Determinants of the Long-Run Growth Rate of Libya

Transcription

1 Inernaional Journal of Business and Social Science Vol. 5, No. 5; April 2014 Deerminans of he Long-Run Growh Rae of Libya Mohamed Fargani PhD Candidae - School of Business Universiy of Wesern Sydney Ausralia Absrac This aricle esimaes Toal Facor Produciviy (TFP) for Libya and analyses is key deerminans. According o he Solow (1956) growh model, long-run growh rae equals TFP. Esimaed β-coefficiens show ha rade openness, foreign direc invesmen and developmen of financial secor increase TFP. 1. Inroducion This aricle analyses some key deerminans of he long-run growh rae of Libya. Our framework uses heoreical insighs from he Solow (1956) growh model and he growh accouning framework in Solow (1957). Our empirical mehodology is based on he exensions o hese works by Mankiwe al. (1992) and Senhadji (2000). Empirical resuls for Libya are esimaed for he period 1970 o In Secion II a producion funcion for Libya is esimaed. Using he esimaed facor elasiciies, a growh-accouning exercise is conduced nex o esimae Toal Facor Produciviy (TFP). The srucure of his aricle is as follows. Firs we presen he lieraure review. In secion 2, i is shown he daa used in he esimaion. Then he model and he esimaion echnique are developed in he nex secion for boh Toal Facor Produciviy (TFP) and is deerminans. The empirical resuls are presened and explained in secion 3, and he final secion will be policy implicaions and conclusion. 2. The Producion Funcion and TFP The neo-classical growh model is also known as he exogenous growh model or Solow growh model. In Solow s model, here are wo facors of producion: capial and labour. Technology is exogenous and represened by a producion funcion: Y f ( K, L) The lieraure on he major deerminans of economic growh, based on he general framework of cross-counry regressions is also quie huge. As menioned, he heoreical foundaions of his approach can be raced o he neoclassical Solow-Swan-Ramsey model of growh as exended o incorporae governmen policies, human capial, feriliy decisions and he diffusion of echnology. According o he model, economies converge o he seady sae where he growh raes of he economies are deermined only by TFP growh. The Solow residual, i.e. TFP, represens he effec in GDP of facors oher han physical capial and labour. According o he growh lieraure, we can idenify he following groups of facors influencing TFP in he long run: geography (locaion, climae, naural resources) human capial (educaion, raining, healh) insiuions (governance, democracy, freedom) Culure (language, religion, hisory) Populaion growh Growh accouning is an empirical mehodology ha allows for he breakdown of observed growh of GDP ino componens associaed wih changes in facor inpus and in producion echnologies. The basis of growh accouning were presened in Solow (1957), Kendrick (1961), Denison(1962), and Jorgenson and Griliches (1967). 176

