On the Casual Relationship between Household Consumption and Economic Growth in Saudi Arabia

Transcription

1. WP /19/09 SAMA Working Paper: On the Casual Relationship between Household Consumption and Economic Growth in Saudi Arabia November 2019 By Moayad Al Rasasi, PhD Yasir Alzahrani Mohammed Alassaf Economic Research Economic Research Economic Research Department Department Department Saudi Arabian Monetary Authority The views expressed are those of the author(s) and do not necessarily reflect the position of the Saudi Arabian Monetary Authority (SAMA) and its policies. This Working Paper should not be reported as representing the views of SAMA 1
2. On the Casual Relationship between Household Consumption and Economic Growth in Saudi Arabia1 November 2019 By Moayad Al Rasasi , PhD Yasir Alzahrani Mohammed Alassaf Abstract This research paper explores the causal relationship between household consumption and economic growth over the period of 1980-2017. Hence, it applies the popular cointegration tests alongside the most common causality test. The empirical analysis shows the presence of a positive long run relationship between household consumption and economic growth. In specific, we find evidence revealing that a one percent increase in household expenditures on consumption would boost economic growth by 0.7 percent. Furthermore, causality analysis, based on Granger (1969) test, suggests that variation in household consumptions could explain changes in economic growth. Keywords: Saudi Arabia; Consumption; Economic Growth; Causality; Cointegration JEL Classification Code: B22, C22, E21, O47. Authors’ contacts: Moayad Al Rasasi, email: malrasasi@sama.gov.sa; Yasir Alzahrani, email: yialzahrani@sama.gov.sa; Mohammed Alassaf, email: moalassaf@sama.gov.sa 1 2
3. 1 . Introduction Assessing the role of consumption expenditures in promoting economic growth has been one of the most important research topics that have received a great deal of attention in macroeconomic research. Hence, there are alternative perspectives regarding the impact of consumption on economic growth depending on various theoretical viewpoints. Broadly speaking, some economists built their analysis based either on the Keynesian consumption theory developed by Keynes (1936) or on the life-cycle hypothesis proposed by Modigliani and Brumberg (1954). This in turn encourages some economists and policy analysts to believe in the essential role of consumption spending in boosting economic growth. Therefore, understanding the nexus between consumption and output growth becomes crucial from policymakers’ perspectives, since maintaining sustainable economic growth is the principal concern of macroeconomic policies, and the government requires a steering mechanism for that. Indeed, there are a large number of studies exploring the relationship between consumption expenditures, either public or household, and economic growth on various advanced and less advanced economies, employing multiple econometric approaches. However, even with this large share of literature, there is a very limited amount of research assessing the role of 3
4. consumption on economic growth for the case of Saudi Arabia . In other words, the existent consumption-growth literature covering Saudi Arabia tends to analyze the effects of energy consumption on economic growth (e.g. Al-Iriani 2006; Alkhathlan & Javid 2013; Alshehry & Belloumi 2015), rather than evaluating the impact of private or public consumption on growth. This in turn motivates us to examine the effects of household consumption expenditures on economic growth. Additional motivation arises from the actual data published by the General Authority for Statistics revealing that real household consumption represents about 56 percent of the real non-oil sector output in 2000; this percentage increased to 61 percent in 2017. Similarly, it can be observed from the actual data that over the 2000-2017 period real household consumption represented about 87 percent of the real non-oil private sector output. One, then, can easily notice the essential role of household consumption in promoting the non-oil economic growth. Some economic indicators in Saudi Arabia support the notion of consumption-led growth. For instance, consumers’ loans, cash withdrawals, and point of sales over the last decade are fluctuating and associated with the economic growth of the non-oil sector as table (1) shows. 4
5. Table 1 : Growth Rates for Selected Economic Indicators (percentage) Year Real Non-Oil GDP Consumer Loans Cash Withdrawals from ATM 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 4.2% 3.3% 3.3% 3.6% 9.3% 7.4% 8.4% 8.9% 8.0% 5.9% 9.5% 8.2% 5.5% 6.4% 4.9% 3.2% 0.2% 1.3% 12.1% 15.3% 16.5% 22.8% 32.0% 32.2% 9.1% 0.3% -3.4% 3.8% 9.1% 20.5% 16.4% 9.1% 7.3% 3.1% 3.6% 0.03% 16.7% 12.9% 29.8% -3.5% 16.8% 22.7% 13.5% 10.6% 22.8% 8.5% 13.9% 23.5% 8.2% 6.8% 9.5% 6.3% -3.1% -3.3% Point of Sales 17.4% 38.9% 43.9% 33.8% 21.6% 17.1% 10.3% 27.3% 30.4% 9.4% 27.7% 37.6% 23.6% 9.8% 19.2% 8.0% 5.7% 9.7% Source: SAMA Database With this background emphasizing the essential role of consumption in boosting economic growth, the main objective of this paper is to evaluate the impact of household consumption on economic growth in the context of the Saudi Arabian economy. To do so, we utilize real annual data over the period of 1980-2017 and apply the most common econometric procedures to assess such link. To our knowledge, unlike previous empirical research on Saudi Arabia analyzing the nexus between energy consumption and economic growth, this paper examining the effects of overall expenditures of household consumption on goods and services. 5
