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African J. Economic and Sustainable Development, Vol. 1, No.

1, 2012

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Exploring sectoral elasticity vis--vis per worker income with a focus to agriculture: a study of Sub-Saharan Africa Ronald Ravinesh Kumar*
School of Government, Development and International Affairs, Faculty of Business and Economics, FBE Green House, Laucala Campus, University of the South Pacific, Suva, Fiji E-mail: kumar_rn@usp.ac.fj *Corresponding author

Radika Kumar
Ministry of Foreign Affairs and International Cooperation, Economics Division, Level 2, South Wing BLV Complex, 87 Queen Elizabeth Drive, Nasese, Suva, Fiji E-mail: radikakumar@gmail.com
Abstract: In this study, we explore the contribution from sectoral share towards per worker income in the Sub-Saharan Africa (SSA) region over the years, 1980 to 2009. Within the last three decades, agriculture and services did not contribute positively towards growth in per worker income. Manufacturing sector on the other hand, had a transcending effect with a positive contributory power (0.31%) towards the long-run growth and sustainability of the region. Therefore, targeted sub-sectoral policy reforms to strengthen backward-forward integration of agriculture and services sectors with manufacturing operations whilst taking into account the historical diversity of the region are vital matters for development and growth discourse in the region. Keywords: agriculture; manufacturing; services; economic growth; ARDL bounds approach; Sub-Saharan Africa; SSA. Reference to this paper should be made as follows: Kumar, R.R. and Kumar, R. (2012) Exploring sectoral elasticity vis--vis per worker income with a focus to agriculture: a study of Sub-Saharan Africa, African J. Economic and Sustainable Development, Vol. 1, No. 1, pp.2748. Biographical notes: Ronald R. Kumar is affiliated with the School of Economics, Faculty of Business and Economics at the University of the South Pacific, where he works as a Teaching Assistant. He was a recipient of the Sasakawa Young Leaders Fellowship Foundation (SYLFF) award in 20092010 by the School of Government, Development and International Affairs under the auspices of Tokyo Foundation. He holds a MCom in Economics and currently, he is pursuing MA in Development Studies. His specific area of research includes migration, development and growth economics in developing countries. Copyright 2012 Inderscience Enterprises Ltd.

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R.R. Kumar and R. Kumar


Radika Kumar is affiliated with Ministry of Foreign Affairs and International Cooperation in the Government of Fiji Islands, where she works as an Economic Planning Officer and she is currently pursuing her MCom in Economics from the School of Economics at the University of the South Pacific. Her area of research is on trade in services with particular focus to Pacific Island countries.

Introduction

The African region is a composition of fifty-three individual countries of which 48 countries comprise the Sub-Saharan Africa (SSA) region. The countries within the African region have experienced varied level of progress which is characteristically distinguished by the pace of industrialisation, oil exports, and fragility due to socio-political events. Nevertheless, the challenges facing many of them are complex, ranging from low productivity to high unemployment and from undeveloped middle class to poor health and abject poverty. Although about a quarter of the regions economies are performing well, the majority of SSA countries are still lagging behind in growth, voice and democratic accountability, control of corruption, political stability, rule of law and lack of government effectiveness towards addressing environmental diversities and promoting social choices which are critical to social and economic progress (Sen and Scanlon, 2004; Sen, 1999, 1997). Further, as noted by many researchers and scholars (Nevile, 2007; Alesina, 2003; Sen, 2000; Stiglitz and Squire, 1998; Rostow, 1985; Amin, 1972, among others), the exclusion from the credit market, gender related-related inequalities and unfavourable labour markets marred by elements and presence of colonialism and ethnic conflicts impinge on sectoral development and critical economic activities in the region. Subsequently, in the height of increasing food prices and the need to expedite productivity and economies of scale in agriculture viz. manufacturing and services sectors within the SSA region, the paper explores the contributory powers from these three key sectors within the augmented Solow model (Solow, 1956) framework with insights from the some of the prominent pioneers of growth theory (Domar, 1961, 1952; Harrod, 1959; Schumpeter, 1933). The study is of interest in at least three ways. First, the contribution of sectors towards the overall economic growth is underscored. Secondly, the study provides a sectoral approach to policy discourse which can be targeted for long-term development of the region. Thirdly, the study outcomes relooks, if not reminds the poignant history and development in agriculture vis--vis other sectors in the African region. The rest of the paper is set out as follows: a brief literature survey is provided exploring the development patterns in Africa with focus to agriculture development, followed by a short analysis on the trends and developments in sector performance. The fourth section discusses the data, methods and results. Finally, the paper is concluded with some policy directions for the SSA region.

