ECS3702 Jun-Jul 2021 Final

UNIVERSITY EXAMINATIONS
June/July 2021
ECS3702
INTERNATIONAL TRADE
100 Marks
Duration: 3 Hours
First Examiner: Dr KO Amusa

Second Examiner: Prof T Greyling
STUDENT NUMBER / STUDENTENOMMER
This paper consists of 33 pages, including this cover page.
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Page 2 of 33 ECS3702
CONFIDENTIAL Jun/July 2021
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[TURNOVER]
QUESTION 1 [25 marks]
QUESTION 1A
Use the table below to answer the questions that follow

Output Lesotho Botswana
Wool (ton/hr) 4 1
Beef (ton/hr) 3 2
(i) Identify the commodity in which Lesotho and Botswana have an absolute
advantage and absolute disadvantage [4 marks]
(ii) Indicate the commodity of each nation’s comparative advantage and

disadvantage. Show your workings. [6 marks]
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(iii) If Lesotho exchanges 4W for 4B with Botswana,
(a) How much does Lesotho gain in terms of beef? [2 marks]
(b) How much does Botswana gain in terms of beef? [2 marks]
(c) What is the range of mutually beneficial trade? [3 marks]
QUESTION 1B
Briefly explain the theories of absolute and comparative advantage, highlighting any similarities
and differences between the two.
[8 marks]
[TURNOVER]
[25]
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QUESTION 2A
You are given the following hypothetical scenario:
Two countries, lunchi and Punchi. Lunchi is a capital abundant country and Punchi is a labour
abundant country. Both countries consume and produce iron and leather. Iron is capital
intensive and leather is labour intensive.
Using a graphical representation of Punchi, explain the two components of the gains from trade.
[15 marks]
[Note, you are not allowed to reproduce the diagram in the textbook. You must use your own
letters and numbers to answer the questions. No marks will be awarded to students who do
not follow this instruction]
[TURNOVER]
QUESTION 2B
Assume two countries, Malawi and Japan, Malawi is labour abundant, and Japan is capital
abundant. Assume further that Good A is labour intensive and good B is capital intensive.
Explain how trade between the two countries will affect factor prices and how income will
be distributed in the two countries. [10 marks]
[TURNOVER]
[TURNOVER]
[25]
QUESTION 3A
(i) If the nominal tariff rate on consumers of leather shoes is 40 percent, the ratio of
imported leather to leather shoes in the absence of tariff is 0.5 and the nominal tariff
rate on leather is 40 percent, calculate the effective rate of protection afforded to
producers. [5 marks]
[TURNOVER]
(ii) Now assume that the nominal tariff rate on leather shoes is 40 percent, the ratio of
the cost of the imported leather to the price of the leather shoe in the absence
of a tariff is 0.5,and the nominal tariff rate on leather is zero, calculate the
effective rate of protection afforded to producers. [5 marks]
[TURNOVER]
(iii) What conclusion(s) can you reach generally about the relationship between g and t
from your answers in (i) and (ii) above? [5 marks]
Question 3B
Assume country A produces and consumes tables. The autarky price of a table in country A
is R100 and the domestic production and consumption in the absence of trade is 160 units.
Assume further that the free trade price of tables is R40. Explain the partial equilibrium effect
of a 50 percent tariff imposed by country A on tables. [10 marks]
[Note that your explanation must be detailed and must speak to the diagram you have
drawn].
[TURNOVER]
[TURNOVER]
QUESTION 4A
Use the article attached at the end of the paper to answer question 4.
Moyo, C., and Khobai, H. (2018). Trade Openness and Economic Growth in SADC
Countries. MPRA Paper No. 84252 (2018)
(i) What is the link between the Ricardian-Heckscher-Ohlin theory and trade openness and
what is the limitation of the theory?
[3 marks]
(ii) According to the endogenous growth model, in what ways does trade openness enhance
growth? [3 marks]
(iii) Briefly explain the consideration of trade in SADC’s objectives [3 marks]
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(iv) Is the relationship between trade openness and economic growth ambiguous or
unambiguous? Use at least three (3) examples to substantiate your answer.
[8 marks]
[TURNOVER]
(v) According to Moyo and Khobai (2018), what type of relationship exists between trade
and economic growth in the 11 SADC countries. Explain the reason(s) for the
relationship found. [8 marks]
[25]
TOTAL: 100
[TURNOVER]
Munich Personal RePEc Archive
Trade openness and economic growth in

