FINANCIAL DEVELOPMENT AND AGRICULTURAL SECTOR IN GHANA: AN ECONOMETRIC ANALYSIS

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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Item Type: Ghanaian Postgraduate Material  |  Attribute: 69 pages  |  Chapters: 1-5
Format: MS Word  |  Price: GH50  |  Delivery: Within 30Mins.
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