Macroeconomic Determinants of Economic Growth in Zimbabwe

Abstract

The study used time series data for Zimbabwe (1975-2012) to: (i) empirically determine the link between economic growth and four macroeconomic variables (Foreign Direct Investment, volume of trade, Inflation and capital accumulation) (ii) analyze the impact of these macroeconomic variables on economic growth (iii) test if innovations in macroeconomic variables influence on the rate of economic growth and vice versa and (iv) establish the major drivers of economic growth. Using the Vector error correction approach findings showed that inflation and openness had a significant negative and positive impact on economic growth respectively. Inflation converged to long run equilibrium with growth and causal relationships were found among other variables in the short term. The response of economic growth to shocks in gross fixed capital formation, trade openness and foreign direct investment was effective even beyond the 30 year period while shocks from inflation were ineffective. The major driver of growth was its previous performance and the rate of inflation in the long term. Overall our findings are consistent with theory. Policy makers should focus on increasing the degree of openness, incentivizing export oriented firms and maintaining low levels of inflation to enhance growth.

Keywords: Economic growth, Trade Openness, Inflation, Gross fixed capital formation, Vector error correction, Vector Autoregression, Impulse response function, Forecast error variance decomposition.