Macroeconomic determinants of growth in the manufacturing and service sector in Zambia

The growth of economies has historically been coupled with structural change. However, despite countries seemingly undergoing diverse structural changes, there is a disparity in how this translates to economic growth. Zambia is one among many African countries which has not experienced sustained high economic growth in the recent years despite having gone through the stereotypical agriculture to manufacturing to services transition. Thus, this study sets out to understand the macroeconomic drivers of output growth in the manufacturing and service sectors of Zambia. It uses secondary time series data for the period 1970 to 2017. Manufacturing value-added and service sector value-added are regressed on a number of macroeconomic variables which are identified as potential drivers of output growth in the two sectors. These include gross fixed capital formation, foreign direct investment (FDI), net exports, exchange rates, money supply and employment. The data was first tested for stationarity using Augmented Dickey Fuller (ADF) test and for structural breaks using Zivot Andrews test for structural breaks and then proceeded to test the relationship between the dependent and independent variables using the Autoregressive Distributed Lag (ARDL) method. The findings of the study are that gross fixed capital formation, employment and net exports are long run drivers of output growth in the two sectors whilst money supply and exchange rate are short run drivers of output growth. The findings show that whilst domestic physical capital accumulation is good for an economy, employment is a key player and should be given significant focus in macroeconomic growth prospects and targets. In addition, FDI which received significant focus in the past should not be given so much emphasis as it did not have a significant impact on both sectors.
Keywords: Manufacturing output growth, Service output growth, ARDL, Short Run and Long Run