Empirical analysis of Macro-Economic Variables towards Agricultural Productivity in South Africa

Abstract

Agriculture in South Africa since the past decades has contributed less than 3% towards growth of the economy and has not improved since then. Moreover, this is an indication that it is not where it should be as the middle-income country. However even though the sector does not play a growth-leading role in the economy of South Africa; it is playing a growth permissive role. Therefore, the study empirically investigates the impact of macroeconomic variables towards agricultural productivity in South Africa. The Johansen cointegration and VECM approach have been applied to examine both the short-run and long-run relationship between macroeconomic variables and agricultural productivity over the period of 1975 to 2016. Three variations of equations were derived from the selected macroeconomic variables (gross domestic product, government expenditure, gross capital formation, consumer price index, real interest rate, real effective exchange rate, money supply and agricultural exports). The dependent variable which is agricultural productivity appeared in all those equations. Variations of results were established between the three equations with its dependent and explanatory variables. In terms of cointegration results, the study finds that there is cointegration relationship existing among those three equations even after the study imposed restrictions on a certain equation. Therefore it is concluded that there is long run relationship among agricultural productivity and macroeconomic variables. The study employed a VECM for all three equations. The speed of adjustment and its t-statistics has been performed according to expectations. Diagnostic tests, granger causality and impulse responses were also analyzed. In conclusion, the results suggest that for South Africa to increase agricultural productivity, the state should give adequate financial support to the agricultural sector by ways of sponsoring skill development and funding improvement of agricultural infrastructure. Investment in the sector should be encouraged from private and public organizations to ensure sufficient support for farmers.