On the Validity of Purchasing Power Parity: The Case of Sierra Leone

Abstract

This paper attempts to empirically validate the Purchasing Power Parity (PPP) theory in the context of Sierra Leone. To achieve this objective, cointegration and error correction techniques were utilized to account for both long and short-run dynamics over the period 2007Q1 to 2019Q1. The Engel-Granger cointegration technique was utilized to ascertain the long-run relationship between the exchange rate and the price differential between Sierra Leone and the United States of America, while the redundant variable test was used to attain the parsimonious short-run error correction model. The results indicated a cointegrating relationship, while the coefficient on the price differential was greater than one (1), reflecting that the PPP does not hold for Sierra Leone. Moreover, the short-run results showed a rejection of the theory and rather endorses the presence of depreciation inertia, where past depreciation of the exchange rate is a major determinant of its current depreciating trend.

Import Substitution Industrialization (ISI): An Approach to Global Economic Sustainability

“…In view of SDGs 1 and 5, which are geared toward ending poverty in all forms and encouraging gender equality, it is vital to remodel the ISI strategy to ensure that government policies particularly in the less developed states of Africa and Asia are molded to cater for human resource development that should be focused on acquiring functional and transformational skills, with the necessary innovations that make it possible to not only rely on primitive means of industrialization but also modelled around the utilization of modern technologies Saffa and Jabbie 2020;Jabbie et al 2020). Such approach will make it possible for the human potential to be adequately utilized, indiscriminately in the best interest of incorporating inclusivity, where both men and women are considered as integral part of developmental ventures (Jabbie et al 2020).…”

“…Most important in this case is the Department of Trade and Industry in individual African countries, which should focus attention in identifying policies to strengthen industrial opportunities for institutions to improve their productive capacity in minimizing overreliance on imported commodity items. Such policies should be backed by government support through subsidies, tied with the condition of improving competitive production and affordable pricing of finished produce while also addressing capacity for inclusive employment (Jabbie et al 2020). There is also high scope for specific targets to be addressed in nurturing shortages of vocational skills set (that which is connected with modern and renewable technologies) in a bid to ensuring countries lagging behind in the region are capable of building capacity in reducing their reliance on the importation of essential commodities from the developed economies .…”

“…International institutions like the IMF are very reluctant in their research findings to attest the truth about there being a need for weaker economies in the world to engage in ISI protectionist strategy, which is meant to reduce their reliance on basic commodity imports. It is certain from empirical economic studies that such high dependence on imports is the primary reason for the backward state of economies located in Africa (Jackson and Jabbie 2020;Jabbie and Jackson 2020) and in some of the Asia and Latin American economies alike, where too much is needed from outside to sustain lives.…”

“…In fact as identified above, the dominance of supply side-driven factors, which is based on high dependence on imports (notably crude oil products and staple items like rice), attributable to weak domestic institutional setup is certainly to be blamed for the uncontrolled state of high inflation and continued depreciation of domestic currencies experienced in many of these economies (Jabbie and Jackson 2020;Jackson 2020;). Critics' voices will continue to be dominant about the failure of ISI, given the fact that experiences from protectionist measure implemented in many of the African and Latin American economies in particular have demonstrated poor outcomesnotably on account of the dominance of political patronization, which seem to have overshadowed many of the economies in Africa, certainly in complete contrast to the experience of the Asian Tiger and some of the Latin American economies (Akyuz and Gore 2001;Akyuz et al 1998).…”

Another Prospective on Real Exchange Rate and the Traded Goods Prices: Revisiting Balassa–Samuelson Hypothesis

“…Such a finding is in sharp contrast to the BS theory which staunchly believes in the definite existence of PPP for tradable sectors and renders nontraded sectors solely responsible for inducing trend departures to the real exchange rate. This tremendous finding of [4] has proven to be a breakthrough in the current works on the similar line of research; therefore, the validity of PPP for traded-sector prices was investigated for other regions also [6,[12][13][14][15][16][17][18][19][20][21][22][23]. Ref.…”