Analysing Relationship between Economic Growth and Inflation and Unemployment Youth in Burundi. Elasticity and Threshold

Abstract

The purpose of this study is 1) to analyze the relationship between gross domestic product growth (GDPG) and inflation (INF), unemployment youth male (UNYM), and unemployment youth female (UNYF), to analyze the nature of elasticity, and 3) to evaluate the threshold where GDPG changes. Time-series data covering 1970 -2018 were used to examine the impact of INF and UNYM, and UNYF on GDPG. To estimate the relationship between GDPG and INF and UNYM, and UNYF, regression analysis was performed. Rainbow test was used to test the linearity of the model, Breusch-Pagan test was used to test homoscedasticity, Box Ljung Test was used to test autocorrelation, Phillips-Perron Unit Root Test was used to test whether time series were stationary. Elasticity was applied to measure the degree of responsiveness of change in GDPG to changes in INF and UNYM, and UNYF levels. Data analysis was performed using R and JASP. Results revealed a statistically significant negative relationship between GDPG and INF, UNYM and UNYF. Moreover, the result showed that GDPG responded strongly towards change in inflation and unemployment youth. A threshold was found beyond which GDPG became negative while under the threshold, GDPG continued to grow. To increase economic growth, Burundi should reduce inflation and unemployment youth under the threshold. Burundi should also focus on reducing female unemployment rate as it has great impact on economic growth. Burundi should stimulate entrepreneurship as it contributes in new job creation.

Key words: Burundi, unemployment, threshold, economic growth.

Introduction

The sociopolitical crisis occurred in 2015 has affected Burundian economy. Almost economic sectors were affected by the crisis. The report of the United Nations (2016) related to the country profile gave some indicators prevailing for 2016. According to the report GDP decreased by 3.9 per cent, growth was estimated at 0.7 per cent of GDP in 2016. During 2015, construction sector decreased by 35 per cent, energy declined by 10 per cent, trade declined by 9 per cent, hotels and catering declined by 6 per cent, and agriculture which contributes 36 per cent to GDP decreased by -3.9 per cent. Public finances deteriorated since 2014, and continued in 2015 leading to the decline of resources by 16 per cent due to the interruption of budget support and falling revenue. The budget deficit arrived at 5.7 per cent of GDP in 2015. Price increased by 5.6 per cent in 2015. Accessing to credit was very restrictive with an average borrowing rate of 16.9 per cent. The population was estimated at 10.1 million people with a density of 379 inhabitants per km2 with the population growth rate estimated at 3%; which remains very high.

There is no agreement on the relationship between inflation and economic growth. Fakhri (2011) showed various view of the impact of inflation on growth. According to him Sidrauski, estimated that there is no effect of inflation on growth, indicating that money was super-neutral; (b) the point of view of Tobin assumed that money was a synonymous to capital, leading inflation to have a positive effect on long-run growth; (c) the idea of Stockman assumed that money was complementary to capital, influencing inflation to have a negative effect on long-run growth; (d) the final point of view is for the New class of models in which inflation has a negative effect on long-run growth, provided that the inflation rate exceeds certain threshold level. In other words, the class models accept that there is a non-linear relationship between inflation and economic growth.

Kryeziu and Durguti (2019) determined the impact of inflation rate on the growth rate or the GDP for Eurozone countries using panel data for the period 1997-2017. Durbin-Watson test was performed to analyze the correlation of serial correlation, and the Breusch-Pagan test was used to test heteroskedasticity. The result of a multiple linear regression model showed that inflation rate has positive impact on the economic growth rate for euro area. Fikirte (2012) analyzed 13 Sub- Sahara African countries from 1969 to 2009 to identify the relationship between economic growth and inflation. His result showed that there was a negative relationship between economic growth and inflation.