2 Cener for Promoing Ideas, USA As we menioned in previous secion our aim o esimae he deerminans of he long-run growh rae in Libya, our framework uses heoreical based on eiher he Solow(1957) exogenous growh model or he empirical mehodology is based on he exensions o hese works by Mankiwe al (1992) and Sndhadj (2000). Also, he producion funcion is used o explain he deerminans of growh hrough channel of macroeconomic variables which affec economic growh. The neo-classical model saes ha, a any poin in ime, he oal oupu of economy depends on he qualiy and quaniy of physical capial employed, he quaniy of labour employed and he average level of skills of labour force. However, once he economy reaches he full equilibrium level, addiional growh in he sock of capial per worker will only ake place if produciviy increases, eiher hrough enhanced capial sock or hrough improvemens in he qualiy of he labour force. As is common in he growh accouning lieraure, i is useful o firs focus on hree major facor caegories: physical capial and human capial, labour, and he oupu. This relaionship beween GDP and he hree major facor caegories in given period is ypically summarized by a Cobb-Douglas relaionship. Theory and evidence sugges ha several facors can conribue o TFP growh. Economics and policies and insiuions play a key role in increasing TFP, as highlighed in he endogenous growh lieraure. Research and Developmen (R&D) can be imporan deerminans of TFP growh (Romer, 1997). Foreign and direc invesmen can conribue o TFP hrough indirec echnology (Coe, Helpman and Hoffmaiser, 1997). Trade openness can conribue o TFP by allowing an economy greaer access o impors of equipmen and machinery, as well as some domesic firms can be subjeced o ge more compeiion (Grossman and Helpman, 1991). There are many ways of measuring TFP, bu he measure is used in his sudy essenially oupu, physical capial, labour and human capial as par of labour, and following empirical mehodology is conduced by Senhadji (2000). Senhadji(2000) uses he exended Solow model and growh accouning framework of Solow (1957) o conduc a growh accouning exercise for a sample of 88 developed and developing counries. He esimaed TFP as he Solow residual for al 88 counries and examines he deerminans of TFP. In his sudy we use ime series echnique o esimae firs TFP, and hen we will focus on a few key of deerminans of TFP in Libya. In paricular, hese deerminans are he raios o Gross Domesic Produc (GDP) of he following: Foreign direc invesmen (FDIRAT) Tradiionally, FDI is viewed as being a key channel for he ransfer of advanced echnology and superior organizaional forms from indusrialised o developing counries. Furhermore, FDI is believed o generae posiive exernaliies in he form of knowledge o he domesic economy hrough, for insance, linkages wih local suppliers and cliens (s- called backward and forward linkages), learning from nearby foreign firms and employee raining programmes plays an imporan role in driving growh hrough increase in produciviy levels. In addiion, FDI brings echnology and creaes employmen which is also help o adop new mehods of producion and enhances produciviy by bringing compeiion in he economy. Moreover, i brings improvemens in he qualiy of labour and capial inpus in he hos economy. Keller and Yeaple (2003), sudying plans in he U.S. ( ), find a srong link beween FDI and growh. Approximaely 14 per cen of produciviy growh over his period can be aribued o FDI indirec. Trade openness (TRAT) is proxy wih he raio of impors plus expors o GDP (i will affec he growh posiively from he benefis of inernaional knowledge. Also i is believed ha more open economies can grow more rapidly hrough greaer access o advanced echnologies ha conribue o TFP), Governmen expendiure (GRAT), we use governmen expendiure as a share of GDP o observe is effec on TFP. A rain (1989) argues ha governmen can boh foser and hinder he process of economic growh depending upon he naure of is aciviies. Time rend (T), we used ime rend o capure he effecs of oher rended bu ignored variables which may have posiive or negaive effecs. Hasan (2002) sudies Indian manufacuring firms beween 1976/1977 and 1986/1987. He invesigaes how produciviy was affeced by various embodied and disembodied echnology inpus. In erms of former, he generally esablishes a significanly posiive effec of impored new capial goods on boh produciviy and new domesic capial goods (he real effec of he wo is abou he same) 177

3 Inernaional Journal of Business and Social Science Vol. 5, No. 5; April 2014 Inflaion rae (INF) is used o capure he sabiliy of economy, which is hypohesized as necessary for TFP growh. In addiion, inflaion adds o economic growh by generaing employmen or merely increasing he working hours of employed labour in a sense ha he posiive relaionship of inflaion and TFP can be expeced. Akinlo(2005) sudied he macroeconomic facors and oal facor produciviy growh in Sub-Saharan counries. Inflaion was one of he indicaors for macroeconomic sabiliy of oal facor, and he found negaive relaionship beween inflaion and TFP. Oil revenue (OILR), we use oil revenue as Libya exporing counry, oil prices is anoher major exogenous shock ha affec TFP. In he previous secion showed ha he flucuaions of oil price affec economic growh. So we will include Dummy variables (DUM81 or DUM73) 1 is o capure he effecs of reforms, since oil shock ook place afer he oil embargo of 1973 followed by he second oil shock in Oher seleced variables are assumed o affec TFP wih a lag. Senhadji (2000) is he earlies o use he framework of esimaing an augmened producion funcion using ime series daa and including human capial. His specificaion of he augmened producion funcion can be expressed as: a (1 ) Y A K ( H L ) (1) 178 Where Y= oupu, A= sock of knowledge, and i is index for he level of oal facor produciviy a ime, K=sock of capial, L= employmen, H= a human capial formaion hrough educaion and healh services, a and (1-a) are parameers ha measure he respecive elasiciy of capial and labour inpus a ime. Also H is a measure for human capial; hence he produc of (LH) represens skill-adjused employmen (Senhadji, 2000). In our exercise we use he educaion expendiure as indicaor of human capial. Invesmen in educaion promoes more skilled and specialized labour inpu. Since more skilled workers are beer able o adjus in a dynamic, knowledge-based economy, his will resul in enhanced produciviy performance. Sharp(1998) has argued ha wih sable macroeconomic environmen, increased public suppor for raining, higher educaion, research and developmen enhances overall produciviy of he economy. Take he logs of variables in equaion (1), he value of regional TFP can be obained as: lny ln K (1 )ln A (1 )ln( L H ) The decomposiion of real GDP o is differen sources requires geing esimaes for he coefficiens characerizing he producion funcion, ( ) and ( 1 ). The firs sep o ge such esimaes is o log linear equaion (2) o become: ln Y (ln K ln L H ) ln L H Therefore he producion funcion in is firs difference is: ln Y ln A ln K (1 )(ln L ln H ) (4) 3. The esimaion of Toal Facor produciviy (TFP) A crucial sep in he esimaion of TFP is he deerminaion of he relaive share of physical capial o producion, ha is he A parameer in he Cobb-Douglas funcion. Using all he daa and Equaions are menioned above, he esimaed value of A is 0.71, which he -raio in brackes is (24.5), and highly significan. By using his value, TFP is esimaed as follows: TFP ln Y 0.71ln K (1 0.71)(ln H ln K) (5) The average TFP before 1990 was approximaely per cen and his has increased o near 0 during 1990 o Table 1 esimaes of oal facor produciviy growh over he 1962 o TFP growh has been calculaed as he simple residual beween oupu and facors inpu such as labour and capial. 1 A dummy variable aking he value of 1 in he period of oil price saiabiliy, and 0 oherwise is used in he analysis. (2) (3)

