Analyzing the relationship between Industrialization and economic growth in Lesotho

Figures & data

Table 1. Justification of explanatory Variables

Independent Variables	Theoretical justification	Empirical justification
Foreign direct investment as a percentage of GDP	FDI is an integral part of the Balance of Payment (BoP) and the BoP is built into the national income identity measure of GDP	Studies that have employed FDI or FDI as an independent variable that affects GDP growth rate abound. Eg Nguyen et al. (2018); Mehar (2021); Sahar (2020); Ibitoye et al. (2022); Wang and Su (2019); etc
Domestic Credit to the Private Sector	Domestic Credit to the Private Sector constitutes an important aspect of private Investment which is generally given significant weight in the determination of Investment and by extension GDP based on the National income identity.	Examples of empirical works that employ Domestic Credit to the Private Sector as an independent variable that affects GDP growth rate include: Mehar (2021); Yu et al. (2014); Duramany-Lakkoh et al. (2022).
Industrial value added	The Solow growth model as well as other growth models explain economic growth via the accumulation and utilisation of capital and production.	Obioma et al. (2015); Ughulu (2021); Akpan and Eweke (2017); Binta and Bazza (2018). Ndiaya and Lv (2018); Saba and Ngepah (2021), Attiah (2019) and Bokosi (2021)
Real effective exchange rate (REER)	The REER equally determines the foreign exchange market and by extension the balance of payment.	Examples include: Babubudjnauth and Seetanah (2020); Duramany-Lakkoh et al. (2022). Sahar (2020); Ibitoye et al. (2022).

Table 2. Summary statistics of Variables

Description	GDPG	LIND	DCPS	FDI	REER
Mean	3.17	21.76	14.95	2.57	137.035
Std. Deviation	3.01	0.81	4.29	1.63	53.45
Minimum	−7.56	20.01	5.26	0.43	56.62
Maximum	8.6	22.56	22.02	8.75	207.28
Variance	9.09	0.62	18.42	2.67	2856.49
No of observations	40	40	40	40	40
Pairwise Correlation
Description	GDPG	LIND	DCPS	FDI	REER
GDPG	1
LIND	−0.26	1
DCPS	−0.17	0.10	1
FDI	0.03	0.33**	0.09	1
REER	0.41***	−0.82***	0.09	−0.27*	1

Note: ***, ** and * represents 1%, 5% and 10% level of significance. Variables are described in the appendix.

Table 3. Unit root test results

Variables	ADF Test		PP Test		Order of Integration
	Level	First Difference	Level	First Difference
GDPG	−4.108***		−4.554***		I(0)
LIND	−3.006**		−3.209**		I(0)
DCPS	−1.594	−4.403***	−1.779	−6.351***	I(1)
FDI	−5.385***		−5.452***		I(0)
REER	−0.780	−4.595***	−0.789	−5.587***	I(1)

Note: ***, ** and * represents 1%, 5% and 10% level of significance. Both tests employed the optimal lag lengths based on AIC.

Table 4. ARDL Bounds test cointegration results

Statistics	Value	Bound level	Critical Bounds
F -Statistics	7.856***		1%	2.5%	5%	10%
		I(0) Bound	3.74	3.25	2.86	2.45
		I(1) Bound	5.06	4.49	4.01	3.52

Note: ***, ** and * represents 1%, 5% and 10% level of significance.

Table 5. Diagnostic checks

Diagnostics	Null Hypothesis	Prob Chi -square	Conclusion
Breusch-Godfrey LM Test	$H_0$: No serial correlation	0.4586	Don’t reject $H_0$
Autoregressive conditional heteroskedasticity	$H_0$: No ARCH effects	0.7250	Don’t reject $H_0$
White Test	$H_0$: No Homoskedasticity	0.4215	Don’t reject $H_0$
Skewness/Kurtosis	$H_0$: skewness and kurtosis are different from the normal distribution	0.4173	Don’t reject $H_0$

Table 6. Short and long-run effects of industrial development on the economic growth of Lesotho

Description	Coefficient
Short Run
Foreign direct investment as a percentage of GDP	2.898* (0.037)
Foreign direct investment as a percentage of GDP (L1)	3.483*** (0.007)
Foreign direct investment as a percentage of GDP (L2)	1.982* (0.071)
Foreign direct investment as a percentage of GDP (L3)	0.897 (0.169)
Domestic Credit to the Private Sector	2.788 (0.204)
Domestic Credit to the Private Sector (L1)	3.146 (0.155)
Industrial value added	11.103** (0.049)
Industrial value added (L1)	17.443** (0.014)
Long-run
Foreign direct investment as a percentage of GDP	−1.468 (0.159)
Domestic Credit to the Private Sector	−2.225** (0.011)
Industrial value added	1.8102** (0.022)
Real effective exchange rate	0.021** (0.035)
ECM	−1.4604*** (0.000)
Constant	−48.4925* (0.058)
R squared	0.8110
Number of Observation	36

Table 7. Results of the NARDL estimation of industrial output on economic growth

Variables	Long-run effect [+]	Long-run effect [-]	Long-run asymmetry	Short-run asymmetry
Foreign direct investment as a percentage of GDP	0.816 [0.255] (0.623)	1.864 [0.409] (0.536)	[0.696] (0.422)	[0.389] (0.546)
Domestic Credit to the Private Sector	−9.771 [0.428] (0.527)	1.721 [0.015] (0.905)	[0.424] (4.178)	[0.064] (0.804)
Industrial value added	−3.256 [1.352] (0.270)	−37.864 [3.68] (0.081)	[4.178] (0.066)	[0.708] (0.418)
Real effective exchange rate	0.130 [0.717] (0.415)	−0.081 [0.415] (0.934)	[0.46] (0.512)	[0.204] (0.661)

F statistics are in [] and probability values in ().

Figure A1. Scatter gram of GDP growth and the model residual.

Figure A2. CUSUM graph of the Model.

Figure A3. Line graph of GDP growth and industry value added.

Table

Variables	Source	Description
GDPG	WBI	GDP growth (annual %)
IND	WBI	Industry (including construction), value added (constant LCU)
DCPS	WBI	Domestic credit to private sector (% of GDP)
FDI	WBI	Foreign Direct Investment, net inflows (% of GDP)
REER	WBI	Real effective exchange rate index (2010 = 100)
GDPPC	WBI	GDP per capita (Constant LCU)

Where WBI represents World Bank Indicators.

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