ASSESSING THE CAUSAL DYNAMICS BETWEEN AGRICULTURE AND ECONOMIC GROWTH IN GHANA

Abstract

This study investigated the causal dynamics between the agriculture output and economic growth in Ghana through historical economic policy adjustments spanning from 1960 to 2016. Results indicate that, the contribution of agriculture sector output to the Ghanaian economy has been declining despite several agriculture-led economic growth policies that have been implemented, including the very recent Planting for Food and Jobs (PFJ). Specifically, the study employed Johansen multivariate cointegration test and a Vector Error Correction model (VECM) as the estimation techniques. Results of the study revealed that Real Gross Domestic Product (RGDP), agricultural output, Gross Capital Formation, trade, inflation and labor force have a long-run equilibrium relationship based on the Johansen Multivariate cointegration test. The Error Correction Term (ECT), which shows the reconciliation of the variables over time right from the disequilibrium position to the period where equilibrium is restored showed that, the speed of adjustment of the variables towards their long-run equilibrium path was relatively high estimated as 77.076%. The short run estimates revealed that agricultural output positively influence RGDP indicating that agriculture is still an engine of economic growth in Ghana. Also, capital formation, trade and labour were found to have a positive correlation with RGDP. In order to examine the direction of causality between agricultural output and economic growth within the vector error-correction model (VECM), the pairwise granger causality test was employed. Test results showed a unidirectional causality between agriculture and economic growth. There exists a causal flow from agriculture to economic growth but no causal flow from general economic growth to agriculture. This implies that while agriculture plays a crucial role in promoting economic growth, there has not been enough support to the sector from general economic growth in order to boost agricultural productivity. Based on this, it is recommended that policy makers should pay attention to the holistic and sustainable development of agriculture sector into their policy modelling in promoting sustainable economic growth.