6. The rest of the paper is organized as follows . Previous empirical studies are presented in section 2, and a description of the dataset is contained in section 3. The applied empirical tests and discussion of the results are covered in section 4, while section 5 summarizes the findings of this paper. 2. Literature Survey There is a growing body of literature attempting to analyze the impact of consumption on economic growth with notable attention to advanced and less developed and emerging economies. By reviewing the existing studies on various countries, we have noted that some of these research papers have tended to use different measures for consumption that could be either private, public, or consumption per capita. Likewise, some studies have tended to use various measures for economic growth as well as adding new variables contributing to consumption and economic growth such as inflation or government expenditures. The survey started with the empirical study of Guisan (2004), who investigated the casual relationship between real economic growth and real consumption in both the US and Mexico by employing annual data for the 1970-2002 period. His study attempted to examine such a relationship by applying various tests consisting of Granger causality, the new version of 6
7. Granger causality , the cointegration test developed by Engle-Granger, and Hausman tests. The findings of these tests did not give a clear indication of the existence of such relation. For instance, the new “modified” Granger causality test showed the presence of bidirectional causality running from consumption to economic growth and vice versa in both countries. However, the Granger causality test revealed the existence of causality using US data, but it is not valid for the case of Mexico. Gomez-Zaldivar and Ventosa-Santaularia (2009) examined the link between consumption and economic growth in Mexico and the US by utilizing annual data spanning from 1971 to 2002 and applying standard tests of cointegration and causality. The empirical results showed the lack of both cointegration and causality between the variables under investigation for the case of Mexico; however, the presence of causality and cointegration between consumption and economic growth was confirmed for the case of the US. In particular, the reported evidence indicated that changes in consumption are able to predict changes in economic growth. Chioma (2009) adopted the simple Ordinary Least Square (OLS) estimation method to examine the relationship between economic growth and personal consumption in Nigeria over the period starting from 1994 to 2007. The empirical findings revealed that higher economic growth does not lead to higher personal consumption. 7
8. To assess the essential role of private consumption in promoting economic growth , Mishra (2011) conducted an analysis of annual observations covering the period 1950-2009 for the Indian economy. The most common econometric procedures such as Johansen and Juselius (1990) cointegration and Granger (1969) causality tests were implemented. The results of these tests indicated the presence of valid cointegration relationship between private consumption and economic growth. Likewise, the long run causal relationship running from consumption to economic growth was confirmed; however, the short run causality between the two variables is absent. Moreover, Bin-Amin (2011) adopted the most popular cointegration tests developed by Johansen and Juselius (1990) as well as the ARDL cointegration approach initiated by Persaran & Shin (1995) in order to study the long run relationship between consumption and GDP growth in Bangladesh. To reach such an objective, he relied on annual data from 1976 to 2009 to conduct these tests that validate the presence of a long run relationship between consumption and economic growth. Furthermore, the result of a Granger (1960) causality test confirmed that there is a causality running from economic growth to consumption, but not vice versa. By relying on Bulgarian and Russian data to assess the existence of a long run relationship between consumption and economic growth, Genchev 8
9. (2012) used consumption per capita and GDP per capita with annual data spanning the 1990 -2010 period. The tests of cointegration indicated that there was a long and significant relationship between per capita consumption and per capita GDP in both countries, suggesting the essential role income plays in promoting consumption. Ramli and Andriani (2013) investigated the effects of consumption, investment, and government expenditures on Indonesian economic growth for the period starting from 2001 to 2010. The analysis of this study was based on a simple regression being estimated by the Ordinary Least Square (OLS) estimation method. The empirical results showed the influential role of these variables in influencing economic growth; in specific, the resulting evidence suggests that an increase in consumption of one percent increases economic growth by 0.67 percent. On the other hand, Bala (2014) attempted to explore the relationship between household consumption and economic growth in Romania over the period of 1990-2012. The Engle and Granger (1987) cointegration test revealed the absence of a long run relationship between these variables. Nguyen (2015) attempted to probe if there is a long relationship between consumption and economic growth in Bangladesh by analyzing annual data from 1980 to 2014. The author concluded that there is a bidirectional Granger causality between real consumption and real GDP, 9