4 Cener for Promoing Ideas, USA I can be seen from able 7.1 ha here is clear increase in TFP growh from1960s o 1970s, bu i decreased during he 1980s and 1990s respecively. Tha could be due o he decline on invesmen of physical capial. In 2000s here is increase in TFP growh and ha is relaed o he massive public invesmen in educaion and healh services. Table 1: he average growh of oal facor produciviy in Libya from 1962 o 2009 The period 1960s 1970s 1980s 1990s 2000s Average of TFP Deerminans of Toal Facor Produciviy The basic empirical framework employed in his sudy is based on he deerminans of economic growh, more specifically he macroeconomic deerminans of TFP. We can specify a simple model of TFP as follows: TFP a 1 FDIRAT 2TRAT 3GRAT 4OILRAT 5INFRAT 6T 7DUM 73 (6). Where, are parameers of he deerminans of TFP respecively. Table 2: Augmened Dickey-Fuller and Phillips-Perron Uni Roo Tes from 1962 o Variables ADF PP C C&T C C&T TFP *** *** *** *** FDIRATE FDIRAT *** *** *** *** OILRATE OILRATE *** *** *** *** TRATE TRATE *** ** ** *** *** ** INFRATE INFRATE *** *** *** *** *** *** GRATE GRATE *** *** *** *** Noe: ***, ** and * implies significan a 1%, 5% and 10% level respecively 5.The Vecor Auoregressive (VAR) To invesigae he long-run relaionship beween each pair of variables under consideraion, VAR model will be used o deermine he long-run relaionship. This model was developed by Sims, Sock, and Wason (1990) and Toda and Phillips (1993). They poined ou ha in a sysem ha conains uni roos, sandard Wald saisics based on ordinary leas-squares (OLS) esimaion of level VAR model for esing coefficien resricions have nonsandard asympoic disribuions and canno be applied o mixed inegraion orders. Toda and Yamamoo (1995) proposed a simple procedure requiring he esimaion of an augmened VAR, even when he variables have differen orders. Addiionally, VAR is esimaed wih lag order of (k+d), where (d) is he maximum order of inegraion of he variables in he sysem and k is he VAR. In our sudy wih only 48 observaions i is no possible o deermine he opimal lag order for Vecor Auoregression wih 9 variables even if we use an iniial lag order of 2. Therefore, we have used only hree crucial raios namely, FDIRAT, GRAT and TRAT saring wih five lags, o deermine he order of VAR model. We using informaion crieria such as: AIC and SBIC o deermine he opimal lags. All he seleced mehods indicaed ha a firs-order VAR is opimal. Equaion (6) is esimaed hrough unresriced VAR model wih variables ha are saionary and a lag number seleced by AIC and SBIC. 179

