In addition, the results show that in the short run a percentage increase in real exchange rate would cause economic growth to reduce by 5%. Ideally, devaluation of Ghana’s currency is make exportable products cheaper in the eyes of foreigners so that more of domestic products can be exported. But devaluation in Ghana’s currency over the 41 -year period did to increase export much since exports are mainly limited to few primary products. Ghana has always being a net import and this has had negative impact on economic growth. A percentage increase in inflation would cause about 17% increase economic growth in the short run. This implies that some level of inflation (which is a measure of macroeconomic instability) is required for growth both in the long run and in the short run since a rise in inflation raises GDP growth.
The VECM in Table 4.8 also shows a percentage increase in ratio of FDI to GDP would increase economic growth by 25.8%. In the short run, contribution of FDI to GDP is enhancing economic growth due to FDI flowed from developed countries to Ghana through multinationals especially in the mining and oil sector.
A percentage increase in openness ratio would decrease economic growth by about 28%. This shows that in the short run, openness of trade (trade liberalization) could be detrimental to growth in Ghana. The negative contribution of trade to growth in the short run may be due to the unfavourable terms of trade. The exports of Ghana are mainly raw primary products which experience fluctuating prices while the prices of her imports which are mainly consumables are rising, thus creating unfavourable terms of trade. In addition, the unfair competition on some of the sectors of the economy such as the textiles, poultry, and rice that results from trade liberalization could explain the negative impact of trade openness on GDP growth. In the short run, some of the domestic sectors of the economy are not able 56