SADC countries
Moyo, Clement and Khobai, Hlalefang

Nelson Mandela University
29 January 2018
Online at https://mpra.ub.uni-muenchen.de/84254/
MPRA Paper No. 84254, posted 30 Jan 2018 14:17 UTC
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Trade Openness and Economic Growth in SADC Countries
Clement Moyo
Email: Clement.Moyo@nmmu.ac.za
Nelson Mandela University, South Africa
Hlalefang Khobai
Email: hlalefangk@gmail.com
Nelson Mandela University, South Africa
ABSTRACT
In spite of the wave of liberalisation studied during the past decades, the debate still remains
open on the issue of the trade openness and economic growth nexus. The paper reviews the
relationship between trade openness and economic growth for 11 SADC countries for the
period between 1990 and 2016. Investments, labour and inflation are incorporated in the model
to form a multivariate framework. The study employed the ARDL-bounds test approach and
the Pooled Mean Group (PMG) model to estimate the long run relationship among the
variables. The evidence suggests that co-integration is detected at the 1% level in all countries
with the exception of Malawi, Mauritius, Swaziland and Tanzania. Co-integration is only
detected at the 10% level in Tanzania while Malawi, Mauritius and Swaziland the null of no
co-integration is not rejected. Furthermore, the results revealed trade openness has a negative
impact on economic growth in the long-run.
JEL: F14, F10, C33, C13, C01,
Keywords: Trade Openness, Economic growth, ARDL model, PMG model, SADC
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1 INTRODUCTION
The relationship between trade openness and economic growth has been analysed extensively
in literature. The traditional trade theory of Ricardian-Heckscher-Ohlin outlines that trade
openness enhances output in the short-run through more efficient allocation of resources. This
model however, does not address the impact of trade openness on long-term growth. According
to the endogenous growth models of Grossman and Helpman (1991) and Rivera-Batiz and
Romer (1991), trade openness promotes growth in the long-run through the transmission of
technologies, increases in the size of the market available to domestic firms and through
product specialisation.
A number of empirical studies have examined the long-term impact of trade openness on
economic growth and most studies conclude that there is a positive relationship between the
variables (Olufemi 2004, Dava 2012, Alragas et al (2015 and Keho 2017). Other studies
suggest that trade openness does not spur growth (Trejos and Barboza 2015, Musila and
Yiheyis 2015). Furthermore, some studies argue that trade openness has a positive effect on
economic growth under certain conditions. Ahmed and Suardi (2009) suggest that trade
openness is beneficial in countries with a more diversified export structure while Fetaki-Vehapi
et al (2015) state that trade openness impacts positively on economic growth in countries with
higher initial per capita incomes, higher levels of foreign direct investments and gross fixed
capital formation.
The Southern African Development Cooperation (SADC) was created to enhance economic
growth and development, eradicate poverty and to promote the free movement of goods and
services, capital and labour amongst regional members (SADC 2011). Trade openness has been
one of the objectives of SADC as stipulated in the Regional Indicative Strategic Development
Plan (RISDP) (Genesis Analytics, 2004). Furthermore, the Trade Protocol initiated in the year
2000 also sought to promote trade openness in goods and services in the region, with the hope
that a free trade area would be formed in 2012 to boost intra-SADC trade.
Despite the initiatives implemented to boost trade openness in the SADC region, barriers to the
movement of goods and services are still present. This study therefore, investigates whether
trade openness has a positive effect on economic growth in SADC. Panel data analysis is
employed for 11 countries over the period 1990-2016. The Pooled Mean Group (PMG)
estimator is utilised to determine the long-run and short-run impact of trade openness on
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economic growth. The technique estimates homogenous long-run and heterogenous short-run
coefficients.
The layout of the paper is as follows. Section 2 provides a brief survey of the existing literature
on the relationship between trade openness and economic growth. Section 3 introduces the data
and methodological approach employed in the paper. Section 4 presents the results of the
econometric analysis while section 5 concludes the paper.
2 LITERATURE REVIEW
It is argued that trade openness boosts economic growth in various ways. For instance, through
the transfer of technology skills transfer increase labour and total factor productivity. The
notion that trade openness affects economic growth is not new in literature. Most of the
literature has focused on single-country studies while a few concentrated on multi-country
studies. The following literature is going to be classified into two categories: Single-country
studies and multi-country studies.
Olufemi’s (2004) study forms part of the earlier researches that examined the relationship
between trade openness and economic growth focusing on single-country study. A Nigerian
time series data covering the period between 1970 and 2000 was used. The study employed
Johansen co-integration technique to determine the long run relationship between the variables.
The study established that there is existence of a long run relationship between trade openness
and economic growth. Furthermore, the results suggest that there is a negative relationship
between trade openness and economic growth. On the other hand, one of the most recent studies
which was conducted in Nigeria by Kalu et.al (2016) established that exports have a positive
and significant effect on economic growth, while imports have a positive but non-significant
effect.
A South African study on the nexus between trade openness and economic growth was
undertaken by Sikwila et.al (2014) covering the period between 1994Q1 and 2013Q3.
Applying the co-integration technique, the study found that trade openness boosts economic
growth.
Musila and Yiheyis (2015) examined the relationship between economic growth and trade
openness in Kenya. The annual time series data used covered the period from 1982 to 2009.
Incorporating investment as an additional variable, it was established that trade openness has a
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positive and significant effect on investment but a positive and non-significant on growth. In
addition, the findings purported that trade openness Granger-causes economic growth in the
long run.
Moyo et.al (2017) examined the linkage between trade openness, economic growth,
investment, exchange rates and inflation in Nigeria and Ghana. The findings from the
Autoregressive distributed lag model suggested that there is a long run relationship among the
variables. The results indicated that there is an existence of a positive relationship between
economic growth and trade openness in Ghana while a negative relationship was exhibited in
Nigeria.
Trejos and Barboza (2015), purposed to determine the causal relationship between economic
growth and trade liberalisation, focusing on twenty-three Asian countries. The study used static
ordinary list square (OLS) and a dynamic ECM estimation models. The findings at country
specific level suggested that higher trade openness is not the main engine for the Asian
economic growth. The findings validate that countries with a growing degree of trade openness
may experience faster per-capita output growth through gains in productivity associated to
capital accumulation rather than the assumed technological spillover effects from the trading
sector.
Fetahi-Vehapi et,al (2015) aimed to investigate the impact of trade openness on economic
growth in 10 South East European (SEE) countries covering the period 1996-2012. The study
incorporated human capital, gross fixed capital formation, foreign direct investment and labour
force as additional variables to form a multivariate framework. The system GMM is employed
to estimate the relationship among the variables. The findings indicate that the positive effect
on economic growth are conditioned by the initial income per capita. It was also discovered
that trade openness in more beneficial to countries with higher level of initial income per capita.
Trade openness also favours countries with higher level of FDI and gross fixed capital
formation.
Zahonogo’s (2016) study investigated the relationship between trade openness and economic
growth focussing on 42 sub-Saharan Africa countries. Annual data used in this study covers
the period 1980 – 2012. The empirical results from the Pooled Mean Group estimation
technique show an inverted U-curve response, which indicates the non-fragility of the
relationship between trade openness and economic growth in the Sub-Saharan countries. The
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results of this study indicate that the linkage between economic growth and trade openness in
Sub-Saharan Africa is not linear.
Burange et.al. (2013) aimed to analyse the causal linkage between economic growth and trade
openness for the member countries of BRICS: Brazil, Russia, India, China and South Africa.
To estimate the long run relationship between trade openness and economic growth, the study
employed the co-integration technique by Johansen (1998) and Johansen and Juselius (1990).
The Granger causality test was used to find the direction of causality between the variables.
The findings suggested existence of a long run relationship between the variables while the
Granger causality techniques showed different results for each country. Commencing with
Brazil, the results show that trade openness Granger-causes economic growth. In South Africa, a
growth-led export hypothesis was established while in China the export-led growth
hypothesis was realised. A bidirectional causality between economic growth and trade
openness was discovered in Russia and India.
Dava (2012) employed a difference-in-difference technique to explore the linkages between