Exploring sectoral elasticity vis--vis per worker income with a focus to agriculture

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A brief literature survey

Agriculture development has been considered as the engine of growth for many low income and developing countries in terms of its contribution in providing cheap food, raw materials, labour, savings, and consequent spill over effect on demand for non-agricultural commodities (Staatz and Dembele, 2008; Diao et al., 2006; Tiffin and Irz, 2006; Bravo-Ortega and Lederman, 2005; Doward et al., 2004; Dorosh and Haggblade, 2003; Gollin et al., 2002; Timmer, 2002; Delgado et al., 1998; Lipton, 1977). Further, agriculture has the export generating capacity, particularly for economies that are in their early stages of development and heavily reliant on primary resources (Dethier and Effenberger, 2011; Johnston and Mellor, 1961; Lewis, 1954). It is also argued that the relationship between agriculture and overall economic growth is dependent on the degree of openness, productivity in agriculture sector versus non-agriculture, and the pace and effectiveness of industrialisation strategy (Gollin, 2010; Dercon, 2009). To emphasise the impact of agriculture on economic progress, various researchers (Bezemer and Heady, 2008; Diao et al., 2006; Mosley, 2002; Lipton, 1987) compare and differentiate the African agriculture development with the East Asian. They comparatively assess the agricultural expenditure with the price regimes, macroeconomic policies, political stability, health, education, and infrastructure in these regions. While few recent empirical analysis have shown contrary views (Gardner, 2005), quite a lot of studies have found agriculture as a catalyst to long run growth and development for many developing countries (De Janvry and Sadoulet, 2009; Self and Grabowski, 2007). However, balancing agriculture and industry (presumably manufacturing and services) is an important yet a difficult dimension of development policy given the fact that multi-dimensional causality between agriculture, manufacturing and services exists, which are largely influenced by pricing and elasticity of resources and products, relative differences in farm size, (incomplete) missing markets for insurance and credit or links to financial markets, limited market access and (imperfect) market information, insecure property and usage rights, unequal income distribution, access and availability of public goods, pace of research and innovation, labour market distortions, degree of rural-urban investment and climatic conditions (Dethier and Effenberger, 2011; Christiaensen et al., 2010; Restuccia et al., 2008; Binswanger and Deininger, 1997; Stiglitz, 1987; Bauer, 1956, 1955). Within the African context, Amin (2004, 2001, 1984, 1983) in his various studies provides the historical diversity of Africa highlighting a gamut of factors and issues explaining the (under)development of African region viz. agriculture development, many of which by and large, are tied to the colonial and (unfair) trade systems. Furthermore, looking at the historical diversity of Africa, Amin points out that African society cannot be reduced to a single mode of production and therefore, for better understanding, need to be segmented as: 1 2 3 4 primitive community tributary slave-based small-scale trade

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R.R. Kumar and R. Kumar the capitalist all of which overlapping across different times, to vividly characterise the African development, resource (gold, diamonds and copper) depletion, and exploitation of (forced) cheap labour which not only made modern Africa a dependent peripheral societies excluded at a global level but further exacerbated the polarisation of wealth at the centre.

Moreover, the individual countries in the SSA region are too small, heterogeneous and many of them lack the necessary resources to achieve economies of scale in the production and marketing of their products and therefore need to work cooperatively, through economic and monetary integration, as a region if they are to achieve significant levels of economic growth and compete in the international markets with the super powers and other emerging regional blocs (Staatz and Dembele, 2008; Nnanna, 2006). Notably, a stable and credible policy environment, an open and competitive economy, and a focused public sector are instrumental to development but high levels of corruption, volatility in real exchange rate distortions, and a lack of rule of law are most detrimental to investment and productivity (Stiglitz and Squire, 1998). Nnanna (2006) highlights that the demand management strategies paired with keeping an over-valued exchange rate regime have been equally detrimental to the development of agriculture in African countries. Despite the evidence of growth in aid inflows to SSA region (c.f., USAID, 2011), the share of aid for agriculture development has fallen dramatically since 1980s, much of which have been channelled in the areas of political reforms (Shleifer, 2009; Goldsmith, 2001). Evidently, all SSA countries spend less than 10% of their aid budget on agriculture, thus further threatening the sustainability of total factor productivity (the amount of output per unit of input of total factors used in the production process) growth in the coming years (Fan et al., 2009). Noting the International Monetary Funds (IMFs) failure to support recovery of many developing economies, Kapur (1998) points out that most of the IMF programs in Africa at the end of the 1970s were not only ill-advised but also overlooked the burgeoning problems which emerged from the adverse socio-political activities. Similarly, Plank (1993) highlights that the structural and sectoral policy reforms of IMF and World Bank have discredited traditional notions of sovereignty in many parts of Africa which had adverse effects on agriculture and other productions. Stiglitz (1999) also puts some blame on the World Banks failure to recognise that most low-income countries, particularly in Africa, did not have access to international capital markets, which resulted in funds flowing disproportionately to a few selected countries, sectors (excluding health and education) and farmers particularly to finance infrastructure from which cost (of lending) can be recouped. Moreover, Stiglitz (2002), using examples from SSA region among other developing countries, condemns the IMFs structural reform policies which further exacerbated the existing income inequalities and wealth distribution, poverty and slow progress towards growth. Thompson (2004) on the other hand, in the context of World Trade Organizations (WTO) promotion for free-trade with respect to African Growth and Opportunity Act (AGOA), highlights that the latter had no positive impact on the macroeconomic performance and economic conditions of workers in many of the of African countries. However, the criticisms and failures of multinational corporations highlighted by Stiglitz (2002) are challenged as well as explicated by Ghosh (2002). Ghosh, although acknowledging the negative effects some developing countries experienced in their effort

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to recover, counter argues that the sources of these failures were mainly due to the inherent weak internal governance structure of the countries from the past, and therefore propose that developing regions need to: a b c d have an institutional framework for global macroeconomic management have a new and better international financial architecture to deal with the problems of crisis management and prevention integrate with the world economy with the aim to promoting development (c.f., Lawrence, 2007) whilst disciplining the Trans National Corporations (TNCs) have in place international rules and institutions that govern cross-border movement of people exacerbated by globalisation.

