2.5. Empirical Results 30
2.5.3. Discussion and conclusion 40
Table 2.7 shows the acceptance of the null hypothesis at lag length two which is the lag length used for the GMM estimation. The implication is that the null hypothesis that there is no autocorellation is accepted at the lag length two. Therefore the GMM estimates are not affected by the problem of serial correlation hence there esimates remain consistent and efficient.
indicates that oil has a negative significant impact on the manufacturing sector of the AOECs.
Another important inference from the study is the existence of a positive relationship between the exchange rate and manufacturing sector growth. A similar result was obtained by Égert and Leonard (2007) in their study of the oil-rich Republic of Kazakhstan. The coefficient of the exchange rate is not significant on the AOECs manufacturing growth rate but a direct relationship is confirmed.
The stunted growth of capital formation in the manufacturing sector of AOECs is revealed in our study. Both the static and dynamic panel models show that capital does not have a significant impact on the manufacturing sector of the AOECs. This means that the manufacturing sectors are less capital intensive (see Ismail, 2010).
Finally, the non-significance of the estimator of electricity generation in most of our models shows further support for the low investment in energy in the manufacturing sector of the AOECs. This situation is evident in some oil-exporting countries such as Nigeria where manufacturing firms are closing down and relocating to neighbouring countries where there is a more stable supply of electricity. Many of these firms take this step to reduce the high marginal cost of production resulting from the need to find alternative sources of energy.
It can be concluded that there is Dutch Disease in the AOECs as shown by the negative relationship between oil revenue and the manufacturing sector growth. Thus, the study contributes to the growing consensus on the existence of Dutch Disease in many oil-rich nations in the world. It is discovered that the growth of the oil sector has a significant negative impact on the manufacturing sector of the AOECs. The implication of this is that apart from addressing policies to improve the manufacturing sector through diversification and investment policy, among others, efforts must be made to plough back the revenue realised in the oil sector to the real sector of the economy. Utilizing a substantial part of oil revenue for the development of the manufacturing sector may
likely cause the oil sector to start exhibiting positive and meaningful effects on the manufacturing sector of the AOECs
The study confirms that the exchange rate demonstrates a positive relationship with the manufacturing sector growth of AOECs. This corroborates the findings of Égert and Leonard (2007), among others, who also concluded from their studies that the exchange rate has a direct relationship with the manufacturing sector growth of the oil-rich Kazakhstan Republic. This implies that an increase in the exchange rate may likely promote the growth of the AOECs manufacturing sectors. The transmission mechanism through which this occurs might not be unconnected to the fact that a rise in the exchange rate discourages importation of manufacturing competitive goods. This in turn will most likely promote the growth of the manufacturing sector. A currency devaluation policy complemented by the provision of adequate incentives to promote the domestic manufacturing output is recommended.
We can also conclude that the level of investment in the manufacturing sector of the AOECs is grossly inadequate. This implies that the manufacturing sectors of the AOECs are suffering from inadequate capital. As shown in the discussion of the literature, the more the manufacturing sector is capital intensive, the stronger is its resistance to negative influence from the oil sector. This dearth of investment in the manufacturing sector of the AOECs is further revealed through the observation that electricity generation does not have any significant impact on manufacturing sector growth. Consequently, our study supports the call for aggressive investment policy that will accelerate a massive investment in the manufacturing sector of the AOECs.
Finally, it is apparent that there is a problem with the manufacturing sector of the AOECs and there isa need to address this problem if the growth of these countries is to be enhanced. Generally, any of the following courses of action can be employed to address these problems: (i) diversification; (ii) currency devaluation with adequate incentives to promote domestic manufacturing output; (iii) aggressive investment policy to increase capital formation in the AOECs manufacturing sector; (iv) stabilization of
the oil sector and utilization of the oil revenue for more investment in the manufacturing sector; and (v) political will to carry out all these necessary measures. It should be noted that none of these measures is, on its own a perfect panacea for the problem of the AOECs manufacturing sector. All these efforts can be launched together or implemented in successive stages until the growth of the manufacturing sector is promoted.
CHAPTER THREE
Monetary policy and growth of the manufacturing sector in Africa’s oil exporting countries (AOECs)
3.1 Introduction
It has been observed that there are two divergent views regarding the effects of monetary policy on manufacturing growth. These include the studies that maintain that monetary policy has been properly administered by many developing economies including AOECs and that this has promoted the growth of their manufacturing sector and the overall growth of the economy and the studies that argue that monetary policy has not been properly practised in the developing economies, leading to the current problem in their manufacturing sector (see Woodford,2001;Jordi and Mark, 2007;Clarida and Gali,2000; and Gali and Gertler,1998).
Other studies have also concluded that it might be necessary to assess the existing relationship between monetary policy and the manufacturing sector in a country before any of the two views can be adjudged to be correct. This might provide insights on how policy administration can be used to improve manufacturing sector growth. The rationale behind this argument is that countries differ from one another in terms of natural resources endowment, level of development, and institutional and structural set- up. The idea, therefore, is that priorities and objectives of monetary authorities in different economies might depend on these factors thereby making monetary policy to have varying degrees of effects on the manufacturing sector (See Blanchard and Gali, 2007; Bouchaour and Al-Zeaud, 2012).
Based on the foregoing, there is a possibility that the unique characteristic of oil abundance in oil-rich countries might influence the relationship between monetary policy and the manufacturing sector in the AOECs. In addition, it appears that there is yet to be a consensus on how monetary policy influences the output of the manufacturing sector especially in the AOECs. Among other studies Olomola (2007)
was more concerned with the relationship between oil rent and economic growth in oil exporting countries in Africa. Other studies such as (Mohamed (2011), Corden and Neary (1982), and Acostal, Lartey and Moudelina(2009) were more focused on the issue of “Dutch Disease” in some oil exporting countries. None of these studies or any one that we are aware of focused on the manufacturing sector of the AOECs that has been described has a major sub sector in the real sector of the AOECs that can play an important role in economic diversification.
While there is a near consensus that monetary policy does not have a long run impact on growth, there are some studies that still contradict this (See Nelson and Plosser, 1982;
Tobin, 1965; Samba, 2013). Consequently, to provide a wider policy alternative that can help in promoting the growth of the manufacturing sector, this study explores the relationship between monetary policy and manufacturing growth in the AOECs using a panel cointegration analysis. Apart from allowing us to study the specific relationship between monetary policy and manufacturing output growth, the choice of panel cointegration will also allow us to verify if a long run relationship between the two variables exists in the AOECs or not.