trade openness and economic growth in seven SADC countries for the period 1980 – 2008. The
fixed-effect results suggested that the mean change in the growth rate to real GDP from the
period prior to and after trade liberalisation was 4.1% points. In general, it was discovered that
trade openness has a positive and significant effect on economic growth in the SADC countries.
Another SADC countries study was done by Mbulawa (2015) in exploring the determinants of
economic growth. The study employed GMM technique for the period from 1996 to 2010. It
was discovered that trade openness only has a positive effect on economic growth when there
is high levels institutional quality.
Alragas et.al (2015) explored the relationship between trade openness and economic for 182
countries covering the between 1971 and 2011. To examine the relationship between the
variables, the study utilises the Common Correlated Effects Mean Group (CCEMG) estimator
and to take into consideration the heterogeneity of the countries being explored, the Cavalcanti
et.al (2011) is applied. The empirical findings suggested that on average, trade openness has a
significant impact on economic growth.
It can be learnt that there is scant evidence of linkages between trade openness and economic
growth in SADC countries using the Pooled Mean Group technique and the ARDL bounds test.
Therefore, this study serves to fill the gap.
[TURNOVER]
3 DATA ANALYSIS AND METHODOLOGY
This section presents the data description and the methodology. The data was sourced from the
World Bank’s world development indicators and covers the period 1990 to 2016 for 111 SADC
countries. The description of the variables is presented on table 1.
1
Angola, DRC, Seychelles and Zimbabwe are omitted because of insufficient data.
Table 1: Description of the variables

