Development planning and macroeconomic policy integration : a study of Eritrea.

Abstract

The purpose of this paper was to assess the integration of development planning and macroeconomic policy in Eritrea. In the first section of the paper, assessment of output and sectoral contribution to GDP of the major sectors is carried out and it is found that output growth in Eritrea is mainly influenced by agricultural output variations. Furthermore, economic growth is analyzed based on unconstrained production function approach and the results indicated that economic growth is impeded due to scarcity of capital input. Similar investigation based on constrained production function indicated also that capital labor ratio has significant effect on output labor ratio. In the next section, macroeconomic investigation using regression analysis is conducted. However, since most macroeconomic time series data on the level forms are non-stationary, ADF tests of stationarity are done. In addition, causation and cointegration tests are carried out to find the correct structure of the variables. Results from ADF statistic test indicated that all the time series data of the macroeconomic variables are found to be non-stationary. Furthermore, the Granger causal test indicated that government revenue causes government expenditure; economic growth Granger causes government expenditure and government revenue, while the analysis result of export growth versus economic growth indicated that causal relationship between the two variables is ambiguous. Moreover, although the time series data of most of the variables were found to be non stationary, the result indicated that they are cointegrated and this implies that they have long run linear relationships. Furthermore, regression analysis of consumption expenditure, investment expenditure and import demand on real income and other variables has been carried out. The results indicated that real income has significant coefficient estimators with respect to all the dependent variables used in the analyses. Finally, the overall assessment indicated that development planning so far in Eritrea is a projection of simple growth models that does no account for many policy instruments, while macroeconomic policies are limited to manage all economic sectors. Moreover, the regression analyses indicated that lower growth rate is dictated more due to structural and institutional rigidity rather than complicated fiscal and monetary policies variability in Eritrea. Hence, it is very difficult to conclude that development planning and macroeconomic policy are integrated in Eritrea under such conditions.