An emperical investigation on the relationship between trade openness and GDP growth rate : the case of South Africa (1994Q1-2008Q4)

Abstract

This dissertation examines the causal relationship between trade openness and GDP growth in South Africa using quarterly series data spanning the years from 199401 through 200804. Despite substantial economic restructuring, South Africa's post-1994 export performance is less than what might have been expected or hoped for. The study examines the trade-openness led-growth hypothesis (ELG) in the South African economy. Further, the study uses both conventional cointegration approaches such as Engel-Granger and Johansen cointegration techniques to determine the long-run relationship between trade openness and GDP growth. Both cointegration tests show that there exists long-run relationship between trade openness and GDP growth at 1 per cent significance level. Therefore, the study also applies an error correction model to determine the speed of adjustment and the short-term determinants of economic growth in South Africa. The estimated models tracks the historical data well and satisfies various specifications and stability tests. In considering trade openness measures, it indicates that they are generally less pivotal and have an even smaller effect than had been anticipated. The study also adopts Granger causality tests and impulse response functions to examine whether growth in trade openness stimulate economic growth (or vice versa). The results suggest that in all trade openness measures that are used, there is weak evidence suggesting causality from GDP to exports or vice versa. The study recommends that openness trade policy will be beneficial strategy for South Africa in the long-run. Therefore, it is suggested that the South African government continue the policy of trade openness.