Title: The Dynamics of Trade Liberalization and Economic Growth of Ethiopia: A Vector Error Correction (VEC) Model Approach
Abstract: Economic growth is one of the primary goals of developing countries like Ethiopia. Hence, investigating the causes of economic growth in such country is of great importance. Thus, in this study, the impact of trade openness on economic growth of Ethiopia from 1982 to 2019 on data obtained from World Bank (WB) database were investigated. The methodology employed in this study is vector error correction model (VECM). A Unit root test was carried out using the ADF and PP tests. From unit root results, all series are non-stationary at levels. The first differences of all series, however, were found to be stationary. For the study period, there was one co-integrating relationship. The estimated long run model shows the existence of strong positive long-run relationship between trade openness and economic growth. The Block Exogeneity Wald Tests result shows a one-way causality running from trade openness to economic growth. The estimated coefficient of the error correction term (α = -0.702) is negative and statistically significant at the one percent level, indicating about 70.2% of the short run disequilibrium in economic growth will be adjusted within a year (the same year). Moreover, in the short run, one-time lagged trade openness has a significant positive impact on the current growth rate of real GDP. Furthermore, the model diagnostic result shows non-autocorrelation and normal residuals.