The relationship between Trade Liberalization, Growth and Balance of Payments in Sub-Saharan Africa: Insights from Dynamic Panel Data Analysis

Abstract

The general objective of this paper is to analyze the relationship between trade liberalization, growth, and the balance of payment in Sub-Saharan Africa. The paper covers a total of 37 sub-Saharan African countries for a period of 24 years, spanning from 1996 to 2019. The formal regression analysis makes use of generalized moment methods (GMM). We also allow control variables in sets of regressions, such as terms of trade, gross fixed capital formation, inflation, labor force, government debt, foreign direct investment, and real effect exchange rate. First, we examine the impact of trade liberalization, measured by trade-to-GDP ratio and tariffs, on economic growth (real GDP). Next, we analyze the impact of growth on trade balance and current account balance to examine whether higher economic growth due to trade liberalization leads to an effect on the balance of trade. Results in the growth model suggest that the trade-to-GDP ratio has a positive and significant effect on economic growth while tariffs exert no effect on growth. Empirical results show that in the balance of trade and current account balance models, economic growth, trade-to-GDP ratio, and tariffs exert a positive and significant impact on both the balance of trade and current account. The results imply that sub-Saharan governments and policymakers should pursue policies that will promote trade openness.