Trade Openness, Exchange Rate Fluctuations and Manufacturing Output in Sub-Saharan Africa

Abstract

Many industrialized economies in the world achieved higher economic growth through the industrialization of their manufacturing sector. However, in Sub-Saharan Africa, the development of the manufacturing sector appears to be in decline. In the quest to increase the economic growth of these developing countries, varieties of trade policies and exchange rate policies have been introduced. These policies were subsequently introduced in Sub-Saharan Africa (SSA) as a means of boosting economic growth and development. The importance of Trade Openness and exchange rate policies in developing countries necessitated the need to study the effect of Trade Openness and exchange rate fluctuations on the manufacturing output of SSA. The study also focuses on the role of electricity as an intermediating factor to Trade Openness, threshold effect, and heterogeneity across groupings. Using the principal component analysis to generate Trade Openness Index and other determinants from 2004 to 2017, (sourced from WDI and World bank doing business indicators), the study employed fixed and random effect estimation techniques in the analysis. The study revealed that less Trade Openness has a negative effect on manufacturing output in SSA. Exchange rate fluctuations have a positive effect on manufacturing. Therefore, it is recommended that the reduction of the trade openness index should be encouraged. Also, exchange rate stabilization policies should be encouraged to promote a good business environment.