Karikari and Abeti (2019) analyzed the impact of unemployment on economic growth, and found the existence of a negative short-run and a long-run relationship between unemployment and economic growth in China using the data covering 1991-2018. Diellza (2018) examined the relationship between unemployment and GDP growth in seven countries of Western Balkan during 2001-2015. He found out that there existed a trade-off between unemployment and economic growth in Western Balkan countries, increasing by one per cent point of unemployment will reduce GDP growth by 0.5 percent points. Ademola and Badiru (2016) analyzed and determined the effects of unemployment and inflation on economic performance in Nigeria. The results indicated the existence of two cointegrating equation implying that there existed long-run relationship between RGDP, Unemployment and inflation. The findings indicated that unemployment and inflation were positively related to economic growth.

Problem Statement

Burundi is among the poorest country in the world based on gross national income per capita. In May 20, 2020, the country organized general elections during which the country got a new President. Many initiatives are being implemented to increase economic growth including the development of the agriculture, youth unemployment rate reduction via the development of entrepreneurship. Increasing economic growth via the control of macroeconomic indicators like unemployment and inflation constitute a challenge for all countries. As indicated by Karikari and Abeti (2019) economic growth and unemployment are among the most important macro-economic variables and indispensable fundamentals in every strategic economic fiscal and monetary policies of every prosperous economy. With the highest population growth, combined the increasing in unemployment rate, the country needs to set up measure to deal with these issues. Mehrnooshand Feizolah (2016) found significant and negative effect of inflation and unemployment on economic growth in long-term, in other words inflation and unemployment decreased economic growth in long term in Iran.

Literature Review

Inflation and unemployment are two macroeconomic indicators that got much attention from policymakers, and scholars. While economic growth is an indicator of country wealth, unemployment rate is an indication of a country’s weakness in the total use of its human resources. Various topics have been developed whether to identify to what extent there are related to economic growth, or their causes, and their consequences in the society. Ademola and Badiru (2016) identified various definitions given to inflation. The main idea from all definition is that inflation refers to a general increase of price level of broad spectrum of goods and services over a long period of time. It is calculated as the rate of growth in the general price level over a given period of time. To the neo-classical considered inflation as a monetary phenomenon, and inflation occurs when there is more rapid increase in the quantity of money than output. The World Bank (2020) considers inflation as measured by the annual growth rate of the GDP implicit deflator indicates the rate of price change in the economy as a whole. The GDP implicit deflator is measured as the ratio of GDP in current local currency to GDP in constant local currency. This study used this indicator as measure of inflation.

As regard to unemployment. In this disagreement, some authors indicate that low inflation is benefit to economic growth while high inflation is harmful to economic growth. The challenge of Khayroollo (2011) is that there may be optimal level of inflation for an economy. His analysis revealed that there existed a positive long-run relationship between inflation and economic growth in Finland. However, the found relationship was non-linear, the Finnish economy grows at its highest rate when inflation is at four per cent. Mohsin and Abdehak (2000) indicated that the threshold above which inflation significantly reduces growth was estimated at one to three per cent for industrial countries while it was estimated to 7-11 per cent for developing countries. Rutayisire (2015) indicated that the threshold inflation was estimated at 2.5 per cent for industrial countries and 17 per cent for developing countries. His study conducted in Rwanda found inflation threshold at 12.7 per cent. Chien and Swee (2005) estimated the threshold level of inflation below which financial development significantly promoted growth at 7.25% for Taiwan and 9.66% for Japan. Phiri (2013) estimated an inflation threshold level of 22.5% for Zambia. Ikechukwu (2018) estimated at 11. 1 per cent inflation threshold in 41 African countries.

Ademola and Badiru (2016) identified many definitions. Unemployment refers to the situation where the supply of labour exceeds the demand for labour. Additionally, unemployment refers to a state of joblessness which happens when people are without jobs and they have vigorously wanted work within the past four weeks. Unemployment is obtained by dividing the number of unemployed individuals by individuals currently in the labour force. Unemployment refers also to numbers of people who are willing and able to work as well make themselves available for work at the prevailing wage, but no work for them.

