An empirical investigation into the export-led growh hypothesis in Ghana

The export-led growth hypothesis (ELGH) postulates that export growth is one of the key determinants of economic growth. This study goes beyond the traditional neoclassical theory of production by estimating an augmented Cobb Douglas production function in a multivariate format. The inclusion of exports and other variables as inputs provide an alternative procedure to capture total factor productivity (TFP) growth. The study tests the hypothesis by analysing the case of Ghana, using annual data for the period 1960-2007. Using Johansen‟s procedure to test for cointegration, it goes beyond the traditional time series studies by examining empirically the short-term as well as the long-run relationship. The study finds that the ELGH does not hold for Ghana due to the nature of export products; however, the empirical results show that capital formation (investment), labour force and political stability mainly drove Ghana‟s overall economic performance from 1960 onwards. From the review of the literature it was found that the empirical evidence regarding the relationship between exports and growth is not robust for almost all developing countries particularly for Ghana as confirmed by the results of this study, and that exports do not have positive effect on the overall rate of economic growth and could not be considered an “engine of growth” as the ELGH advocates, their impact was quantitatively negative, in both the short and the long-run regressions. The granger-causality test rather revealed a unidirectional causality running from GDP to exports but not vice versa. The evidence presented clearly supports the neoclassical theory of production but, to a larger extent, not the so-called new- vi fashioned economic wisdom (ELGH). Moreover, it challenges the empirical literature regarding the ELGH and expresses serious doubts with regard to promoting exports as a comprehensive development strategy for Ghana. The ELGH is probably beneficial only for a limited number of developing countries, and only to a certain extent but not for Ghana. However, among other things the following recommendations have been made for Ghana. More resources should be committed into the empirical studies of growth determinants particularly issues of export expansion and development to ascertain the findings of the present study. There has not been much research in the areas of export expansion and real GDP growth based on time series analysis (The export-led growth hypothesis). More importantly, effort should be on the diversification strategy to swiftly shift from the primary exports to manufactured and service sectors of Ghana‟s export base. This will help enhance Ghana‟s export performance against the major trading partners whose exports are more valuable and weightier than Ghana whose exports are mainly primary with downward trend fluctuating prices. The negative contribution of export variable in the short run and the long run growth equations indicate a possible gloomy future for Ghana‟s liberalization polices („‟open border‟‟ policies). Thus, liberalization or exports for that matter will only be growth enhancing when the primary products (raw goods) which form the bulk of Ghana‟s exports base is refined and develop the manufacturing and services sector so well to make them more competitive with stable international prices like our trading partners.

Source: KNUST