The Relationship between Economic Growth and Service Sector in Tanzania: An Empirical Investigation

Abstract

The study uses Autoregressive Distributed Lag Model (ARDL) to examine the relationship between economic growth and service sector in Tanzania for the period 1970 to 2015. Further, bounds test of cointegration is used to test for existence of long-run relationship among the variables. Results show that the real economic growth is positively related to the growth rate of the services sector, and the latter’s effect is statistically significant in the long-run as postulated in theory. The error correction term has the envisaged negative sign and is statistically significant, implying convergence towards the long-run equilibrium. The results also show there is a bi-directional causality between GDP growth and growth of services sector. However, the growth in services sector has no effect on the economic growth in the short-run. This calls for friendly cum enabling business environment for investment and business operations in trade, tourism, financial sector, etc. in order to enhance value addition in the services industry.  Promotion of technological innovations in the services sector is very crucial so as to improve efficiency, quality and productivity in delivery of services and thus enhance competition. The services sector should be considered as equally important as industrial sector due to cross-fertilization between the two.