10. implying both variables are mutually affecting each other . Kim (2017) used a factor analysis approach to evaluate the relationship between consumption and economic growth in 52 Asian countries from the period of 2012 to 2016. The paper uses 18 variables including, among other variables, GDP per capita reflecting economic growth, consumer spending, savings, and government spending. The empirical evidence confirmed the existence of a positive relationship between consumer spending and economic growth in Asia. In addition to the mentioned studies, Tapsin and Hepsage (2014) provided a comprehensive literature review on the link between economic growth and consumption. Concerning the literature focusing on Saudi Arabia, we have found that the prevailing research is analyzing the specific relationship between energy consumption and economic growth, rather than considering the overall consumption of goods and services. The findings of these studies (e.g. AlIriani 2006; Alkhathlan & Javid 2013; Alkhathlan et al. 2012; Alshehry & Belloumi 2015; Algahtani et al. 2017) seem to be mixed depending on the variables and econometric techniques that are used in the analysis. None of the observed literature, based on our knowledge, examines the nexus of household consumption and economic growth in Saudi Arabia. Henceforth, 10
11. this research paper aims to enrich the literature by investigating such a relationship . 3. Data The purpose of this paper is to investigate the dynamics of the relationship between household consumption and economic growth in Saudi Arabia. To this end, this study utilizes two economic variables: the real non-oil Gross Domestic Product (GDP) measuring economic growth, and real private final consumption expenditure (C) as a measure for household consumption. This study relies on annual observations expressed in natural logarithm form for the sample period from 1980 to 2017. The data series used are obtained from the General Authority for Statistics (GASTAT). The non-oil GDP deflator measure was used in order to convert consumption from nominal to real terms over the period 1980-2000 since real consumption data are not available for this period. 4. Econometric Methodology 4.1 Unit Root Tests An evaluation of the stochastic properties of macroeconomic time series has become necessary in empirical analysis in order to avoid spurious 11
12. relationships . Prompted by this necessity, eminent economists have developed various unit root tests evaluating the time series properties of macroeconomic and financial time series. In this paper, therefore, we follow the empirical literature by checking the stochastic properties of the utilized macroeconomic variables. Thus, we apply the unit root tests originated by Kwiatkowski et al. (1992) since it is more efficient and can overcome the issues with earlier unit root tests. That is to say, unit root tests such as Dickey & Fuller (1979) and Phillips & Perron (1988) seem to be weak in power as noted by Schwert (1987). The results obtained from this test are summarized in table (2) and confirm that all variables are integrated of order one. Table 2: Kwiatkowski et al. (1992) Unit Root Test KPSS Test Level Data First Difference Constant Trend Constant Trend C 0.66 0.20 0.13 0.12 Non-oil GDP 0.69 0.19 0.31 0.10 Note: The KPSS 5% critical values for constant = 0.463, and for trend= 0.146. 4.2. Cointegration Tests The results obtained from unit root tests, as presented in table (2), confirm that the two macroeconomic variables under investigation, real nonoil GDP and consumption, are integrated of order one. This finding in turn 12
13. might indicate the presence of a cointegrating relationship between the two variables as suggested by Engle and Granger (1987). To assess whether a cointegration relationship exists or does not; this paper relies on the most popular cointegration tests, namely Trace and Maximum Eigenvalue tests developed by Johansen and Juselius (1990). The results of both tests, as shown in table (3), suggest the presence of a cointegration relationship between real non-oil GDP and real private final consumption expenditure at the 5 percent significance level. The presence of such a cointegration relationship indicates that all these variables seem to share the same trend, which in turn suggests that the cointegration relationship is not spurious and that it is valid for analysis and forecast. Table 3: Johansen and Juselius (1990) Cointegration Tests Null Hypothesis Alternative Hypothesis Test Statistics 5% Critical Value Panel A: Trace Test 19.67 15.49