Variable Description
GDP Gross value added by all resident producers in the economy
INV Gross fixed capital formation as a percentage of GDP
TRA Imports plus exports as a percentage of GDP
LAB Labour force participation rate
INF Consumer price index reflecting the percentage change in the cost of
a basket of goods
Source: World Bank (2017)
3.1 Descriptive statistics

Descriptive statistics are shown on table 2. The mean value of GDP growth is 4.34%. The
average for inflation is 13.70% which is higher than the target of 3% set by SADC authorities.
Investment to GDP ratio averages 22.88%. This ratio is lower than those of the fastest growing
regions in the world such as Asia. The labour force participation rate averages 68.98%. Trade
as a percentage of GDP is 87.77% which indicates that the level of trade openness in SADC
countries is high.
Table 2: Descriptive statistics

GDP INF INV LAB TRA
Mean 4.34 13.700 22.88 68.98 87.77
Maximum 26.85 183.31 69.03 89.64 209.89
Minimum -12.67 -9.62 6.18 48.56 33.49
Std. Dev. 3.82 18.94 10.29 13.71 37.18
Source: Researchers’ own computations

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3.2 Correlation analysis

Table 3 presents correlation analysis. This is conducted using Spearman’s rank order
correlation test. GDP and trade openness are negatively correlated; however, the coefficient is
insignificant. GDP is positively correlated with investment and labour force participation
which is in line with a priori expectations. GDP and inflation are negatively correlated but
insignificantly. The correlations provide some evidence that multicollinearity is not a problem in
the study as all the correlations between the independent variables are lower than 0.8.
Table 3: Correlation analysis
Variables GDP INF INV LAB TRA
GDP 1.00
INF -0.09 1.00
INV 0.19* -0.19* 1.00
LAB 0.16* 0.21* -0.05 1.00
TRA -0.0003 -0.25* 0.41* -0.42* 1.00
Where: * represents significance at the 1% level
Source: Researchers’ own computations.
3.3 Unit root tests

Unit root tests were conducted to determine the order of integration of the variables. The tests
utilised are the Levin, Lin & Chu (2002), Im, Pesaran & Shin (2003) tests, as well as the ADF
Fischer Chi-Square and PP Fischer Chi-Square tests proposed by Maddala and Wu (1999). The
null for each test is that the series has a unit root while the alternative states that the series is
stationary. Unit root test results are presented on table 4. The results show that all variables are
either stationary in levels and at first difference. There are no variables integrated of order two
(I(2)) which means that the PMG model is appropriate for the analysis.
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Table 4: Unit root tests

