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Role of Agriculture in Economic Growth of Bangladesh: a Var Approach

Zubaidur Rahman
Lecturer and Corresponding author:
Department of Economics, Bangabandhu Sheikh Mujibur Rahman Science and Technology University, Gopalganj, Bangladesh

Md. Elias Hossain
Professor
Department of Economics, University of Rajshahi, Bangladesh

Abstract/ Executive Summary:

This study investigates the relationship between agriculture and economic growth in Bangladesh, employing the Vector Autoregression (VAR) approach. VAR is an active system of models in which the current level of each endogenous variable in the system depends on past movements of all variables and it determines how much influence each of the endogenous variables has on each other. The stationarity of the data have been examined by using Augmented Dickey-Fuller (ADF) test, Phillips-Perron (PP) test and correlogram. Johansen-Juselius cointegration test is applied to examine the long-run relationship between agriculture and economic growth. In order to show the direction of causal relationship between agriculture and economic growth, Granger causality test has been used. Both agriculture and economic growth were found non-stationary at level forms and they become stationary after taking their first difference. The cointegration analysis suggests that, there is a long-run relationship between agriculture and economic growth as it is confirmed by both Trace statistics and Maximum Eigen-value test statistics. Results found from Granger causality test suggest that uni-directional causality running from agriculture to economic growth exists in Bangladesh. The VAR results confirm that changes in agricultural GDP respond more critically to economic growth, suggesting that boosting agricultural sector will effectively stimulate economic growth in Bangladesh.

Keywords: Agriculture, Economic growth, Vector auto regression, VAR, Bangladesh.

Location: In Bangladesh

Start Date:

End Date:

Program Area: Socio-economic and Policy

Commodity: Socio-economic status, Micro-finance

Objectives:

The specific objectives: (i) to check the stationarity properties of the two-time series; (ii) to investigates the long-run relationship between agriculture and economic growth in Bangladesh; and (iii) to find out the direction of causal relationship between agriculture and economic growth in Bangladesh.

Methodology:

This paper applies unit root test to investigate the stationarity properties of the two considered series. In this context, Augmented Dicky-Fuller (ADF) unit root test and Phillips-Perron (PP) unit root test are used. Then, the technique of cointegration is used to see whether there is any long run relationship between two time series. Causal relationship is checked with the help of Granger causality test (Granger, 1987). Finally, VAR approach is applied to determine how much influence each of the endogenous variables has on each other. Cointegration means that despite being individually nonstationary, a linear combination between two or more time series can be stationary. Cointegration techniques are used to find the long-run relationship between variables if they are integrated of order same. Cointegration of two (or more) time series suggests that, there is a long run or equilibrium relationship between them. There are several econometric techniques to investigate the long-run relationship among the time series macroeconomic variables. The cointegration technique comprises of uni-variate cointegration that includes Engle-Granger (1987) and Fully Modified Ordinary Least Squares (FMOLS) of Philips and Hansen (1990); and multivariate co-integration techniques that include Johansen (1988); Johansen & Juselius (1990); and Johansen’s (1995). The testing hypotheses are the null of non-cointegration against the alternative that is the existence of cointegration by using the maximum likelihood procedure (Johansen and Juselius, 1990). To determine the number of co-integrating vectors, Johansen (1988, 1989) and Johansen and Juselius (1990) suggested two statistic tests, viz., the Trace test statistic, and the Maximum Eigenvalue test statistic. The data for agricultural GDP and economic growth of Bangladesh are collected from several sources including the World development indicators, 2012 published by the World Bank, International Monetary Fund (IMF) CD-Rom and various issues published by Bangladesh Bureau of Statistics (BBS). Variables are transformed in their natural logarithms to avoid the problem of heteroscedasticity and denoted as lnAGDP and lnGDP. The value of gross domestic product of agriculture is used as a proxy for agriculture while gross domestic product is used as a proxy for economic growth.

Source of Information: Journal of Business Studies, JBS-ISSN 2303-9884, Volume-7

Article Link (Online Journal):

Funding Source:

Budget:

Total Budget (Tk.) :

Achievement/Findings:

This study used annual time series data for the period from 1973-74 to 2010-11 in order to identify the causal relationship between agriculture and economic growth in Bangladesh. The Augmented Dicky-Fuller (ADF) test and Phillips-Perron (PP) test were used to check the stationarity of agriculture and economic growth. Having found both the variables are non-stationary but integrated of order one, the techniques of cointegration and Granger causality tests were employed to examine whether a long run relationship exists between agriculture and economic growth in Bangladesh from 1973 to 2008. The results of the cointegration test suggest that, there is a long run relationship between agriculture and economic growth in Bangladesh. The Granger causality test suggests that the relationship is uni-directional running from agriculture to economic growth with two periods lagged. The VAR results confirmed that changes in economic growth responds more critically to changes in agricultural output. This implies that boosting the agriculture sector will effectively stimulate economic growth in Bangladesh. Promoting price support and input subsidy policies, building agriculture-based growth centers, extending irrigation and credit facilities, and facilitating market access for the rural crop producers can be the options towards achieving high and stable agricultural growth in Bangladesh in the future.

Knowledge Management: Journal