In regards to the manufacturing sector development and growth, Rodrik (2008) highlights that the former has enabled skill upgrading, capital deepening and enhancement of worker productivity and therefore has a positive contributory power to increase income and employment. Further, Rajan and Subramanian (2011) underscore the use of aid in developing the manufacturing sector and characterise manufacturing exports as a vehicle for growth take-off besides having a transcending effect on economic activities. Moreover, many researchers have identified services sector to have a critical role in economic development with greater benefits evident in cases where the services are relatively cheaper due to low wage cost and speedy development of key sectors in the economy (Banga and Goldar, 2004; Kongsamut et al., 2001; Francois and Reinert, 1996; Bhagwati, 1984; Chenery, 1960). However splintering effect (that is, when indirect production activities are outsourced thus raising the demand for producer services as intermediate input) has influenced the growth of services sector (Bhagwati, 1984). Further, in some small and low income economies where sectors such as banking and finance are not fully developed or is affected by massive capital outflows due to large foreign ownership, the effect on growth is either negative or nil (Kumar, 2011a, 2011b). On the other hand, in some relatively well developed and developing and small economies, services like electricity, information and communications technology (ICT), tourism, financial development and remittance inflows (trade in services) are critical drivers of growth (Jayaraman et al., 2011, 2010, 2009; Jalava and Pohjola, 2008).

Trends and patterns in sectoral trade

Agriculture is critical for both human welfare and economic growth in Africa. In SSA, roughly two-thirds of the population live in rural areas and are dependent on agriculture for their livelihoods. However, agriculture sector overall had suffered poor performance over the last three decades despite having momentary trajectory of good performance. The growth in population and consequent demand for food has resulted in expansion of food, however at the cost of deforestation and land degradation. Low farm productivity in Africa also has been attributed to the use of traditional crop varieties, shrinking plots of land, scarce and unreliable water supply, crop losses from pests, diseases and natural disasters, inequitable land-distribution patterns besides high proportion of population being landlocked, inefficient and unfair markets and poor agricultural and

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transportation infrastructures (Pratt and Yu, 2009; Toenniessen et al., 2008; Collier and Gunnings, 1999). Table 1 shows the key indicators of the SSA region. In Table 2 to Table 4, the top ten sectoral shares (agriculture, manufacturing and services) are listed with the SSA region as a whole.
Table 1 Selected key indicators for SSA 23,613.4 44.2 840.3 64.0 1,062.0 5.4 8.7 13.5 0.9 23.4 22.4 146.9 46.1

Land area (sq. km. 000) Agricultural land (% of land area) (20032007) Population (2009: millions) Rural population (% of total population) (20052009) Per capita GDP (US$) current prices (20052009) Annual growth rate in percent (20062010) Annual inflation in percent (GDP deflator) (20052009) Fiscal balance of Central Government as percent of GDP (20052009) Current account balance as percent of GDP (20072010) External debt as a percent of GDP Private financial flows (net in billions USD) (20062010) Reserves (in billions of USD) (20062010) Ratio of reserves to imports of goods and services (20062010) Source: World Bank (2010) and IMF (2011) Table 2 Year Central African Republic Sierra Leone Comoros Ethiopia Congo, Dem. Rep. Rwanda Malawi Ghana Mozambique Gambia Sub-Saharan Africa Agriculture share (% GDP) 19851994 46.9 42.6 38.9 58.6 38.4 37.8 43.4 46.5 40.5 29.8 18.6 19952004 53.1 51.8 45.5 50.1 49.8 41.2 36.2 40.7 29.4 31.6 17.9 2005 54.4 51.6 51.0 46.7 45.5 38.7 32.9 40.9 27.0 32.1 16.9 2006 55.0 51.1 45.2 47.9 45.7 38.6 34.2 30.4 27.9 30.3 16.2 2007 53.9 49.9 45.3 46.2 42.5 35.6 34.3 29.0 27.7 28.7 14.9

2008* 52.9 50.2 45.8 43.8 40.2 37.4 34.3 31.0 30.5 28.5 11.9

2009 55.5 51.4 45.2 50.7 42.9 38.7 35.9 31.7 31.5 27.5 12.3

Note: *Ranked by 2008 figures. Figures in range of years are averages calculated by the authors. Source: World Bank (2010)

Exploring sectoral elasticity vis--vis per worker income with a focus to agriculture Table 3 Year Swaziland Mauritius Lesotho Cote dIvoire South Africa Madagascar Malawi Mozambique Namibia Senegal Sub-Saharan Africa Manufacturing share (% GDP) 19851994 31.8 23.8 15.5 17.9 22.3 10.7 17.2 10.0 12.7 14.9 16.9 19952004 39.8 23.0 19.3 19.3 19.5 11.7 13.4 12.3 12.4 16.3 14.7 2005 40.0 19.8 20.5 19.3 18.5 14.0 13.9 15.5 13.6 15.2 13.1 2006 43.4 20.0 21.8 17.8 17.5 14.2 13.6 16.0 15.6 14.2 12.6 2007 44.4 19.8 20.3 17.5 16.9 15.5 14.1 15.4 17.0 14.3 13.9 2008* 44.4 20.1 19.1 18.0 16.5 15.3 14.2 14.0 13.7 12.7 13.4