5 Inernaional Journal of Business and Social Science Vol. 5, No. 5; April 2014 Once he VAR model wih opimal lags has been seleced, we need o esimae long-run coefficiens. The coefficiens on he forcing variables mus be significan o prove he long-run relaionship beween he variables under invesigaion. Then he appropriae disribued lag regression model is disribued lag model wih only curren and pas value of he seleced explanaory variables (i can be seen from able 3). Table 3 repors he ess of he unresriced VAR model, and he invesigaion of he deerminans of oal facor produciviy produced ineresing resuls ha are broadly consisen wih oher previous sudies. Using a firs-order VAR, he esimaed equaion is re-esimaed afer deleing he insignifican variables. These esimaes are impressive and all he coefficien have he expeced signs and are significan a he convenional levels of 5 or 10 percen excep he OILRAT which is insignifican. The TRAT, GRAT and FDIRAT have a posiive and significan impac on TFP. Also wih rade openness, rade become srongly significan, and ha implies rade openness is one of he key deerminans of TFP in Libya. On he oher hand, inflaion rae has a negaive and significan effec on TFP. The fac is ha high and unsable prices canno creae economic uncerainies and discourage invesmen in Libya. OILRAT is no significan sugges ha i doesn have any effec on TFP. As we menioned in he previous secion he wo dummy variables are included o capure he effecs of reforms. The dummy variables are (DUM73) and (DUM81). When we include DUM81 o our analysis, he coefficien for DUM81 implies ha here is no effec on TFP. On he oher hand, he dum73 implies ha reforms in Libya have enhanced TFP. Table 3: Esimaed equaion (6) for TFP and is deerminans for period 1962 o 2009 by using VAR mehod TFP TRAT OILRAT INF GRAT FDIRAT TFP(-1) 1.057*** * * [6.885] [-1.109] [1.071] [-1.872] [-1.621] [1.320] TRAT(-1) 6.107** [2.159] 0.601*** [15.231] [1.411] [1.234] * [-1.712] 3.812** [2.107] OILRAT(-1) [-0.712] [0.158] 0.972*** [9.697] * [-1.613] 0.486*** [4.534] 1.182* [1.610] INF(-1) * [-1.873] [-0.274] ** [-2.490] [1.362] [-0.245] [0.096] GRAT(-1) 0.049* [1.722] * [-1.729] [-0.130] [0.573] [0.863] [-0.338] FDIRAT(-1) 0.034* [1.643] 0.008* [1.623] 0.031* [1.920] * [-1.867] 0.043** [2.007] 0.325** [2.058] C ** [-2.604] 0.005*** [3.487] 0.277* [1.688] 5.525** [2.366] [0.724] * [-1.655] T * [-1.854] *** [-3.232] [1.294] [0.839] [1.035] 0.083** [2.333] DUM * [1.669] [-0.410] [-0.632] [0.645] [1.032] ** [-2.047] Adj. R-squared F-saisic [0.001] [0.0001] [0.0000] [0.091] [0.000] [0.001] AIC Noe: ***, ** and * implies significan a 1%, 5% and 10% level respecively. The VAR opimal lag srucure was deermined by AIC and SIC. Conclusion and Policy implicaions This sudy develops a heoreical model for produciviy deerminans in developing counries following he advices and recommendaions of Senhadji (2000), aking ino accoun wo effecs of reforms; 1973 and To do so he key macroeconomic variables in he behavioural equaions were esed for saionariy and nonsaionariy. To es he saionariy of he Libyan ime series daa he ADF and PP ess wih an inercep erm and a linear rend indicaes ha he radiional uni roo es were able o rejec null-hypohesis ha seleced variables have uni roo. 180

6 Cener for Promoing Ideas, USA The economeric mehod for esimaing he share of physical capial is based on esimaing an aggregae producion funcion. Moreover, he esimaed value of A is 0.71 which is relaively higher han he usual values of 0.4 o 0.5, used in growh accouning exercises.afer he long run relaionship was esablished he long run relaionship beween TFP and macroeconomic variables were esimaed by unresriced VAR approach. In addiion, his sudy looks a TFP series in he broad conex of he Libyan macro-economy during four disinc phases saring from he 1962 unil The behaviour and he growh of TFP have found o vary from one phase o anoher. In hissudy we found some key deerminans of TFP for Libya. By using one lag of he raios of GDP of rade opened, foreign direc invesmen and governmen expendiure have significan posiive effecs. Economic reforms from1973 have also had a significan posiive effec. Inflaion rae has negaive effecs on TFP. Alhough he average rae of growh of per capia oupu during 2000 o 2009 was 3.3 per cen, he average of TFP was 0.17 percen. Therefore, i is no possible o susain his growh rae in he long run because i is enirely because of facor accumulaion. To increase his growh rae o double he per capia in he fuure, i is necessary o increase TFP and mainain he conribuion of facor accumulaion o he growh. Since facor accumulaion proves he mos imporan componen of oupu growh, economic policies designed o increase he paricipaion of labour supply which can spur economic growh. These policies o increase TFP can be implemened in he shor o medium erms. Therefore policy makers should focus on policies ha improve rade openness because his will increase TFP in Libya. References Dauerlauf, S., Johnson, P. and Temple, J. (2005) Growh economerics, in Handbook of Economic Growh, Vol. 1, Chap. 8 (Eds.) P. Aghion, and S. Durlauf, Norh Holland, Amserdam, pp Easerly, W. Levine, R. and Roodman, D. (2004) New daa, new doubs: a commen on burnside and Dollar s Aid, Policies, and Growh (2000), American Economic Review, 94, Mankiw, N. G., Romer, D. and Weil, D. (1992) A conribuion o he empirics of economic growh, Quarerly Journal of Economics, 107, Senhadji, A. (2000) Sources of economic growh: an exensive growh accouning exercise, IMF Saff Papers, 47, Solow, R. (1956) A conribuion o he heory of economic growh, Quarerly Journal of Economics, 70, Solow, R. (1957) Technological change and he aggregae producion funcion, Review of Economics and Saisics, 39,