Trade Openness and Economic Growth in Uganda 1980-2016

Abstract

It is believed that trade openness will always result into high real GDP growth rates. However, discussions about the relationship between these two macroeconomic variables both in academic and policy arena is not a foregone conclusion. The aim of this study was to investigate the relationship between trade openness and economic growth in Uganda for the period 1980-2016. Using Johansen method for co-integration test it was established that two co-integrating relationship among the study variable exists. A VECM was fitted to analyze the short run and long run relationship between trade openness and real GDP growth rate over the study period. Causality relationship between trade openness and real GDP growth rate was analyzed using granger causality method. VECM shows that both long run and short run association-ship exists between trade and real GDP growth rate. The negative sign of the co-integrating equation L.ce2 shows great adjustment speed towards the long run equilibrium. However, the study did not find evidence of association-ship between the two variables (GCF and Inflation to Real GDP growth rate) in the short run. Since there is both long run and short run association-ship between trade openness and real GDP growth rate, there is need to enhance policy that facilitate trade not only in the region but also international for the country to benefit in the long run. Since most of the export commodities are agricultural, there is need to find avenues of diversifying the export base away from primary agricultural products to more competitive export products. This is expected to contribute towards the national growth agenda such National Development Plan II and the Uganda Vision 2040.