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The Dynamics of Trade Liberalization and Economic Growth of Ethiopia: A Vector Error Correction (VEC) Model Approach

Received: 27 October 2020     Accepted: 21 November 2020     Published: 8 December 2020
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Abstract

Economic growth is one of the primary goals of developing countries like Ethiopia. Hence, investigating the causes of economic growth in such country is of great importance. Thus, in this study, the impact of trade openness on economic growth of Ethiopia from 1982 to 2019 on data obtained from World Bank (WB) database were investigated. The methodology employed in this study is vector error correction model (VECM). A Unit root test was carried out using the ADF and PP tests. From unit root results, all series are non-stationary at levels. The first differences of all series, however, were found to be stationary. For the study period, there was one co-integrating relationship. The estimated long run model shows the existence of strong positive long-run relationship between trade openness and economic growth. The Block Exogeneity Wald Tests result shows a one-way causality running from trade openness to economic growth. The estimated coefficient of the error correction term (α = -0.702) is negative and statistically significant at the one percent level, indicating about 70.2% of the short run disequilibrium in economic growth will be adjusted within a year (the same year). Moreover, in the short run, one-time lagged trade openness has a significant positive impact on the current growth rate of real GDP. Furthermore, the model diagnostic result shows non-autocorrelation and normal residuals.

Published in International Journal of Economic Behavior and Organization (Volume 8, Issue 4)
DOI 10.11648/j.ijebo.20200804.11
Page(s) 81-91
Creative Commons

This is an Open Access article, distributed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution and reproduction in any medium or format, provided the original work is properly cited.

Copyright

Copyright © The Author(s), 2020. Published by Science Publishing Group

Keywords

Economic Growth, Trade Openness, Unit Root, Co-integration, Vector Error Correction Model

References
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[4] Rodriguez, C. A. (1974). The non-equivalent of tariffs and quota under retaliation. Journal of international economics, vol. 4, pp, 295-98.
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[6] Prebisch, Y. (1950). "The Economic Development of Latin America and Its Principal.
[7] Thirlwall, A. P. (2000). Trade, Trade Liberalization and Economic Growth: Theory and Evidence. Economic Research Papers (63). University of Kent at Canterbury.
[8] Manni, U. H and Ibne Afzal, M. N. (2012). Effect of Trade Liberalization on Economic Growth of Developing Countries: A Case of Bangladesh Economy. Journal of Business, Economics and Finance Universiti Brunei Darussalam: Brunei. 1 (2).
[9] Almas Heshmati and Yeonhak Kim. (2012). Time series analysis of interdependent phases of the electricityindustry in South Korea. OPEC Energy Review, 36 (3), 319-348.
[10] Mukhopadhay, k. and Chakraborty, D. (2005). Is liberalization of trade good for the environment? Evidence from India. Asia –Pacific Development Journal. 12 (1): 109-139.
[11] Zewdu Bedasa & Minyahil Alemun. (2017). Economic Growth Nexus Trade Liberalization in Ethiopia: Evidence from the Johnson’s Multivariate Cointegration Analysis. International Journal of Latest Research in Engineering and Technology (IJLRET); ISSN: 2454-5031. Vol 03 PP. 53-59.
[12] Salinas, G and Aksoy, A. (2006). Growth Before and After Trade Liberalization. World Bank Policy Research Working Paper (4062).
[13] Gujarati. (2004). “Basic Econometrics”, 4thedition, New York: The McGraw-Hill.
[14] Phillips, P., & Perron, P. (1988). Testing for unit root in time series regression. Biometrika, 75 (2), 335–346. http://dx.doi.org/10.2307/2336182.
[15] Hall, S. G., & Henry, S. S. B. (1989). Macroeconomic modeling. Amsterdam, The Netherlands: Elsevier SciencePublishers.
[16] Johansen, S. and K. Juselius, (1990). Maximum likelihood estimation and inference on cointegration with application to the demand for money. Oxford Bulletin of Economics and Statistics, 52 (2): 169-210.
[17] Johansen, S. (1988). Statistical Analysis of Cointegrated Vectors, Journal of Economic Dynamics and Control, 12: 231-254.
[18] Juselius, K. (2006). The Cointegrated VAR Model: Methodology and Applications, Advanced Texts in Econometrics, Oxford University Press.
[19] Lütkepohl, H. (2005). New Introduction to Multiple Time Series Analysis, Spring Verlag, Berlin.
[20] Alexander, C. (2001). Market models: A guide to financial data analysis. John Wiley & Sons Ltd and Welfare in an Open Economy, Journal of International Economics, 32: 179-91.
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  • APA Style