LLC
Variable Levels First Difference
Intercept Trend & Intercept Trend &
Intercept Intercept
GDP -2.73* -1.20 -9.20* -7.03*
TRA -0.13 -1.07 -8.37* -6.88*
INV -0.42 0.77 -4.72* -3.03*
LAB -0.79 -0.82 -1.49*** -2.12**
INF -4.96* -5.67* -14.48* -12.59*
IPS
GDP -5.69* -3.90* -15.07* -13.616*
TRA -0.45 -1.50*** -8.67* -6.83*
INV 0.14 0.47 -7.74* -5.60*
LAB 0.57 0.11 -2.92* -1.43***
INF -4.13* -4.99* -14.42* -12.95*
ADF Fisher Chi-square
GDP 75.17* 53.40* 205.32* 169.74*
TRA 24.03 32.02*** 113.58* 84.95*
INV 18.62 16.06 101.66* 73..76*
LAB 16.42 18.37 46.77* 31.95***
INF 57.06* 66.06* 198.51* 150.74*
PP Fisher Chi-square
GDP 189.05* 175.79* 264.85* 2112.12*
TRA 25.59 27.06 185.15* 389.70*
INV 19.04 30.30 186.34* 164.01*
LAB 7.02 4.823 54.04* 35.92**
INF 66.75* 174.90* 405.26* 571.04*
Where *, **, ***, represent significance at 1%, 5% and 10% levels, respectively
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Source: Researchers’ own computations.
3.4 Methodology
The study utilises the PMG model developed by Pesaran, Shin and Smith (1999). This
technique involves pooling and averaging of individual estimates across groups whereby the
intercept and short-run slope coefficients and the error variance are assumed to differ across
units while the long-run coefficients are constrained to be similar across groups. The long-run
relationship between the variables is specified as follows:
𝐺𝐷𝑃𝑖𝑡 = 𝜃0𝑖 + 𝜃1𝑖 𝑇𝑅𝐴𝑖𝑡 + 𝜃2𝑖 𝐼𝑁𝑉𝑖𝑡 + 𝜃3𝑖 𝐿𝐴𝐵𝑖𝑡 + 𝜃4𝑖 𝐼𝑁𝐹𝑖𝑡 + 𝜇𝑖 + 𝜀𝑖𝑡 (1)
Where: GDP = GDP growth rate
TRA = Trade openness
INV = Investments
LAB = Labour force participation
INF = Inflation
𝜇𝑖 = The country-specific effect
𝜀𝑖𝑡 = Error term
Investment is captured by gross fixed capital formation as a percentage of GDP which includes
land improvements, plant, and machinery and equipment purchases (World Bank, 2017).
According to the growth theories such as Solow-Swan as well as Harrod-Domar, higher
investment levels enhance the productive capacity of an economy and thus impact positively
on economic growth (Romer, 2012). The coefficient is thus expected to be positively signed.
Inflation captures the effect of macroeconomic instability on economic growth. High and
fluctuating inflation is an indication of macroeconomic instability which increases the
uncertainty with regards to the profitability of investment projects (Misati & Nyamongo, 2012).
The increase in uncertainty dampens both domestic and foreign investments which negatively
impacts on economic growth. The labour force participation rate captures the level of human
capital in the economy and expected to be positively signed.
The PMG model assumes that variables are cointegrated and as such cointegration tests have
to be conducted initially. The variables in the study have different orders of integration and
therefore ARDL bounds test proposed by Pesaran, Shin and Smith (2001) is employed. The
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test is applied to the individual countries in a similar approach followed by Pesaran et al (1999).
The ARDL approach has a number of advantages over the other cointegration tests. Firstly, the
test can be conducted with variables of varying orders of integration unlike tests such as the
Johansen cointegration test which requires all variables to be integrated of order one. Secondly,
the ARDL approach is robust in case of small sample sizes. Lastly, the technique utilised a
reduced form equation compared to the system approach adopted by other techniques such as
the Johansen test.
The implementation of the ARDL-bounds test approach involves two steps. In the first step,
equation (1) is estimated using the OLS in order to determine the existence of long-run
relationship between unemployment rate and relevant energy variables as well as the control
variables. The long-run relationship is determined using the Wald-coefficient test or F-test for
joint significance of the lagged level of the variables. In the present study, the null hypothesis
of no co-integration is performed by setting 𝜙1 = 𝜙2 = 𝜙3 = 𝜙4 = 𝜙5 = 0 against the
alternative that 𝜙1 ≠ 𝜙2 ≠ 𝜙3 ≠ 𝜙4 ≠ 𝜙5 ≠ 0. Similar restriction is imposed when other
variables in equation (1) are used as dependent variables (Pesaran et al. 2001).
Pesaran et al. (2001) provide two sets of asymptotic critical value for the F-test. One set
assumes that all the variables are I(0) and another assumes the variable are all I(1). The null
hypothesis is rejected if the computed F-statistic is shown to be higher than the upper bound of
the critical values. Conversely, if the computed F-statistic falls below the lower bound of the
critical values, then the null hypothesis cannot be rejected. However, if the computed F-statistic
falls within the band, then the result is inconclusive and prior information about the order of
integration of the variable is necessary to make a decision on long-run relationships.
4 EMPIRICAL RESULTS
Table 5: Bounds test
Country F-statistics
Botswana 17.34
Lesotho 6.04
Madagascar 8.75
Malawi 2.11
Mauritius 1.29
Mozambique 11.21
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Namibia 26.35
South Africa 13.87
Swaziland 2.77
Tanzania 3.69
Zambia 4.73
Critical Value Bounds
Significance I0 Bound I1 Bound
10% 2.2 3.09
5% 2.56 3.49
1% 3.29 4.37

