Trade openness and economic growth: evidence from Ghana

Abstract

In contrast to previous studies on the relationship between trade openness and economic growth, this study develops a new measure of trade openness. Composite Trade Intensity (CTI) was employed to generate an index to capture trade openness. The study used Trade Intensity (TI) and Relative World Trade Intensity (RWTI) dataset to create an index for trade policy openness. This new measure of trade openness improves on the results of trade openness compared with the traditional measure of trade openness which takes into account the size of Ghana’s trade to the rest of the world in comparison to its national economy and this is shown in the long and short run estimates in Table 6 and Table 7 using CTI and Appendix C and Appendix D using TI (X+M/GDP) as a measure of trade openness respectively. The study used data which span from 1986 to 2015. The Autoregressive Distributed Lag (ARDL) approach to cointegration was used to examine this relationship. The regression results show that trade openness, FDI, real effective exchange rate, capital stock and labour force are important determinants of economic growth particularly in the long run. However, inflation was found to be growth hampering. The Granger causality test revealed a unidirectional causality between trade openness and economic growth running from trade openness to growth. The study recommends that policy should focus on export promotion strategy and encourage efficient utilization of capital goods; ensuring enabling environment to attract the needed FDI to the industrial and the agricultural sectors; and maintaining price stability in order to stimulate economic growth in Ghana.