The influence of industrial sector on economic growth in Palestine : a Kaldorian approach

Abstract

The paper aims to test the Kaldor’s laws in Palestine, by explaining and analyzing the Kaldor’s first law and second law. This approach is considered one of the endogenous growth theories for making policies that will stimulate openness, competition, and efficiency. The laws formulated in terms of Co-integration and Granger causality analysis in order to examine the relation among growth in industrial output and growth in GDP in the long and short- run. The study examines the contribution of industrial sector to the growth of Palestinian economy by via quarterly time series data from 2000 to 2015, and formulates the laws in term of co- integration and Granger causality between industrial output and GDP ( the first law) and manufacturing output and labor productivity (Verdoons law/ second law) . Secondary data is obtained from Palestinian Central Bureau of Statistics. Due to the recent establishment of the Palestinian Authority (PA), data was limited for short period from 2000 to 2015. The study is based on both the descriptive analysis to describe the variables of the study, and statistical analysis to study the long run and short run relationship between the growth in the industrial sector and GDP and also to examine the relation among the industrial growth and the growth of productivity in industrial sector. Three models are used in this study based on first and second Kaldor’s growth laws. The first, real gross domestic product forms the dependent variable while industrial output is the independent variable. In the second, labor productivity in industrial sector forms the dependent variable while growth of industrial production is the independent variable. In the third, growth in the number of employees in manufacturing sector forms the dependent variable while growth in manufacturing output is the independent variable. (ADF), Augmented Dickey Fuller Unit Root Test, show that the data is stationary at first difference, as most of the financial and economic variables are characterized by instability (non-stationary) over time. Then, the co-integration analysis using Johansen co-integration test, to examine the presence of steady linear relation among non -stationary variables in the long run. this test indicates that industrial sector has significant and positive linear long run relationship with economic growth. Then vector auto-regression, the Granger Causality Test also used to capture causality among the variables in order to scrutinize the direction of the causal relation among the industrial output and growth of the economy in the short run. Finally, (VECM) the vector error correction model also used to scrutinize the long and short run equilibrium relationships among the variables. The results of the data analysis through using various analytical models indicated an insignificant impact of growth in industrial sector on growth in real GDP in long run in Palestine, and there are no long run relation among the industrial output growth and the increase of labor productivity in manufacturing, and there are no long run relation among growth in industrial output and the growth of number of manufacturing employees. On the other side this empirical study also found the unidirectional Granger causality from growth in GDP to the growth in manufacturing sector , as GDP growth stimulates the development of the industrial sector in Palestine in the short run, despite this results opposed what Kaldor’s proposed that the direction of causality should be from manufacturing sector to economic GDP growth, but the growth in GDP in Palestine in essential for the sake of development the industrial sector in short run. This empirical study also found short run unidirectional Granger causality from growth in manufacturing sector to growth in the number of employees in manufacturing, and also found that growth in manufacturing and growth of productivity do not cause each other in short run. But there is a short run causal relationship, run in one direction from real gross domestic product to the industrial sector, which indicates that growth in real GDP causing the development of industrial sector over the short term. While it was not there a long-run causal relationship from GDP growth to the growth in the manufacturing output, this may explain that the level of economic growth in Palestine is not enough to stimulate high growth rates in the Industrial sector in the long run. This study gives the guideline to the policy makers. In order to achieve high growth rates