The Causal Relationship between Trade Openness and Economic Growth in Ethiopia

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The main purpose of this study was to investigate the causal relationship between trade openness and economic growth in Ethiopia. The model which is economic growth was estimated using both short run and long run models using econometric and descriptive techniques. The model was also tested different diagnostics tests and other forecasting methods using secondary annual time series data covers the period range from 1980/81-2020/21 Ethiopian fiscal year, a total of 41 data points. The empirical analysis part which was results of ADF and PP unit root tests were stationary at first difference. The Johansen cointegration results of both the trace test and the max-Eigen value test had four co-integrating equations relationship for both models. The results of pair wise granger causality test supports trade lead growth hypothesis. Trade openness, labor force and capital expenditure had a positive impact on economic growth and its coefficient was statistically significant at the one percent level, in the long run but remittance and education expenditure negatively related to economic growth. In the short run, remittance was statistically significant at five percent level to economic growth. Based on finding of the study the author recommended: the formally flowed remittances should spend on the productive sector and providing incentives and accesses to allow Ethiopian Diasporas to engage highly in the domestic investment than before activity.Key Words: Co-integration, EconomicGrowth, Ethiopia, Granger Causality, Trade Openness and VECM



Economic Growth, Trade Openness