Trade Openness and Economic Growth: An Empirical Investigation of Tanzania

Abstract

There is still disagreement among researchers concerning the link between a country’s openness to trade and its economic growth. Despite a number of studies utilizing different methodologies and approaches to study the link over time, the results are still mixed conflicting. With this reason, the author examines the effect of trade openness on economic growth in Tanzania to contribute to the exiting debate in literature. Methodology This study uses time series data for period spanning from 1992 to 2020 to investigate the relationship between trade openness and economic growth. The Autoregressive Distributed Lag framework (ARDL) developed by Perasan, Shin and Smith, (2001) was adopted. Using ARDL model is appropriate for the small sample size and also requires different order of integration of series. In addition, bound testing technique was applied to determine the long-run and short-run relationship. Findings It was found that trade openness positively influences economic growth both in the short-run and long run. The results confirm the trade-led growth hypothesis for the case of Tanzania. Thus, Tanzania has to further encourage trade openness by reducing barriers and restrictions in order to promote trade openness. This finding implies that, the positive trade openness–economic growth could be attributed to the direct impact of the current rise in international trade volume of the country. Originality Different from other previous studies, this study adopts an ARDL model to investigate the relationship between trade openness and economic growth in Tanzania. This approach is more reliable in a study involving variables integrated of different orders. Many studies on the impact of trade openness on growth are based either on cross-country analysis. In addition, previous studies have either used policy-oriented measures of trade openness which are known to be subjective or they used outcome-oriented measures of openness that may only capture a country’s share of trade. As a result, specific case studies are not considered resulting to the lack of statistical rigor