Aggregate import demand and expenditure components in Ghana.

Author:Fosu, Oteng-Abayie Eric
Position:Report
 
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INTRODUCTION

Ghana is classified as a low income country with real GDP per capita in 2002 of US$428.6. Ghana has a population of around 20.4 million inhabitants as of 2004 and has about 40% of the population living under the national poverty line (1). Ghana's macroeconomic performance has been rather sluggish over the last two decades. Economic growth has stagnated around 4.7 per cent per annum. In 2004 the Ghanaian economy grew by 5.5 per cent and a higher growth rate of 5.8 per cent is forecasted for 2005 (2).

In Ghana, imports as a share of GDP has been rising strongly, particularly over the past three decades. Again over the past 30 years imports have fluctuated considerably, generally in line with changes in real GDP. A significant portion - about 55 per cent - of Ghana's GDP was spent on import payments in 2002. Given the importance of imports for Ghana's economic growth and development and the ensuing implications on the balance of payments, the central aim of this study is to estimate the aggregate import demand for Ghana during the period 1970 to 2002.

The economy has been going through structural changes in recent years. Ghana has not remained a primarily agricultural economy. The share of agriculture in GDP has declined from about 45% in 1990 to about 36% in 2004. During the same period, the manufacturing and services sectors increased from 16.8% and 38.4% to about 25% and 39% respectively. In 2001, exports and imports of manufactures stood at 16.35% of merchandise exports and 56.29% of merchandise imports respectively (1).

Ghana has become more open since trade liberalisation in the early 1980s. In 2002, Ghana exported $2624.97 million worth of goods and services but the total imports bill was $3,379.94 million (1). The country continues to have a negative trade balance. In 2002, Ghana's external trade balance on goods and services stood at a deficit of $754.96 million about 12.3% of GDP. The indicator for trade openness (Trade as a percent of GDP) in the economy has increased consistently since the liberalisation from 6.3% in 1982 to a peak of 116% in 2000 and declined to 97.5% in 2002. Capital goods, crude oil and energy have constituted the most important items of import. However, Ghana also imports a considerable amount of primary raw materials and other intermediate and consumable goods. Non-durable consumable goods imports have become particularly important on Ghana's imports bill due to the declining capacity in domestic production and changing preferences due to globalisation. Although Ghana has embarked on massive export promotion campaign with the promulgation of an Export Free Zone Act, it has not succeeded in increasing export over imports. The import penetration ratio (import as a per cent of GDP) has increased from a minimum of 2.98% in 1982 to the highest of 67.24% in 2000 and declined to 54.87% in 2002.

The above analysis shows that external trade is a key determinant of economic growth and development in Ghana. For policy purposes, it is pertinent to know the determinants of aggregate import demand in Ghana. The study, to the best of our knowledge, is the first to use the recent disaggregated import demand formulation approach to study the behaviour of aggregate import demand in Ghana. Following recent studies by (3), (4), (5), we use the disaggregated components of domestic income (i.e. final demand expenditure components) together with the standard relative price variable to specify the aggregate import demand model for Ghana.

The use of the disaggregated components of total domestic income to estimate aggregate import demand is a relatively recent research approach (3), (4), (5) different from the traditional approach which uses only domestic income and the relative prices. Two advantages accrue from using the disaggregated import demand model over the traditional aggregate import demand model. The later implicitly assumes that the import contents of all components (consumption, investment and exports) in the final expenditure demand are identical. If this assumption does not hold, the use of a single demand variable will lead to aggregation bias (6). By disaggregating the final demand, the disaggregate model not only can avoid the problem of aggregation bias, but also can be used to estimate the separate effects of each component on import demand. Moreover, by avoiding aggregation problems, the disaggregate model has better forecasting powers than the traditional import demand models (5).

EMPIRICAL LITERATURE

There is an overplus of studies that examine the causal factors of aggregate import demand models. From the empirical literature we surveyed, no study was found that specifically estimates the determinants of aggregate import demand in Ghana. It is therefore only logical for us to survey the literature that is directly relevant to the theme chosen for this study. At this point, we focus on reviewing only those studies that have used the disaggregate approach.

Abbott and Seddighi (7) used the cointegration approach of (8) and the error correction models of (9) to estimate an import demand model for the UK. From their results consumption expenditure had the largest impact on import demand (1.3) followed by investment expenditure (0.3) and export expenditure (0.1). The relative price variable (the ratio of import price to domestic price) had a coefficient of 20.1.

Mohammed and Tang (10) also used the Johansen and Juselius (8) cointegration technique and estimated the determinants of aggregate import demand for Malaysia, over the period 1970-1998. The results indicated that while all expenditure components had an inelastic effect on import demand in the long run, investment expenditure had the highest correlation (0.78) with imports followed by final consumption expenditure (0.72). Expenditure on exports was found to have the smallest correlation with imports (0.385). They also found a negative (-0.69) and inelastic relationship between relative prices and import demand. All results were found to be statistically significant at the 1 per cent level.

Mohammad et al. (11) examine the long-run relationship...

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