    Teshome Hailemeskel Abebe. (2020). The Dynamics of Trade Liberalization and Economic Growth of Ethiopia: A Vector Error Correction (VEC) Model Approach. International Journal of Economic Behavior and Organization, 8(4), 81-91. https://doi.org/10.11648/j.ijebo.20200804.11

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    Teshome Hailemeskel Abebe. The Dynamics of Trade Liberalization and Economic Growth of Ethiopia: A Vector Error Correction (VEC) Model Approach. Int. J. Econ. Behav. Organ. 2020, 8(4), 81-91. doi: 10.11648/j.ijebo.20200804.11

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    AMA Style

    Teshome Hailemeskel Abebe. The Dynamics of Trade Liberalization and Economic Growth of Ethiopia: A Vector Error Correction (VEC) Model Approach. Int J Econ Behav Organ. 2020;8(4):81-91. doi: 10.11648/j.ijebo.20200804.11

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  • @article{10.11648/j.ijebo.20200804.11,
      author = {Teshome Hailemeskel Abebe},
      title = {The Dynamics of Trade Liberalization and Economic Growth of Ethiopia: A Vector Error Correction (VEC) Model Approach},
      journal = {International Journal of Economic Behavior and Organization},
      volume = {8},
      number = {4},
      pages = {81-91},
      doi = {10.11648/j.ijebo.20200804.11},
      url = {https://doi.org/10.11648/j.ijebo.20200804.11},
      eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.ijebo.20200804.11},
      abstract = {Economic growth is one of the primary goals of developing countries like Ethiopia. Hence, investigating the causes of economic growth in such country is of great importance. Thus, in this study, the impact of trade openness on economic growth of Ethiopia from 1982 to 2019 on data obtained from World Bank (WB) database were investigated. The methodology employed in this study is vector error correction model (VECM). A Unit root test was carried out using the ADF and PP tests. From unit root results, all series are non-stationary at levels. The first differences of all series, however, were found to be stationary. For the study period, there was one co-integrating relationship. The estimated long run model shows the existence of strong positive long-run relationship between trade openness and economic growth. The Block Exogeneity Wald Tests result shows a one-way causality running from trade openness to economic growth. The estimated coefficient of the error correction term (α = -0.702) is negative and statistically significant at the one percent level, indicating about 70.2% of the short run disequilibrium in economic growth will be adjusted within a year (the same year). Moreover, in the short run, one-time lagged trade openness has a significant positive impact on the current growth rate of real GDP. Furthermore, the model diagnostic result shows non-autocorrelation and normal residuals.},
     year = {2020}
    }
    

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  • TY  - JOUR
    T1  - The Dynamics of Trade Liberalization and Economic Growth of Ethiopia: A Vector Error Correction (VEC) Model Approach
    AU  - Teshome Hailemeskel Abebe
    Y1  - 2020/12/08
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    T2  - International Journal of Economic Behavior and Organization
    JF  - International Journal of Economic Behavior and Organization
    JO  - International Journal of Economic Behavior and Organization
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    PB  - Science Publishing Group
    SN  - 2328-7616
    UR  - https://doi.org/10.11648/j.ijebo.20200804.11
    AB  - Economic growth is one of the primary goals of developing countries like Ethiopia. Hence, investigating the causes of economic growth in such country is of great importance. Thus, in this study, the impact of trade openness on economic growth of Ethiopia from 1982 to 2019 on data obtained from World Bank (WB) database were investigated. The methodology employed in this study is vector error correction model (VECM). A Unit root test was carried out using the ADF and PP tests. From unit root results, all series are non-stationary at levels. The first differences of all series, however, were found to be stationary. For the study period, there was one co-integrating relationship. The estimated long run model shows the existence of strong positive long-run relationship between trade openness and economic growth. The Block Exogeneity Wald Tests result shows a one-way causality running from trade openness to economic growth. The estimated coefficient of the error correction term (α = -0.702) is negative and statistically significant at the one percent level, indicating about 70.2% of the short run disequilibrium in economic growth will be adjusted within a year (the same year). Moreover, in the short run, one-time lagged trade openness has a significant positive impact on the current growth rate of real GDP. Furthermore, the model diagnostic result shows non-autocorrelation and normal residuals.
    VL  - 8
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Author Information
  • Department of Economics, Ambo University, Ambo, Ethiopia

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