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2009 44.4 19.4 17.0 18.0 15.1 15.4 14.5 13.6 14.7 12.7 12.8

Notes: *Ranked by 2008 figures. Figures in range of years are averages calculated by the authors. Source: World Bank (2010) Table 4 Year Seychelles Cape Verde Mauritius South Africa Kenya Eritrea Senegal Madagascar Gambia Lesotho Sub-Saharan Africa Services share (% GDP) 19851994 77.7 65.2 54.3 55.4 50.5 60.2 56.6 55.8 56.7 42.7 49.4 19952004 70.1 71.8 61.2 63.9 52.0 59.3 57.3 57.1 54.8 46.0 52.6 2005 75.6 74.0 66.4 66.2 53.7 56.9 59.5 55.9 54.6 56.3 51.5 2006 77.1 73.2 66.9 66.0 54.8 57.2 62.2 56.4 55.5 53.5 51.9 2007 77.7 73.0 67.1 65.5 65.0 56.5 63.0 56.4 56.5 52.8 53.0 2008* 77.7 72.1 66.4 64.3 63.9 63.3 62.8 57.5 56.4 54.3 55.9 2009 78.3 70.7 66.6 65.8 62.1 63.4 61.7 58.5 57.1 57.5 57.4

Notes: *Ranked by 2008 figures. Figures in range of years are averages calculated by the authors. Source: World Bank (2010)

The Table 2 to Table 4 shows the countries within the SSA region with different rankings for the sectoral shares to GDP. For instances, while agriculture (as a percent of GDP) is highest in countries like Central Republic Africa, Sierra Leone, Comoros and Ethiopia (Table 2), manufacturing (as a percent of GDP) is topped by Swaziland, Mauritius, Lesotho and Cote dIvoire among other countries (Table 3). Similarly services (as a percent of GDP) are highest in countries like Seychelles, Cape Verde, Mauritius and South Africa among others (Table 4). Overall, comparatively, manufacturing (as a

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percent of GDP) has caught-up and even exceeded the agriculture (as a share of GDP) between 20072009 periods. The growth in GDP in the SSA region has been positive since 1995 and remained stable despite the current global economic downturn (Table 5). Similar trend is noticed in the growth of per capita GDP, except for 2009. In line with the positive trends in GDP growth, manufacturing growth remained positive and relatively higher than agriculture and services between the 1970 to 2006 periods. On the other hand, FDI inflows growth rate have been largely negative, supported by declining trends in investment. Urban population and overall population growth has been on the rise while growth in energy use indicates mixed trends.
Table 5 Year Agriculture (%GDP) Domestic savings (%GDP) energy use per capita Exports (%GDP) FDI, net inflows GDP GDP per capita Imports (%GDP) Industry (%GDP) Investment (%GDP) Manufacturing (%GDP) Population (%) Services (%GDP) Urban Population Annual percentage growth of selected indicators for SSA region 19651974 19751984 19851994 19952004 2005 2006 2007 2008 2009 n.d. 1.3 1.3 2.1 2.4 1.9 3.5 0.0 4.4 0.9 3.1 3.9 3.6 3.5 3.5 3.8

0.7 5.3

0.5 1.0 n.d. 5.0 2.2 1.3 4.3 n.d. 7.0 2.6 4.7 5.1

0.7 1.0 9.9 2.1 0.8 0.9 2.8 2.7 3.6 2.9 3.0 4.8

0.8 1.0 9.8 1.6 1.1 1.3 0.3 1.5 0.6 2.8 1.3 4.5

0.3 1.1 5.1 3.9 1.2 0.9 3.9 0.1 3.4 2.6 4.3 4.1

1.0

0.5

2.1 0.1 n.d.

4.5 2.2 1.4 6.2 18.8 35.7 8.1 23.1 4.8 10.3 5.7 3.2 6.3 3.7 6.5 3.9 5.1 1.7

2.5 0.8

4.4 3.9 2.6 9.5 17.1 6.2 7.0 7.9 3.9 2.7

4.4 3.7 7.3 7.0 2.4 5.7 2.5 5.8 3.8 5.7 2.5 2.2 3.9 6.2 2.5 6.9 3.9 3.6 5.2 2.5 6.1 3.9 2.5 1.8 3.8

Source: World Bank (2010)

Moreover, disaggregating public expenditure on various sub-sectors of the SSA region, it is evident that the largest share (as a percent) is attributed to fuel and energy production, manufacturing, construction and general administration, while the least is in transport and communication (services) and agriculture between 2000-2005 periods (Table 6).

Exploring sectoral elasticity vis--vis per worker income with a focus to agriculture Table 6 Composition of public expenditure (%) Year Agriculture Education Health Sub 1980 Saharan 1990 Africa 2000 2005 7.1 5.5 3.8 6.3 14.4 14.5 14.1 15.4 4.9 4.5 6.7 8.1

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Transport and Social Defence Other* communication security 11.0 4.5 4.7 5.8 2.9 2.5 5.0 2.8 19.7 17.1 8.8 6.5 40.1 51.5 56.9 55.1

Note: *Others include fuel and energy, manufacturing, and construction, and general administration. Source: Taken from World Bank as reported in Fan et al. (2009, p.4).

