Economic growth and trade openness : evidence from Zambia

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Date
2019
Authors
Muwau, Elias
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Publisher
The University of Zambia
Abstract
There has been controversy amongst economists regarding the nature of the relationship between trade openness and economic growth. The standard neoclassical model of exogenous growth postulates that changes in trade openness can only affect the pattern of product specialization but not the long term rate of economic growth, while the new growth theory postulates that changes in trade openness can influence long term economic growth rate but the nature of the impact of trade openness on long term rate of economic growth when trading partners are structurally different in terms of innovation is ambiguous. Zambia has been relatively open since colonial time. Openness to international trade helps to reduce domestic volatility in GDP. Zambia’s openness can act as a channel for the diversification of country specific shocks. However, the question of whether trade openness translates to economic growth is still not clear for the Zambian economy because of its long openness period and fluctuating economic growth performance. This study sought to investigate the linkage between trade openness and economic growth using time series data of Zambia for the period 1978 to 2016. Two additional variables, Foreign Direct Investment (FDI) and physical capital measured by real gross fixed capital formation using 2010 as the base year, were incorporated to form a multivariate framework. Autoregressive Distributed Lag (ARDL) bound approach was used to determine the presence of the long run relationship among the variables while the Vector Error Correction Model (VECM) was used to determine causality among the variables both in the short run and long run. The ARDL reviewed a long run relationship among the variables. Trade openness was found to have an insignificant effect on economic growth in the long run. In the short run however, trade openness was found to have a significant positive effect on economic growth. Physical capital and FDI were found to have a significant long run effect on economic growth. Bi-directional granger causality was significant between economic growth and trade openness in the short run. Additionally, the study established a unidirectional short run causality flowing from physical capital to trade openness and from FDI to economic growth. A strong long run causality was found flowing from economic growth, FDI and physical capital to trade openness. Additionally, the study established a weak long run causality flowing from economic growth, trade openness and FDI to physical capital. However, no long run causality was found flowing from trade openness, FDI and physical capital to economic growth. As such, Zambia need growth policies that are directed at opening the economy to international trade. This implies that a substantial portion of the economic expansion of Zambia involves the external sector. Additionally, physical capital and FDI led growth policies are necessary for achieving long run growth. Keywords: Economic Growth, Trade Openness, Causality
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Keywords
Globalization , Free trade--Zambia , Free trade--Africa, Eastern.
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