Economic Growth and Trade Openness: Evidence from Zambia

Abstract

This paper sought to investigate the causal relationship between economic growth and trade openness using time series data of Zambia for the period 1978 to 2016. Two additional variables, Foreign Direct Investment (FDI) and physical capital were incorporated to form a multivariate framework. Autoregressive Distributed Lag (ARDL) bound approach was used to determine the presence of the long run relationship among the variables while the Vector Error Correction Model (VECM) was used to determine the direction of causality among the variables, both in the short run and long run. The ARDL revealed a significant long run relationship among the variables. Physical capital was found to have a significant long run effect on economic growth but highly insignificant in the short run. Bi-directional granger causality was significant between economic growth and trade openness in the short run. The study also established a unidirectional short run causality flowing from physical capital to trade openness and from FDI to economic growth. Strong long run causality was found flowing from economic growth, FDI and physical capital to trade openness. The study further established a weak long run causality flowing from economic growth, trade openness and FDI to physical capital.