Data, method and results

For the purpose of this study, all three sectors are assumed to be critical for the economic growth of SSA region. However, at the outset, the impact of each sector on per worker income cannot be overly speculated and therefore largely depend on the overall performance from the sectors. For instances, the development in agriculture is largely influenced by myriad of factors constraining its growth as discussed in the literature earlier on. Similarly, low levels of investment and decline in exports and foreign direct investment are likely to have adverse impact on service sector performance. The analysis uses 30 years annual data for the period 19802009. The capital stock utilised for the study has been built up by a perpetual inventory method.1 Population is used as a proxy for labour stock since there is no consistent time series data on employment. All data including agriculture (AGRt)2, manufacturing (MANt)3 and services (SERt)4 as a percent of GDP respectively, are sourced from the World Development Indicators and Global Development Finance, World Bank (2010) database. Subsequently, AGRt, MANt, and SERt are used in the conventional Cobb-Douglas production function, with the Hicksneutral technical progress. The per worker output (yt) equation is defined as:
yt = At kt , where 0 < < 1

(1)

where A = stock of technology and k = capital per worker, and is the profit share. The Solow model assumes that the evolution of technology is given by
At = A0 e gT

(2)

where A0 is the initial stock of knowledge and T is time. To capture the effect of, AGRt, MANt, and SERt on total factor productivity (TFP), At is defined as:
At = f (T , AGRt , MANt , SERt )

(3)

which is expanded as:


At = A0 e gT AGRt MAN t SERt

(4)

and therefore:

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yt = A0 e gT AGRt MAN t SERt kt

(5)

and finally, the above can be formulated as:


Lyt = gt + LAGRt + LMAN t + LSERt ,

(6)

where, L denotes difference in logs of respective variables, and the intercept term gt is the steady state growth rate of output (TFP) due to other likely growth factors not included in the analyses. Since the number of observations is small, the bounds testing approach under ARDL procedure developed by Pesaran et al. (2001) is deployed. In bounds testing approach, pre-testing of unit roots is not required and it is possible to investigate cointegration of the levels of the variables, irrespective of their order. However, with a view to meeting the criticism that it is difficult to accept that variables of different orders are cointegrated, the unit root tests first conducted to ensure they are of the same order before entering them into the analyses. In computing unit root tests to examine the time series properties of the variables, the ADF and Phillips-Perron test statistics are used. From the test results, all variables are non-stationary in their levels however they are stationary in their first differences (Table 7).
Table 7 Variable Ly Lk LAGR LMAN LSER Results of unit root tests ADF Level 1.854 1.606 0.760 2.725 1.853 First difference 3.321 3.869 4.604 3.195 4.907 * *** *** ** *** Level 2.929 3.545 0.746 2.653 2.091 Phillips and Perron First difference 2.66 3.47 4.55 5.39 4.93 * ** *** *** ***

Notes: The ADF critical values are based on Mckinnon. The optimal lag is chosen on the basis of Akaike Information Criterion (AIC). The null hypothesis for both ADF and Phillips-Perron tests is a series has a unit root (non-stationary). ***, **, and *denotes the rejection of the null hypothesis of unit root at 1%, 5%, and 10% level of significance respectively.

The next step is to examine the existence of a long run relationship between yt, kt, AGRt, MANt and SERt by using bounds test. The ARDL equations are specified as follows:
Lyt = 10 + 11 Lyt 1 + 12 Lkt 1 + 13 LAGRt 1 + 14 LMAN t 1 + 15 LSERt 1 + 16TREND + +
p p

i =1

11i Lyt i +
p

i=0

12i Lkt i

(7)
+ 1t

i=0

13i LAGRt i +

i=0

14i LMANt i +

i=0

15i LSERt i

Exploring sectoral elasticity vis--vis per worker income with a focus to agriculture

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Lkt = 20 + 21 Lyt 1 + 22 Lkt 1 + 23 LAGRt 1 + 24 LMANt 1 + 25 LSERt 1 + 26TREND + +

i =1

21i Lyt i +
p

i=0

22i Lkt i

(8)

i=0

23 LAGRt i +

i=0

24 LMANt i +

i=0

25i LSERt i

+ 2t

LAGRt = 30 + 31 Lyt 1 + 32 Lkt 1 + 33 LAGRt 1 + 34 LMANt 1 + 35 LSERt 1 + 36TREND + +

i=0

31i Lyt i +
p

i=0

32i Lkt i

(9)
+ 3t

i =1

33i LAGRt i

i=0

34i LMAN t i

i=0

35i LSERt i

LMANt = 40 + 41 Lyt 1 + 42 Lkt 1 + 43 LAGRt 1 + 44 LMANt 1 + 45 LSERt 1 + 46TREND + +

i=0

41i Lyt i +
p

i=0

42i Lkt i

(10)
+ 4t

i=0

43i LAGRt 1 +

i =1

44i LMANt 1 +

i =1 p

45i LSERt 1

LSERt = 50 + 51 Lyt 1 + 52 Lkt 1 + 53 LAGRt 1 + 54 LMANt 1 + 55 LSERt 1 + 56TREND + +


