An analysis of causality between tea exports and its determinants in Rwanda

Abstract

Tea growing in Rwanda started in 1952 and by 2002 tea had become the country’s largest export item. However, an increase in tea farm land has been constrained by population growth, impacting the quantity of tea that the country produces. Tea exports are volatile and are influenced by the real effective exchange rate, incomes of major trading patterns, total investments as a proportion of GDP, tea world market prices and coffee world market prices. There is little recent empirical research on factors affecting Rwandan tea exports. This study assesses the causality between tea exports and their determinants in Rwanda. The study applies a causal research design and uses time series data collected from different sources. It uses the Granger causality test to test for predictability between exports and their factors. The research concludes that non-causality in the long term was possible because before the late 1980s Rwanda had an economy that was based on a pre-structural adjustment program when exports were under total control. Short-run causality was possible because after the 1980s, a decline in world tea prices may have led to an increase in exports as demand increased in the short run. What is needed now are more investments in tea factories, diversification of commodities that are exported, prioritizing forward selling or contracting and widening niche markets for tea products. Key words: GDP, exports, economic analysis, Granger causality test, time series.Tea growing in Rwanda started in 1952 and by 2002 tea had become the country’s largest export item. However, an increase in tea farm land has been constrained by population growth, impacting the quantity of tea that the country produces. Tea exports are volatile and are influenced by the real effective exchange rate, incomes of major trading patterns, total investments as a proportion of GDP, tea world market prices and coffee world market prices. There is little recent empirical research on factors affecting Rwandan tea exports. This study assesses the causality between tea exports and their determinants in Rwanda. The study applies a causal research design and uses time series data collected from different sources. It uses the Granger causality test to test for predictability between exports and their factors. The research concludes that non-causality in the long term was possible because before the late 1980s Rwanda had an economy that was based on a pre-structural adjustment program when exports were under total control. Short-run causality was possible because after the 1980s, a decline in world tea prices may have led to an increase in exports as demand increased in the short run. What is needed now are more investments in tea factories, diversification of commodities that are exported, prioritizing forward selling or contracting and widening niche markets for tea products. Key words: GDP, exports, economic analysis, Granger causality test, time series.