Concerning economic growth Ademola and Badiru (2016) indicated that it is the process whereby the real per capital income of a country increases over a long period of time, and is measured by the rising in the amount of goods and services produced in a country. Diellza (2018) indicated that economic growth refers to the growth in output or as a growth in the capacity of the economy to produce goods and services that are needed to reduce the rate of poverty. The study used annual percentage growth rate of GDP at market prices based on constant local currency. GDP refers to the sum of gross value added by all resident producers in the economy, adding any product taxes and minus any subsidies not included in the value of the products. It is found without making deductions for depreciation of fabricated assets or for depletion and degradation of natural resources (World Bank, 2020).

Nwankwo and Ifejiofor (2014) established a relationship between economic growth and employment. According to them, as the amount of goods and services produced increases, the labour required for production will increase also; because economic growth and employment go hand-in-hand. According to these authors, unemployment in Nigeria is caused by poor educational planning within a system which does not equip students with the much needed tools required to meet the expected needs of the society; negligence of the agricultural sector, adoption of untimely economic policy measure since 1986 which accompanied in liberalization, deregulation and the devaluation programme of the domestic currency, many of the teething domestic firms collapsed. As consequence of loss of many jobs and thereby rendering many people unemployed. Bad impression about technical and vocational studies leading to large number of job seekers lack practical skills that could enhance self-employment. As consequence, rather than providing jobs for others, the graduates and unemployed persons keep depending on the government and the non-vibrant private sector for job opportunities. Finally, they added a hostile production environment characterized by absence of infrastructures and the overall heat of the investment environment. Regarding the consequences of unemployment, Nwankwo and Ifejiofor (2014) indicated unproductive labour force which cause lost output in terms of goods and services, coupled with no income tax to collect and the loss of receipts from indirect taxes payers; contributes to crime and violence, drug addiction, low GDP, deep psychological scars resulting from not realizing one’s dream, inadequate nutrition and adversely affect health of the youth and their families; political instability, etc. Youth unemployment used in this study refers to the share of the labor force ages 15-24 without work, but available for and seeking employment as indicated by the World Bank (2020).

Unemployment cannot be eliminated no matter the degree of development. However, as there is a threshold for inflation that harms economic growth, there is also a threshold unemployment that reduces economic growth. Celil and Ömer (2017) estimated inflationary threshold for relationship between unemployment and economic growth at 10.44%.

Study Objective

Generally, the study aims to investigate which was the impact of inflation and unemployment rate on economic growth during the period 1970-2019. Specifically, the study aims:

1) to investigate the relationship between inflation and economic growth and the nature of elasticity;
2) examine the relationship between youth unemployment (male and female) and economic growth and the nature of elasticity;
3) determine the threshold for each variable.

Significance of the Study

The study tends to contribute in increasing economic growth in Burundi by identifying the relationship between gross domestic product and inflation and youth unemployment. The study tries to identify the strength of the responsiveness of GDP resulting in the change of inflation and unemployment rate. Finally, it identifies the level on each variable beyond which GDP decreases. Knowing threshold will facilitate in the periodization process decision making by policymakers. Academically, the study contributes to the existing literature by testing the Okun law on the inverse relationship between unemployment, and economic growth. According to the Okun law reducing by one per cent unemployment will increase gross national product by 3 percent. It also contributes by analyzing the nature of the impact of inflation on economic growth as the is no common conclusion on the impact of inflation on the economic growth especially in Burundi. Ruzima and Veerachamy (2016) made critical analysis indicating that the lack of consensus in both theoretical and empirical research on the relationship between inflation and economic development. The findings mostly rely on the hypotheses adopted in the study. The theoretical literature therefore suggests that the nexus of inflation-growth can be optimistic, negative or neutral. The empirical results are often diversified on the basis of economic circumstances, the methods used, the data used, the essence of the research, whether cross-sectional, panel.

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