Table 8

i=0

51i Lyt i +
p

i=0

52i Lkt i

(11)
+ 5t

i=0

53i LAGRt i +

i =1

54i LMAN t i +

i =1

55i LSERt i

Results of bound tests Dependent variable Computed F-statistic 7.17* 3.24 3.62 1.63 1.41 Pesaran, Shin and Smith. (2001)a Lower bound value 4.40 3.47 Upper bound value 5.72 4.57

Lyt Lkt LAGRt LMANt LSERt Critical value 1% 5%

Notes: Table CI. v: Case V with unrestricted intercept and unrestricted trend, p.300; *indicates significance at 1% level. Source: aCritical values are obtained from Pesaran et al. (2001)

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There are two steps in examining the relationship between Lyt, Lkt, LAGRt, LMANt and LSERt. First, equations (7) to (11) are estimated by ordinary least squares techniques. Second, the existence of a long-run relationship can be traced by imposing a restriction on all estimated coefficients of lagged level variables equating to zero. Hence, bounds test is based on the F-statistics (or Wald statistics) with the null hypothesis of no cointegration (H0: = i1 = i2 = i3 = i4 = i5 = 0) against its alternative hypothesis of a long-run cointegration relationship (H1: i1 i2 i3 i4 i5 0). The results of the bounds test are reported in Table 8, confirming the presence of a long run relationship amongst the variables when only real output per worker (Lyt) is set as the dependent variable. The computed F-statistics for Lyt is 7.17, which is significant at 1% level.
Table 9 Autoregressive distributed lag estimates ARDL (1, 1, 0, 0, 0) selected based on Akaike information criterion Dependent variable is LY 30 observations used for estimation from 1980 to 2009 Regressor LY(1) LK LK(1) LAGR LMAN LSER C T R2 S.E. of regression Mean of dependent variable Residual sum of squares Akaike info. criterion DW-statistic Test statistics (A): Serial correlation (B): Functional form (C): Normality (D): Heteroscedasticity Coefficient 0.3543 1.1594 0.9740 0.1722 0.2033 0.7129 5.4576 0.0060 = 0.99182 = 0.00722 = 6.28910 = 0.00115 = 101.998 = 1.74340 LM version p-value 2(1) = 0.5891 2(1) = 0.5853 2(2) = 0.2997 2(1) = 0.0195 0. 443

Standard error 0.0956 0.2613 0.1984 0.0364 0.0489 0.0825 0.6643 0.0008

t-Ratio 3.706 4.437 4.909 4.728 4.156 8.638 8.215 7.289 = 0.98220 = 381.085 = 0.06952 = 109.998 = 96.3931 = 0.82480 F version p-value

*** *** *** *** *** *** *** ***

F-statistics [F( 7, 22)] S.D. of dependent variable Equation Log-likelihood Schwarz Bayesian criterion Durbins h-statistic

Diagnostic tests

F(1, 21) = 0.4206 F(1, 21) = 0.4179 Not applicable F( 1, 28) = 0.01820

0.524 0.525 0.894

0. 444 0. 861 0.889

Notes: ***Acceptance of coefficient at 1% level of significance; Rejection of null hypothesis of (A)(D) biasness at 1% level of significance.

Exploring sectoral elasticity vis--vis per worker income with a focus to agriculture

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Having confirmed the existence of a long-run relationship between output (yt) with capital stock (kt), AGRt, MANt, and SERt, a number of diagnostic test results (see the lower panel of Table 9), such as Lagrange multiplier test of residual serial correlation, Ramseys RESET test using the square of the fitted values for correct functional form, normality test based on a test of skewness and kurtosis of residuals, and heteroscedasticity test based on the regression of squared residuals on squared fitted values, showed that the equation performed well as the disturbance terms are normally distributed and serially uncorrelated with homoscedasticity of residuals, duly confirming the model has a correct functional form. Besides, the CUSUM and CUSUM of Squares plot (Figure 1 and Figure 2) shows the parameters of the model are relatively stable over time.
Figure 1 Plot of cumulative sum of recursive residuals

15 10 5 0 -5 -10 -15 1980 1985 1990 1995 2000 2005

Note: The straight lines represent critical bounds at 5% significance level Figure 2 Plot of cumulative sum of squares of recursive residuals

1.5 1.0 0.5 0.0 -0.5 1980

1985

1990

1995

2000

2005

Note: The straight lines represent critical bounds at 5% significance level

The ARDL estimate (Table 9) indicates a positive lagged effect of income to long run growth (0.35), which is plausibly due to effective overall growth policies in the SSA region. The high capital share in the equation is offset by the negative share in the lag-one period, which is plausibly due to poor use of technology and capital stock depletion in later periods. Further, agriculture and services have negative income

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elasticity, which implies that as income increased, the contribution from agriculture and services declined.
Table 10 Dependent variable: RGDP/Labour (Ly) ARDL(1, 1, 0, 0, 0) Short-run coefficients Regressor Lk LAGR LMAN LSER C T ECT(1) R
2

