The effects of trade and finance on industrial growth in Zambia, 1985 – 2016.

Abstract

Post-industrial prosperity requires industrialization, otherwise the economy becomes unsustainable. This is evident in the budget and current account deficits of developing countries that attempt to import high end consumption commodities without industrial bases to finance them. As such, Zambia like other developing countries has over the past half-century attempted to industrialize, albeit unsuccessfully. The relatively rapid industrialization of the newly industrialized countries has shown that not only can countries move from underdevelopment to development but they can do so in a relatively short period provided their trade, finance and industrial policy is effective and coordinated. This study attempted to address the foregoing by assessing the effects of trade and Finance on industrial growth in Zambia. Time series data running from 1985 to 2016 obtained from the World Development Indicators were used, utilizing Stata 14 for analysis and Microsoft Excel for data management. The literature identified trade openness as the appropriate trade indicator and FDI and lending interest rate as indicators for foreign and domestic finance, respectively. Industrial growth was primarily indicated by manufacturing share of GDP with broad industry share of GDP being a comparative indicator, culminating in a parallel analysis of two models. Stationarity tests found that the variables were integrated at order one, optimal lag tests further identified four lags for each model while Johansen’s tests for cointegration found one cointegrating equation for each model, prompting the fitting of Vector Error Correction Models and further Granger Causality analyses. The generated models passed the relevant postestimation tests of normality, autocorrelation, stability as well as specification. Trade openness and lending interest rate were found to individually granger cause industrial growth in the short run. On the contrary FDI was not found granger cause industrial growth. Further, long run analysis showed that trade openness had a positive long run relationship with industrial growth while FDI and lending interest rates were found to have negative long run relationships with industrial growth. Furthermore, comparative analysis showed that while FDI granger caused broad industry it did not granger cause manufacturing, a result rationalized by the composition of FDI in Zambia. The study made three key recommendations; efforts towards FDI should be spread across mining and non-mining sectors to facilitate industrial growth and promote diversification. Further, international trade should be promoted as it has positive effects on industrial growth. Lastly, policy needs to keep interest rate low to enhance industrial growth. Key Words: Industrial Growth, Trade, Finance, Vector Error Correction, Zambia