Exploring the relationship between trade liberalization and Ethiopian economic growth

Abstract

Theoretical and empirical economic literature has shown that the economic growth of countries is related to both liberalization and international trade integration. The main purpose of this study is to apply this knowledge to the Ethiopian case and estimate the impact of trade liberalization on Ethiopian economic growth. The study has employed an Error Correction Model (ECM) for the time series data ranging from 1980 to 2016 to examine the economic effect of trade liberalization on the Ethiopian economy. To examine the structural break resulting from regime change, the model incorporated a dummy variable and the inclusion of the dummy variable reveals about the significant impact of policy change. The empirical results show that there are both short-term and long-term relationships between liberalization and economic growth. More specifically, trade openness has had a positive and significant impact on the economic growth of Ethiopia. Therefore, the government of Ethiopia should integrate and open the economy. Furthermore, it should design a more open trade policy so as to reap the benefits associated with integrating a country’s economy with that of the world.

Key word: Co-integration; Economic Growth; Ethiopia; ECM; Trade Liberalization; Trade Openness

JEL Classification: F1, F4, F6, O4