Trade Liberalization and its Impact on Economic Growth: The Case of Ethiopia .

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These days the domestic growths of countries are related to liberalization and international donors are highly preaching its importance for less developed countries in particular. The purpose of this paper is therefore to estimate the impact of trade liberalization on Ethiopian economic growth. The massive reform undertaken in 1992 taken as a structural break, the study uses a time series data ranging from 1970 to 2009. Two-Stage Least Squares (2SLS) regression and Error Correction Method (ECM) methods were used to examine the relationship of trade liberalization with export, import and GDP. The empirical results indicate that the trade reform had positive impact on both imports and exports whereas its impact on imports is faster and higher than that of exports, worsening the trade balances. The result also shows that trade liberalization had negative impact on GDP growth as result of its worsening effect on trade balances. Therefore, the study suggests that the country should increase its exports to reap the jidl benefit of trade liberalization. Diversifying exportable through incentives, creating enabling environment for foreign direct investment and improving policy and institutions of the country are the policy implication of the study to get out of the worsening trade balance. Key words: Trade Liberalization, Economic growth, Export Growth, Import growth, time series analysis and Ethiopia.



Liberalization and Its Impact on Economic