ABSTRACT
This study was purposefully carried out to determine the
effect of financial development on Agricultural value added as a fraction of
GDP. Time series data was employed covering a period from 1961 to 2014. The
study also specifically investigated the trend dynamics (short and long run) of
financial development and Agricultural value added as a fraction of GDP
relationship. For the trend analysis, ARDL Bound test and FMOLS Wald test were
used. Three different regression estimators were used for the impact analysis
in order to derive a more convincing results. These are; Fully Modified
Ordinary Least Square (FMOLS), Autoregressive Distributed Lag (ARDL), and
Canonical Cointegration (CCR). The variables employed in this study are
Agricultural value added as a fraction of GDP, Broad money supply as a fraction
of GDP, Domestic credit to private sector as a fraction of GDP, Agricultural
machinery and tractors per Agricultural land and rural population as a fraction
of total population. Based on the ARDL coefficient diagnostic test, the result
shows, there exist a short-run relationship among the variables and were
cointegrated in the long run. Same was the case in the FMOLS Wald test when the
variables; Agricultural value added fraction to GDP, M2 fraction to GDP,
Domestic credit to private sector fraction to GDP and Agricultural Machinery
and tractors per Agricultural land were employed in the model with FINSAP inserted
in the model as a deterministic variable. The results from ARDL, FMOLS and CCR
all indicated that increased financial development (when Domestic credit to
private sector as a share of GDP was used as proxy) leads to a fall in
Agricultural value added share of GDP. However with Broad Money Supply share of
GDP, it was positively related to Agricultural value added per GDP but
significant only in the ARDL estimate. This means, the effect depends on the
measure used. These findings concretized the notion that, the best way to
improve Agricultural output in Ghana is through subsidy and credit support from
Government.
CHAPTER ONE
INTRODUCTION
1.0 Background of the Study
There is a lot of work in the
literature that collectively attest to the finance-growth nexus. (World Bank,
1989). These works albeit differences in the direction of the causation, which
is whether it is supply leading or demand driven do show a causation between
them.
Many authors like McKinnon (1973),
Shaw (1973), Fry (1988), Schumpeter (1993) and Levine (2004) argue that
financial growth stimulate economic growth through enhanced savings
mobilization, capital accumulation and investment. They also argue that this
growth in the financial sector means an increase in financial institutions and
services which foster competition in service delivery that ensures efficient
disbursement of funds to productive sectors of the economy.
On the other side also are authors
like Greenwood and Jovanovic (1990), Arestis and Demetriades (1991), Robinson
(1952), Lucas (1988), who believed in demand stimulating financial development
argued in the opposite, which is, it is rather the expansion of economic
activities that stimulates or catalyze the spring up of financial institutions
and intermediations. These works however does not tell us to what extent does
financial development affect some important component of economic growth like
agriculture. A scrutiny to the best of the researcher‘s ability shows few
empirical works exist on this nexus (financial development and agriculture) and
absolutely none in the researcher‘s home country, Ghana.
Ghana, after the financial sector
reform in the 1980s proposed by the International monetary fund saw a rise in
both the number of financial intermediaries and financial services due to
‗free‘ entry and relatively liberalized interest rate. This rise saw an
increase in financial development indicators like M2 to GDP and Domestic credit
to private sector to GDP ratios. (Bawumia, 2010)
According to the World Bank ―M2
which is Money and Quasi Money comprise the sum of currency outside banks,
demand deposits other than those of the Central Government, savings deposit,
time deposit and foreign currency deposits of resident sectors other than the
central government‖. A World Bank (2013) report indicated that M2 to GDP ratio
growth was comparatively steady at 21% from 1964 to 1974, then went up for some
time in the middle of 1970s, peaked at 29% in 1976 and strongly fell to 11.3%
in 1983.
According to a data from the World
Bank, domestic credit to private sector as a percentage of GDP recorded its
lowest value (1.54%) in 1983 and highest ever was recorded in 2014 at 19.89%.
From the data, the indicator experienced a relatively higher and stable rise
from the period 1999 all the way to 2014. All the years for instance recorded a
percentage point above 10 with 2008, 2013 and 2014 recording the highest point
of 15.83%, 16.07% and 19.89% respectively.
A country that is experiencing a
sustained rise in this financial depth indicator ceteris paribus, is on a
trajectory of improving economic growth and development. This is intuitively so
because, rising domestic credit to private sector as a GDP percentage means,
increasing domestically mobilized financial resources that is extended to the
private sector. More funds in the hands of the private sector stimulate growth
through a rise in GDP. This is so not only to the fact that, the private sector
is a component of aggregate demand but because the sector is seen by economist (especially capitalist) as the
engine of growth due to its ability to create employment, produce goods and
services utilized by households and to some extent firms and ultimately increase
aggregate demand.
Agriculture in Ghana was a major
source of wealth and income and the largest sector in terms of contribution to
GDP (about 50%) for decades before been dominated recently by the service
sector. Cocoa alone in 1955 provided about three- fifth of total export
earnings (Issahaku, 2012). It is currently the second largest contributor
employing the highest percentage of the citizens, serving as a source of
foreign exchange, and providing food for citizens as well as raw materials to local
industries. The importance of agriculture in any economy especially developing
countries like Ghana can never be over emphasized due to its ability to
eradicate poverty, ensure food security, create employment and foreign exchange
which strengthens the trade balance and ultimately the balance of payments.
Thus the multiplier effect of an improved agriculture output or investment is
very healthy for economic growth. Enu in 2014 found a positive relationship
between agriculture sub-sectors in Ghana and economic growth with cocoa haven
the most effect. Amidst factors like land, labor, human development and capital
that affect agriculture output, capital arguably stands out as the most
important factor that affect the real sector. Developing countries greatest
challenge is capital and human development but research conducted by (Dehejia
and Muney,2007) show a positive relationship between finance and human
development meaning financial development influence human development
positively and therefore, finance among the factors is well suited as an
explanatory variable for agriculture investment.
Intuitively, credit has an
influence on agriculture output since inputs and factors like seeds,
weedicides, pesticides and land, labour respectively are acquired by finance.
Increased availability and accessibility to credit all things being equal means
farmers can increase their investment through the acquisition of more inputs
and factors of production as well as shifting from labor intensive to medium
and highly sophisticated machineries.
Empirical evidence on this
correlation shows a conflicting sign, with (Afangideh, 2009 and chisasa, 2014)
works showing a positive correlation betwen finance and agriculture whiles
(Dehejia and Muney, 2007) established an opposite relation between finance and
farming in the U.S.
This work (financial development
and agriculture sector in Ghana) seeks to assess the financial development
(Domestic credit to private sector to GDP ratio and M2 to GDP ratio) impact on
agriculture growth in Ghana by running multiple regression analysis.
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