Macroeconomic determinants of value addition in the manufacturing sector in Zambia

Abstract

Zambia is one among many African countries which has not experienced sustained high economic growth in the recent years despite having previously transitioned from stereo-typical agriculture to manufacturing. Thus, this study sets out to understand the macroeconomic drivers of manufacturing value-addition gains and estimated macro-economic determinants of value addition in the manufacturing sector in Zambia. The study adopts the secondary time series data for the period 1984 to 2021.

Manufacturing value-addition was regressed on several macroeconomic variables to help understand by how much the manufacturing value addition tends to change with others which were identified as potential drivers of output growth in the manufacturing sector. These include gross domestic product (GDP) per capita, foreign direct investment (FDI), manufacturing exports, manufacturing imports, real interest rates, money supply and population. The data was first tested for stationarity using Augmented Dickey Fuller (ADF) test. The Granger Causality test was adopted as a theoretical framework for this analysis as more than two variables were adopted for the study. The Johansen co-integration test is used to ascertain the long-run relationship between the established variables. The findings of the study show that FDI boosts Zambian manufacturing value-added that increases the GDP per capita and showed the importance of manufacturing exports in driving manufacturing value-added in Zambia. Further, the study showed that net exports are long-term drivers of output growth in the manufacturing sector showing the existence of a unique long-run relationship between manufacturing value addition and the real interest rate.

The constraints of this investigation primarily stemmed from the insufficiency of data points, preventing the inclusion of additional variables like private sector credit, which the researcher found pertinent. In addition, the study's results provide robust evidence of the unique long-run relationships between Manufacturing Value Added (MVA) and Foreign Direct Investment (FDI), GDP per capita, Manufactured export (manu_export), and Real Interest Rate (RIR) in Zambia. This study revealed strong, long-term connections between factors like foreign investment and exports, and Zambia's manufacturing sector growth. These insights can guide policymakers in developing strategies to ensure the industry's sustainable development. Notably, manufactured exports show a positive long-term impact, but a short-term dip, highlighting the dynamic nature of this relationship. Overall, the study offers valuable considerations for decision-making and future policies affecting manufacturing value-added in Zambia.