LONG RUN RELATIONSHIPS BETWEEN SECTOR SHARES AND ECONOMIC GROWTH A Panel Data Analysis of the Schengen Region

Abstract

The structural change of economy entails that in long run the dynamics of sector shares (industry, service, and agricultural) are related to each other and to economic growth.For this purpose co-integration, error correction (EC), and Granger non-causality test (GC) models were estimated in panel setting.The panel data consists of 15 Schengen countries in period 1970-2004.The co-integration analysis confirmed long run relationships between the sector shares.EC-model estimates based on different presentations of sector share co-integration relations indicated that long run structural adjustments between all sector share pairs existed.Shocks in industry sector share cause turbulence in sector share relationships which slowly correct to equilibrium.The results of GC-tests suggested that unidirectional causality runs from the growth rate of GDP per capita (GDPc) to agriculture share growth, but a two-way causality runs between industry share growth and growth rate of GDPc.The relationship between services share growth and growth rate of GDPc is also bi-directional.Therefore, feedback impacts are found between sector shares and the growth rate of GDP per capita.The links between GDPc growth, service, and agriculture shares are complex but industry sector is still the "engine" of economic growth.

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