An Empirical Examination on Trade Openness and Economic Growth Nexus in Africa

Abstract

African countries have experienced disparities in the growth of their economies. The literature provides different propositions on the causality of economic growth which has given rise to debates on the alternative course that countries need to pursue to enhance their respective growths economically. The paper has therefore examined the effects of trade openness on economic growth for the African countries. In order to analyse the link between trade openness and economic growth by using the growth model, the instrumental variables and two stage least squares (2SLS) for panel data models approach is employed. Later an examination of the direction and strength of causality is conducted by using such techniques as Johansen cointergration test and short run granger causality test. The paper uses data from the World Bank database. A sample size consists of 49 African countries with a sample period of 20 years. Empirical results reveal that of all the variables that were included in the growth model, gross capital formation revealed a great impact on economic growth for African economies, followed by openness and then FDI flows. A test of granger causality for individual countries so as to explain the economic disparities, reveals that majority of the African countries (in the sample) supports the export led growth hypothesis. Implications are that the export led hypothesis would be much more advantageous for the African countries if it would not only result into increased real incomes but also economic structural transformations.

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