Long-run coefficients Regressor Lk LAGR LMAN LSER C T Standard Coefficient t-ratio eror 0.2870 *** 0.07409 0.3149 *** 0.07789 8.4527 *** 1.15820 0.0093 *** 0.00186 3.8734 4.0433 7.2980 5.0109 0.2668 *** 0.06355 4.1990 1.1042 *** 0.16972 6.5064

Coefficient

Standard error

t-ratio 4.4374 4.1555 8.2155 7.2894

1.1594 *** 0.26127 0.2033 *** 0.04893 5.4576 *** 0.66431 0.0060 *** 0.00827

0.1723 *** 0.03644 4.7278 0.7130 *** 0.08254 8.6382

0.6457 *** 0.09561 6.7532 = 0.87619 = 35.3723

Short-run equation statistics = 0.90608 = 0.00722 = 0.00213 = 0.00114 = 101.998 = 1.74340 R


2

S.E. of regression Mean of dependent variable Residual sum of squares Akaike Info. Criterion DW-statistics

F-statistics [F(6, 23)]

S.D. of dependent variable = 0.02053 Equation Log-likelihood Schwarz Bayesian criterion = 109.998 = 96.3931

ECT = Ly 0.2870Lk + 0.2668LAGR 0.3149LMAN + 1.1042LSER 0.0093T 8.4527 Note: ***Significant at 1% level

The long-run estimation (Table 10) shows similar outcomes as Table 9. The capital stock share is about 0.29 which is close to the stylised value of one-third (c.f., Rao, 2010; Ertur and Koch, 2007). Furthermore, the elasticity for agriculture is 0.27 and services is 1.10 while the manufacturing sector has the elasticity of 0.31, all significant at 1% level. Time trend5, is positive and significant, both in the long run (0.009) and the short-run (0.006), however having a marginal contributory power towards per worker income, indicating weak response to supply side shocks. The trend captures (positively) the supply side responses such as investment decisions, labour market distortions and credit expansions in the short and long run respectively. Further, in the short-run, the manufacturing sector elasticity coefficient is 0.20 which is positive and significant at 1% level. On the other hand, the agriculture and services have a negative elasticity of 0.17 and 0.71 accordingly. These results underscore the production shift towards manufacturing as the economy grows relative to agriculture and services. Evidently, the long-run elasticity is larger than the short-run because prices are not completely flexible and hence (labour) markets are slow to clear in the short run. Further, the Granger causality test was conducted to identify the causation effect (Table 11). The results show unidirectional relationship running from output to capital, from manufacturing to output, and from manufacturing to capital stock. Therefore, it is

Exploring sectoral elasticity vis--vis per worker income with a focus to agriculture

41

evident that growth in output Granger-cause growth in capital; growth in manufacturing base Granger-cause growth in output and growth in capital stock accordingly.
Table 11 Granger causality tests with ECT from bounds test F-statistics ECT (t-statistics) 0.6457 (6.7532) 0.20208 (15.6453) 1.4445 (7.9702) 0.62023 (3.1603) 1.2832 (6.0297) Notes: *, **, and *** indicates rejection of the null hypothesis of no causality at 10% and 5% respectively;

Ly Ly Lk LAGR LMAN LSER


1.0100 0.5171 3.4005** 1.3591

Lk
2.33458* 0.7046 2.5609* 1.6301

LAGR
1.78771 1.7635 1.8715 1.2196

LMAN
0.5001 0.1206 0.7266 0.5643

LSER
0.7734 1.1776 1.5920 0.8065

and indicates significance level at 1% and 5% respectively based on t-statistics and correct sign.

Conclusions and policy discussion

We have shown that agriculture and services sectors had negative elasticity coefficients, whilst manufacturing sector had positively contributed towards improving per worker income in the SSA region. The study resonates, if not underscores, some of the concerning and long-standing poignant issues in agricultural and other production sectors in the African region highlighted by some of the prominent scholars (Sen, 2000; Stiglitz and Squire, 1998; Rostow, 1985; Amin, 1972; among others). In light of the results, it is clear that SSA countries need to increase their budgetary allocations to agriculture. A big challenge looming ahead for the countries is the recent surge in world food prices, the recent financial crisis and the series of disasters affecting the horn of Africa which threatens to reverse any past gains in poverty reduction. Higher food prices will severely affect rural and urban consumers, especially among the poor. By increasing spending in agriculture and rural development now, the region can avert this threat by rapidly increasing agricultural productivity and ensuring a long term and stable supply of affordable food to millions (Fan et al., 2009). Our results also coincides with the notion that agriculture-led path out of poverty does not occur automatically simply if the agricultural sector grows. It will require that agricultural growth be spread among a broad class of smallholder entrepreneurs to broaden the demand for labour-intensive goods and that some of that growth be tapped for investment in education, health, infrastructure and better-functioning labour markets (Ulimwengu and Sanyal, 2011; Staatz and Dembele, 2008).

