Notwithstanding
global economic fluctuations, SSA has persistently witnessed strong real
economy, especially in 2011 when regional output rapidly increased by 5%
compared to the pre-crisis period (2004-2008) when the region’s output hit an
average of 6.5% (Lutz, 2015). Also, the World Bank (2019b), reported that there
was moderate growth in SSA in 2014 amidst various risks such as the Ebola
outbreak, large budget deficits due to accelerated public spending in Ghana and
Zambia, Boko Haram insurgency in North-East Nigeria, political conflicts in
South Sudan and the Central African Republic and drop in crude oil prices which
negatively affected Sub-Saharan oil-producing countries (Nigeria, Ghana and
Angola). The fall in oil prices led to a high rate of inflation, decreased
government revenue which further weakened the Nigerian Naira against the U.S
dollar in 2014, leading to the central bank tightening the monetary policy and
devaluing the Naira and the same was said for other oil-exporting countries
currency i.e. Ghana and Angola. Ghana and South Africa Central Banks equally
tightened their monetary policy because inflation increased above the upper
limit of the target range for 2014, which is contrary to the single-digit
average inflation rate targeted by the SSA countries (Somnath and Suchismita,
2015). The study by Agalega and Antwi (2013), on the impacts of similar
macroeconomic variables on Ghana's output, suggested that a high rate of
inflation beyond 14% adversely affected economic output.
In
three economic giants in SSA
notably, Nigeria, South Africa and Ghana,
governments have over the years come up with various macroeconomic policies.
Some had been monetary while others had been fiscal policies. The compelling
argument is that these policies have larger implications on the macro economy
and may have influenced the level of economic growth in SSA countries
differently. For instance, the Nigerian government’s adherence to the floating
exchange rate regime has led to the devaluations and appreciations of the
Nigerian currency over time (Nwoye, Obiorah and Ekesiobi, 2015). Similarly, the same scenario is obtained in
Nigeria, South Africa and Ghana where the adoption of a floating exchange rate
regime has also led to depreciation and appreciation of the South African currency
over time. In the same way, government policy on interest rates has brought so
much dynamism to the interest rate charged by commercial banks on loans in both
countries. Also, the inflation rate in Nigeria and South Africa has not been
static as the inflation rate in both countries has experienced lots of
fluctuations owing to government macroeconomic policies (Wunyeka, 2014; Bakare,
Kareem and Oyelekan, 2015; Vermeulen, 2017). Interestingly, the economies of
Nigeria and South Africa have both been acknowledged as the largest and
second-largest growing economies in Africa respectively (Alemaychou, 2010).
Given the dynamism associated with the individual country's macroeconomic
fundamentals, it is worthwhile investigating how macroeconomic dynamics have
affected the economies of Nigeria, South Africa and Ghana. “Have the Nigerian,
South African and Ghanaian economies benefitted from the dynamism associated
with these macroeconomic variables?” This is the central kernel that this study
proposes to crack. Essentially, the study aims to assess the impact of
macroeconomic dynamics on economic growth in Nigeria, South Africa and Ghana.
1.2 STATEMENT OF THE PROBLEM
It
is widely believed that economic output in any context is highly affected by a
myriad of macroeconomic factors. A negative growth rate is associated with a
volatile macroeconomic environment which is reflected in unstable interest
rates, exchange rates, high inflation and unemployment, etc. (Andrašić, Mirovic and Kalas, 2018). For instance, the
output is negatively affected due to high lending rates which tend to
discourage companies from financing projects through loans from commercial
banks and thus they resort to rather less expensive financing which includes
informal financing which is said to be more limiting and indirectly more
expensive (Agbarakwe, 2017). Also, inflation on the other hand, which is
defined as the decline in the purchasing power of money leads to a decline in
the units sold by firms, hence discourages further production activities (Agri,
Mailaifa and Umejiaku, 2017). On the other hand, rising exchange rate causes
the price of domestic export commodities to increase, hence discourages
domestic production while the high unemployment rate is underutilization of
human capital in the process of production, resulting in low growth (Hoang, Tih
and Minh, 2020). Unfortunately, the effect of these macroeconomic variables on real
economic output in developing countries like Nigeria, South Africa and Ghana is
still unresolved because there are still controversies in the theoretical and
empirical literature regarding the macroeconomic variables that determines real
economic growth in developing countries.
Numerous
studies have been done with regards to the impact of macroeconomic variables on
the real economy in Nigeria, South Africa and Ghana. Kargbo (2007) showed that
shocks to macroeconomic fundamentals such as the exchange rate, interest rate,
inflation and money supply exert strong influences on the trend of real
economic sector like agriculture in South Africa. Hackland (2015) also found
that inflation and prime lending were negatively correlated with growth in
South Africa. Also, Onakoya (2018) found that prevailing exchange rates,
interest rate, inflation and money supply have caused hindrance to economic production
in Nigeria. In Ghana, Ho and Iyke (2018); and Mwinlaaru and Ofori (2017) found
that debt servicing, financial and human capital development, and exchange rate
were significant determinants of Ghanaian economic growth. Other studies on the
subject include, among others; Karki (2018); Iwedi (2017); Abdalla (2016);
Worlu and Omodero (2015) who all confirmed a significant relationship between
macroeconomic dynamics and economic output. Nevertheless, it is notable that
while different studies do agree that the dynamics of macroeconomic aggregates
such as interest rates, inflation, unemployment, exchange rate, amongst others
do affect the level of economic output, they did not do a cross country study.
