Export earnings instability and investment in Ghana from 1980-2011

Abstract

The study investigates the effect of the instability of export earnings on gross fixed capital formation (total investment) in Ghana over the period, 1981 to 2011, marked by continuous political stability. The analysis employs the autoregressive distributed lag (ARDL) method of cointegration to evaluate a set of factors, which affect investment as measured by the investment to gross domestic product (GDP) ratio. The results of the analysis confirm the expected negative relationship between export earnings instability and investment. Other factors that significantly influence investment in Ghana are real GDP growth, merchandise trade balance, real interest rate and gross domestic savings ratio. Based on the analysis, we recommend policy measures aimed at increasing the domestic savings ratio and export diversification given the re-emergence of reduced real values of Ghanaian export commodities in the world market after the high values of these commodities during the first decade of the 21st century.