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Subsequently, each country within the SSA region should focus on key sector reforms that are most likely to have the largest impact at every stage of economic development. For example, the agriculture and land use policy can be reviewed to promote clear flow of benefits from the ownership of land. Fostering sustained growth through domestic and foreign investment, private sector development, improved public sector management and sectoral development within the overarching framework of good governance are vital. Additionally, voice and accountability, political stability, corruption control and rule of law are critical for equitable growth. Countries in North Africa that experienced high growth such as Tunisia and Egypt have also experienced social unrest and undergone regime change, stemmed by highly inequitable growth and unproductive or non-existent job prospects and corrupt institutions, making some of the SSA countries highly susceptible to unrest. Further, such social unrests and prolonged civil wars divert resources, including human capital, away from productive income generating activities. Poor infrastructure and high cost of transportation impose substantial barriers to entry, thus allowing transport companies to maintain a monopoly and charge prohibitively high prices. Gender equality and female empowerment and participation in all sectors, backed by increased health expenditure towards improving well being and reducing child and maternal mortality are required so as to freeing up and strengthening resources for productive activities which can be deployed to critical sectors of the economy. Natural disasters quite often hit hard the horn of Africa creating a grave concern on the staple food security and sustainable livelihood of many besides population displacement. Therefore, disaster and crisis management need to be organised and aid from donors need to focus more on investing in technologies to anticipate and formulate strategies to manage these crisis and support agriculture. Moreover, noting that development aid flows to Africa from multinational corporations (IMF and World Bank) have resulted in controversial, if not contrary outcomes, the donor and recipient (SSA) countries need to explore better mechanism to channel aid which is linked to solid growth initiatives and projects to have a welfare enhancing effect. Further, projects related to agro-marketing need to be promoted and monitored so that benefits reach the small holder farmers. The drive need to come from relevant government bodies such and non-government organisation with an inclusive approach to dialogue. Ensuring the availability of investment fund to buy land and other capital inputs for agricultural production, effective coordination of agri-business with financial services and integrating private sector participation including manufacturing and services sector operations with agriculture development initiatives will create the environment for overall growth and development. For instance, linking tourism (service) and food processing (manufacturing) with locally produced commodities will boost domestic agriculture. Further, encouraging private sector and non-government organisation partnership in sub-sectors like fisheries, forestry, cash-crop industries among others are some important areas to look at. Among other things, the focus need to be more on branding, promoting and diversifying domestically produced commodities both in local and international markets to reduce dependency on imported items, and tax incentives and subsidies need to be defined and engineered to support growth in sectoral (agriculture, manufacturing and services) productivity. In addition, specific sub-sector based (scientific and non-scientific) research, training and capacity building in areas of agriculture development, financial literacy and the use of technology and media to access and penetrate local and international markets for new and existing commodities need to be promoted.

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43

The legal aspects governing the sectoral investment need to be scrutinised so that (new) investors are incentivised to invest in without compromising the law and order. Therefore, the right institutional environment and infrastructure need to be in place so that various key sector performances can be enhanced at operational and managerial levels. Finally, the effective participation of the SSA countries in the multilateral rules of trade via WTO and other regional trade bodies are vital. In order for the agricultural sector to expand and gain efficiency, bringing competition in the sectors is imperative. Active negotiations by the countries for its offensive and defensive tariff are vital, whist striving to suss out ways in which trade can promote their development optimally. Sub sectors within the agricultural sector which are inefficient need to be liberalised (if not reformed) as well as Green box subsidies can be provided to ensure that the sector improves over time. In contrast to this, the more productive sectors such as manufacturing which are duly competitive can offset the effects of preference erosion through tariff reductions in agriculture. It is imperative that the countries also identify precisely their special and sensitive products in the agricultural sector for the agricultural modality in the recent Doha rounds and also make targeted cuts in non-agricultural market access (NAMA) commodities or choose the best mix of tariff cuts, whilst providing the countries more room for policy space on one hand (c.f., Stiglitz and Charlton, 2005) and having a binding mechanisms which ensures monetary compensation in cases where poor countries lose out as a result of subsidies and preference erosion, on the other. Moreover, the need for solidifying North-South cooperation, particularly in relation to investment in agriculture, energy, raw materials, reforestation, and disaster and crisis management, in order to have resource foundations for growth in both regions and to assure resources are priced reasonably to permit growth in both regions are critical for long-run growth and sustainable development.

Acknowledgements
The corresponding author would like to thank the SYLFF for the opportunity to pursue this research. Further, the authors would like to sincerely thank the anonymous reviewers and referees for their invaluable comments and suggestions.

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Notes
1 The capital stock is computed for the period of 19602008, using perpetual inventory method, where investment is proxied by gross fixed capital formation, initial capital stock is estimated to be 1.5 times the real GDP of 1960 and the depreciation rate of 10.5% is used. Dataset from 1980 onwards was used in the analysis to maintain consistency. Agriculture value added corresponds to ISIC divisions 15 and includes forestry, hunting, and fishing, as well as cultivation of crops and livestock production (see World Bank, 2010) for full definition). Manufacturing value added refers to industries belonging to ISIC divisions 1537 [see World Bank (2010) for full definition].

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Services value added correspond to ISIC divisions 5099 and they include value added in wholesale and retail trade (including hotels and restaurants), transport, and government, financial, professional, and personal services such as education, healthcare, and real estate services. Also included are imputed bank service charges, import duties, and any statistical discrepancies noted by national compilers as well as discrepancies arising from rescaling [see World Bank (2010) for full definition]. The trend captures the supply side responses such as investment decisions, labour, market distortions and credit expansion in the short and long run, accordingly.

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