An assessment of the relationship between foreign trade and economic performance: empirical evidence from South Africa

Abstract

The driving objective of the study was to estimate the impact of foreign trade on economic performance using the economy of South Africa as a test site. The study contributes to the empirical literature by testing for a long-run relationship between foreign trade and economic performance in South Africa by employing quarterly data stretching from the period 1995Q1 to 2015Q4. The method of vector autoregression (VAR) was employed. Variables included in the study consisted of real GDP, exports, openness of the economy and exchange rate. The study found cointegrating relationships among the variables investigated, and that export was found to contribute more towards economic performance compared to openness of the economy and exchange rates. When it came to Granger-causality analysis, the study found a number of unidirectional relationships between the pairs of variables examined in the model. For example, it was found that economic growth granger causes exports and also openness of the economy granger causes exports. The forecast error variance decomposition suggests that economic performance itself accounted for most of the innovations that ensued during the 10-period forecast horizon employed in the analysis. Policymakers could utilize the results of this study, when it comes to policy formulation and design for the economy of South Africa. The findings of the research could be used to improve upon economic policy for South Africa and other developing countries on a similar path. The study creates opportunities for further research endeavours concerning the issue under investigation so as to unveil more evidence on the nature of the relationship between foreign trade and economic performance in the economy of South Africa.