The impact of trade openness on economic growth in Sub-Saharan Africa

Abstract

In spite of the wave of liberalization and trade reforms undertaken during the last two decades, the debate, among economists, assessing the impact of trade openness on economic growth is still open. Some economists argue that a higher degree of trade openness induces economic growth, while others argue that protectionism rather than openness leads to increased economic growth. However, there is a general consensus that the impact of trade openness varies by country, region, size and level of development. Over the past two decades, Sub-Saharan Africa (SSA) countries have increasingly integrated in World trade. However, this hasn’t translated into high levels of economic growth. The aim of this paper is to contribute to this debate by proposing a more elaborated way of investigating the impact of trade openness on economic growth taking into account additional dimensions of SSA countries. This study used the Generalized Methods of Moments (GMM) technique to analyze panel data of 20 SSA countries as most explanatory variables are likely to be jointly endogenous with economic growth, our results confirm that SSA countries are highly integrated in world trade indicated by a high trade openness index of the magnitude 67.8. The maximum trade openness index is 152.6 while the minimum is 19.2. This implies that in some cases, there is a big gap between trade openness of some countries compared to others. Trade openness, physical capital, and human capital were found to have a positive significant effect on economic growth, while population growth and inflation had a negative significant effect on growth. Thus there is need to facilitate access to the export market for new exporters, through export promotion agencies for example as aid for trade to increase on investments and savings hence capital formation which stimulates economic growth, and in particular aid for building productive capacity, and capital formation intends to focus on these matters, therefore, there is need to diversify on exports to increase the volume of trade. Governments of SSA countries should strengthen their macroeconomic management.