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Causal Relationship Between Agriculture, Industry and Services Sector for Gdp Growth in Bangladesh: an Econometric Investigation

Mirza Md. Moyen Uddin
Assistant Professor (Economics)
Bangladesh Civil Service General Education Cadre, Under National University, Directorate of Secondary and Higher Education, Ministry of Education, Dhaka, Bangladesh

Abstract/ Executive Summary:

This study examines the contribution of agriculture, industry and services sectors to economic growth in Bangladesh by using time series data from 1980 to 2013. Augmented Dickey-Fuller (ADF) and Phillips-Perron (PP) unit root tests show that the time series data stationary at first difference. Then, the cointegration analysis indicates that each economic sector has strong, positive and significant linear relationship with economic growth. Granger causality test found bi-directional causality between agriculture and GDP and also industry and agriculture. This empirical study also found the unidirectional Granger causality from the services sector to agriculture and the industry sector to the services sector. Finally, the Vector Error Correction Model (VECM) also used to examine the short and long-run equilibrium relationships among the variables. This study gives the guideline to the investors and policymakers.

Keywords: Economic growth, Economic sectors, Econometric analysis, Bangladesh

Location: In Bangladesh

Start Date: 00-00-1980

End Date: 00-00-2013

Program Area: Socio-economic and Policy

Non-commodity: Development, Business, Income generation

Objectives:

To investigate how three different sectors namely, agriculture, Industry and Service sector are affecting the GDP growth in Bangladesh. It also intends to measure the relationship between the concerned variables and their overall impact on GDP.

Methodology:

Data: This paper uses annual time series data of the Agriculture, Industry and Service sector of their value-added contribution in GDP covering the period from 1980 to 2013 of Bangladesh. Real per capita GDP is taken as US dollar ($). The data obtained from online version of World Development Indicators (WDI), the World Bank. As this study examines the contribution of agriculture, industry and service sector to economic growth in Bangladesh, secondary data is appropriate for the study. Methodology Assessment of Granger causality between the variables and the direction of their causality in a vector error correction framework requires three steps. The first step is to test the non-stationarity property and determine order of integration of the variables, the second step is to detect the existence of long-run relationships and the third step is check the direction of causality between the variables. Model Specification: This study investigates the contribution of economic sectors to economic growth in Bangladesh from 1980 to 2013. Correlation analysis and multiple regression analysis are used to examine the relationship between the dependent variable and the independent variables in the study. The following model represents the relationship between per capita real Gross Domestic Product (GDP) and the three economic sectors, namely agriculture, industry and services sectors for Bangladesh. The equation for the multiple regression analysis is: GDP = β₀ + β₁Agr + β₂ Ind + β ₃ Serv + µ (1). Where, GDP = Real Gross Domestic Product per capita, Agr = Share of value-added in the agriculture sector to real GDP per capita, Ind = Share of value-added in industry sector to real GDP per capita, Serv = Share of value-added in the services sector to real GDP per capita, β ₀ = Intercept, β_1, β_2, β₃, = Co-efficient and µ = Error Term. Stationarity: Test The annual time series data cover a period of 34 years from 1980 to 2013 is used to determine the relationship between economic sectors and economic growth in Bangladesh. In the first step of the estimation process, this study examines the stationarity properties of the data series. According to Nelson and Plooser (1982), most of the time series that appear in the economy will have to be differenced in order to become stationary. In fact, most economic variables show a trend and therefore in most cases are non-stationary. Thus, before moving further analysis of the variables, it needed to ensure stationary properties of the variables. This study uses the Augmented Dickey-Fuller (ADF) test (Dickey and Fuller, 1979, 1981) to perform the unit root tests. The ADF test includes extra lagged terms of the dependent and independent variables, which are real GDP per capita, agriculture sector, industry sector and services sector in order to eliminate autocorrelation.

Source of Information: Journal of Poverty, Investment and Development, Vol.8, 2015, ISSN 2422-846X

Article Link (Online Journal): www.iiste.org

Funding Source:

Budget:

Total Budget (Tk.) :

Achievement/Findings:

This paper examined the causal relationship among GDP per capita, agriculture, industry and services sectors for Bangladesh for the year 1980-2013. The study found the existence of the long-run causal relationship among these variables. To search for the nature of the relationship between the variables, we have implemented the granger causality tests and found a bi-directional relationship between GDP and agriculture which indicates that the agricultural and GDP influence on each other to grow in case of Bangladesh. And also bi-directional causality is obtained in case of agriculture and industry. So, the results showed that industry and agriculture sector influence on each other for the growth of our GDP. We also found unidirectional Granger causality from the industrial sector to GDP growth and service sectors to industrial growth. So, it is clear that if the agriculture and industry sector will boost, then its influence to increase the GDP of Bangladesh whereas service sectors do not influence the GDP of Bangladesh individually. But, the services sector is a more significant contributor (53.9%) to economic growth in Bangladesh and day by day its involvement is increasing. Therefore this sector should be given priority in the planning of national development policies. In addition, the country should devise strategies to attract more foreign investments into its industry and agriculture sectors to contribute in GDP growth. Thus, the three sectors are closely connected with each other and any changes of strategy in any sector will affect the economy and the livelihoods of the people that is why government and policymakers should take the decision with updated and significant result of research.

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