The
puzzle in the literature is that countries across the world respond differently
to the vagaries of the macroeconomic environment. This explains why authors
from different countries emphasized diverse macroeconomic variables, resulting
in a mixed bag. The focus of this study is to empirically investigate the
macroeconomic variables that affect SSA countries by comparing outcomes of
Nigeria, South Africa and Ghana. The uncertainty and country-specific factors
affecting the performance of macroeconomic variables in SSA countries justifies
the need to empirically study and compare how dynamics in these macroeconomic aggregates
impact the real economy of Nigeria, South Africa and Ghana.
1.3 OBJECTIVES OF THE STUDY
The core objective of the study is to
investigate the impact of macroeconomic dynamics on the real economy in
Nigeria, South Africa and Ghana. The specific objectives included to:
1)
examine the effect of
exchange rate on gross domestic product in Nigeria, South Africa and Ghana.
2)
investigate the effect of
inflation rate on gross domestic product in Nigeria, South Africa and Ghana.
3)
evaluate the impact of
discount rate on gross domestic product in Nigeria, South Africa and Ghana.
4)
analyse the impacts of
unemployment rate on gross domestic product in Nigeria, South Africa and Ghana.
1.4 RESEARCH QUESTIONS
The study provided answers to the
following research questions:
1)
How does exchange rate
affect gross domestic product in Nigeria, South Africa and Ghana?
2)
What is the effect of
inflation rate on gross domestic product in Nigeria, South Africa and Ghana?
3)
In what ways do discount
rate affect gross domestic product in Nigeria, South Africa and Ghana?
4)
How does unemployment
rate affect gross domestic product in Nigeria, South Africa and Ghana?
1.5 HYPOTHESES
The following hypotheses were tested
in the study:
Ho1:
Exchange rate does not have significant
impact on real gross domestic product in Nigeria, South Africa and Ghana.
Ho2:
The impact of inflation rate on gross domestic
product in Nigeria, South Africa and Ghana is not statistically significant.
Ho3:
Discount rate has no statistical
significant impact on gross domestic product in Nigeria, South Africa and
Ghana.
Ho4:
The impact of unemployment rate on gross
domestic product is not significant in Nigeria, South Africa and Ghana.
1.6 SCOPE OF THE STUDY
This study covered the period 1980 to
2020. The year 1980 was considered as the base year for the study to capture
the era of modern globalization which gained ground in Africa in the 20th
century and expectedly informed macroeconomic policies of African countries and
governments of Nigeria, South Africa and Ghana. The year 2020 was considered
the end period for the study to accommodate the current realities as it
concerns the macroeconomic instruments and the real economy in Nigeria, South
Africa and Ghana before and during the COVID-19 pandemic. Again, Nigeria and
South Africa happen to be the top two largest economies in Sub-Saharan Africa
(SSA) while Ghana is among the fastest-growing economy within the SSA region.
1.7 SIGNIFICANCE OF THE STUDY
The
study is of practical value and significance to the following groups:
1)
The
Government: This study will broaden the knowledge
of the government in the three countries (Nigeria, South Africa and Ghana) on
the impact of macroeconomic policy instruments on the level of growth in the
real economy of these countries. This will enable the governments and
policymakers to adjust or strengthen policies (be it monetary, fiscal or income
policies) to achieve increased production. Where a macroeconomic policy
instrument has a negative impact on the growth of the economy, governments
would adjust or re-align such policy to reverse such negative impact on the real
economy to enthrone economic growth and vice versa.
2)
The
academia: This study provides a guide to researchers
and scholars in formulating questions and hypotheses that would help in
carrying out their study. The literature generated in the study will also help
them develop an appropriate literature framework and theoretical framework for
their study.
3)
The
general public: From the perspective of the public,
the study will enlighten them on how investment decisions are affected by
changes in the macro economy and therefore this study would significantly shed
some leading light on the part of prospective investors on the investment
opportunities and the influence of macroeconomic variables on their investment
decisions and economic production.
1.8 LIMITATIONS OF THE STUDY
The study was limited by the lack of
convergence in the three countries' macroeconomic policies timelines. This
resulted in difficulties in choosing the appropriate scope of the study because
of significant differences in macroeconomic dynamics. This took a lot of time
from the scheduled timeline for the completion of this study. To overcome this
limitation, the study focused on macroeconomic variables common among the
selected SSA countries namely, Nigeria, South Africa and Ghana.
1.9
OPERATIONAL
DEFINITION OF TERMS
Certain terms in the study were
defined in the context of this study and they include:
1)
Macroeconomic
dynamics: This refers to behaviour of the
macroeconomic variables under different environmental policy regimes.
2)
Macroeconomic
variables: These are major indicators (such as
exchange rate, inflation, discount rate and inflation) that signals the current
economic trends.
3)
Discount rate: This refers to the rate of interest the central banks charge to commercial
banks for short term loans. In Nigeria, the discount rate is known as the
monetary policy rate, in Ghana, it is called Central Bank policy rate and Reserve Bank (SARB) repo rate in South Africa.
4)
Exchange
rate: This refers to the rate at which the
domestic currencies for Nigeria (Naira), South Africa (Rand) and Ghana (Cedis)
is converted to a dollar (United States’ currency).
5)
Real
economy: The real economy embodies key components
of gross domestic product agriculture, industry and services sectors.
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