3.4. Results and discussion 57
3.4.6. Inferences and comparison with previous empirical studies 69
Firstly, the results show that there is a weak long-run relationship between individual monetary policy variables and growth of the manufacturing sector in the AOECs. In both the static and dynamic panel models, all monetary policy variables demonstrate a more significant impact in the short-run than in the long-run. This is in line with findings of some authors who have shown that monetary policy variables demonstrate little or no significant long-run relationships with growth of real output (see Mundel,
1963). However, our findings do not completely refute the existence of a long-run relationship because it appears that Tobin’s Principle which supports the existence of long run relationship between money and output is also supported by our result.
According to Tobin(1965), the monetary transmission mechanism through which growth can be boosted in the long-run is via expansionary monetary policy which increases the volume of money in circulation. This will lead to an increase in inflation which in turn leads to higher portfolio investments. The increase in capital stock can thus bring about improvements in growth in the long-run. Many authors have found the existence of a long-run relationship between some of the variables e.g exchange rate, capital formation and growth (see Cipollini, Hall and Nixon, 2012; Nenbe and Madume, 2011; Gul, Mughal and Rahim, 2012).
It can be inferred that the panel estimation results are reflections of the fact that we focused on manufacturing growth rate only rather than the over-all growth of the AOECs’ economies. This shows that the manufacturing sector growth can be significantly affected by monetary policy instruments, especially money supply in the short-run(transitory). The interest rate however, has not been shown to be a strong determinant of manufacturing sector growth even in the short run. Moreover, it appears that monetary policy generally appears to have more of a transitory effect on manufacturing growth rate in the AOECs.
Secondly, our result fails to convincingly support the general belief that expansionary monetary policy will have a positive and significant relationship with growth. This is because despite the fact that the coefficient of money supply is statistically significant in the fixed effects model, it fails to show a significant impact on the manufacturing sector growth in the dynamic model which produces a more reliable estimator. These findings are consistent with Anthony and Mustafa, (2011); Gul, Mughal and Rahim, (2012); and Ditimi, Nwosa and Olaiya, (2011) who found that expansionary monetary policy will promote manufacturing growth, although some see it otherwise (see, Nenbe and Madume, 2011).
Our results also show that net domestic credit has a significant negative relationship with growth of the manufacturing sector in the AOECs in the short-run, but the significant effect dies off in the long-run. The implication of this is that an increase in domestic credit might not necessarily promote the growth of the manufacturing sector in the AOECs. This might well be the reason why the money supply does not have a significant impact on manufacturing sector growth of the AOECs. Apparently, selective credit control often used by the central banks to increase credit supplies to a particular sector of the economy, might not be effective in controlling credit channels after all in some AOECs.
Our investigation shows that credit allocation to the manufacturing sector in some AOECs has been dwindling over the years. For instance, in Algeria it fell from 16.5% in 2009 to 14.8% in 2011; in Egypt it fell from 42% in 2009 to 31.3% in 2011;while in Nigeria, it fell from 38.6% in 2008 to 21.15% in 2011 (World Bank, 2012). In another separate finding, the Central Bank of Nigeria(CBN) (2008) discovered that less than 5%
of the Nigerian banks comply with the selective credit control policy of the CBN.
It should be noted that selective credit control is one of the policies of the CBN designed to develop some particular sectors of the economy. According to the policy, the CBN usually directs or mandates commercial banks to improve credit allocation to particular sectors of the economy. Nnanna (2000) reveals that the CBN special order or directive is not being followed by many of the commercial banks in Nigeria. This is evident in the Nigerian economy where huge loans are made available to civil servants in the form of soft loans. Many of these loans were supposed to be made available to manufacturers if the directive of the CBN is followed, but because of the problem of loan recovery associated with manufacturing loans among others, many of the Nigerian banks often divert loans meant for the manufacturing sector to other sectors where loan recovery will be easier(see Kayode, 2000; CBN, 2009; and Nnanna, 2003). This is an indication that credit diversion is rampant in the AOECs, and consequently the purpose and intention of monetary authorities of either to follow a market based credit allocation or selective credit control are often sabotaged by financial intermediaries.
Furthermore, findings from our study also show that inflation has a positive but not significant effect on the growth of the manufacturing sector both in the long run and the short-run. This is an indication that the level of inflation currently experienced in the AOECs might not be having a notable influence on manufacturing industries’ output. In the same vein, the interest rate has the appropriate inverse relationship, but it still fails to have any significant impact on manufacturing sector growth in the AOECs. This has further supported the inverse relationship between manufacturing growth rate and net domestic credit. It shows that interest rates have not played a significant role in stimulating the growth of the manufacturing sector in the AOECs. The reason might not be unconnected to Aiyegbusi (2010) who observed that the large number of people that do not have access to banking in most developing countries, have limited the effectiveness of monetary policy tools, such as interest rates.
The exchange rate has a significant positive relationship with manufacturing growth rates in the short-run. This finding has supported the growing literature on currency undervaluation and growth in most developing countries. Many empirical studies have strongly supported the view that the positive relationship between growth and exchange rates is more pronounced in developing countries than in the developed countries (see Rodrik, 2008). Our study has not deviated from this position since all the AOECs are developing countries. It further shows that despite our focus on the growth of the manufacturing sector, the currency value that is based on equilibrium level of exchange rate has been shown to have a significant and positive relationship with the manufacturing growth rate in the AOECs. The mechanisms through which this works can be explained within the confines of development economics in that an increase in the exchange rate (i.e fall in value of currency) will discourage imports and encourage exports. This has the tendency of boosting domestic output and consequently promotes the growth of the real sector (see Todaro, 2003).
Finally, our findings have shown that a combination of the monetary variables will have a significant impact on the growth of the manufacturing sector of the AOECs. This is shown in both the dynamic panel and fixed effects models. The overall test of statistical
significance through both the Chisquare test value and Wald test confirmed this. This result is similar to the conclusion of many studies that have posited that an appropriate monetary policy mix that reflects the empirical relationship obtained in this studywould have a significant effect on the manufacturing growth rate and overall growth of most economies (see Olomola, 2007; Oladipo and Fabayo, 2012).
3.5 Summary and Conclusion