Trade openness and economic growth: The case of Ethiopia

This paper examines the relationship between trade openness and economic growth on Ethiopia's economy. The relationship between the two has been controversial in literature. Even though most findings support positive relationships, there are still plenty of findings claiming negative or no relationship at all. This research is carried out using annual data for the period between 1981 and 2015. The stationarity of variables is tested using ADF and was found to be stationary at first difference. The co-integration of variables was tested using Johansen co-integration test. Finally, VECM was used to identify short-term and long-term relationships while Granger causality test is used to identify the direction of causality. Based on the analysis, it was found that trade openness (when measured in the form of Openness 1 and Openness 2) and economic growth are co-integrated in Ethiopia. However, trade openness is not co-integrated to economic growth when measured ın the form of Openness 3. While a significant and positive relationship is found between the variables in the long run, it is found that there are no significant relationships between openness and growth in the short run. On the other hand, there exists unidirectional causality extending from trade openness to economic growth.