The bounds test results are shown on table 5 and these reveal that cointegration is detected at
the 1% level in all countries with the exception of Malawi, Mauritius, Swaziland and Tanzania.
Cointegration is only detected at the 10% level in Tanzania while Malawi, Mauritius and
Swaziland the null of no cointegration is not rejected.
Diagnostic tests are conducted on the individual ARDL models and the results are presented
on table 6. The level of significance chosen for the analysis is the 5% level. Residual normality
is detected 10 of the 11 countries while no country shows evidence of serial correlation and
heteroscedasticity. Model misspecification is only detected in Swaziland. Therefore, co-
integration is detected in the majority of the countries in the study and most of the individual
ARDL models pass the diagnostic tests which provides an indication that the PMG model is
adequate for the analysis. As a result, it can be concluded that there is a long run relationship
between trade openness and economic growth.
Table 6: Diagnostic tests

Country Normality Serial Heteroscedasticity Reset test
correlation
JB Prob. F-stat Prob. F-stat Prob. F-stat Prob.
Botswana 0.36 0.83 3.39 0.36 1.89 0.33 0.05 0.85
Lesotho 1.41 0.50 1.78 0.22 0.85 0.58 0.92 0.36
Madagascar 0.23 0.89 3.03 0.19 1.76 0.28 3.32 0.45
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Malawi 0.78 0.68 2.07 0.27 1.22 0.45 5.71 0.75

Mauritius 0.77 0.68 1.58 0.26 0.66 0.76 1.34 0.25
Mozambique 0.71 0.70 3.04 0.15 0.90 0.60 0.26 0.32
Namibia 0.18 0.92 50.80 0.09 3.51 0.25 0.75 0.55
South Africa 1.60 0.45 0.01 0.94 0.42 0.93 0.04 0.85
Swaziland 11.40 0.00 0.72 0.44 0.15 0.99 11.65 0.012
Tanzania 5.58 0.06 3.46 0.16 0.54 0.84 0.59 0.60
Zambia 1.09 0.59 0.65 0.45 1.10 0.46 0.70 0.43

The PMG homogenous long-run and short-run results are shown on table 7. GDP and trade
openness have a negative and significant long-run relationship which is against a priori
expectations. A possible reason for the negative impact of trade openness on economic growth
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is that SADC countries do not export diversified products which is necessary for trade openness to exert
a positive impact on economic growth according to Ahmed and Suardi (2009). Moreover, the
initial per capita income as well as the institutional quality in SADC countries are low. These results
are consistent to Olufemi (2004).
Table 7: PMG results

Variables Coefficient Std. Error T-statistics Prob.
INF -0.16 0.02 -9.80 0.00
INV 0.23 0.03 8.57 0.00
LAB 0.43 0.05 8.39 0.00
TRA -0.16 0.02 -8.68 0.00
Short run
COINTEQ01 -0.85 0.18 -4.69 0.00
D(GDP(-1)) -0.06 0.09 -0.64 0.52
D(INF) 0.07 0.10 0.73 0.47
D(INV) -0.22 0.11 -2.02 0.05
D(INV(-1)) -0.11 0.07 -1.49 0.14
D(INV(-2)) -0.19 0.09 -2.20 0.03
D(LAB) -4.99 3.07 -1.63 0.11
D(LAB(-1)) 3.97 4.31 0.92 0.36
D(LAB(-2)) -1.23 2.47 -0.50 0.62
D(TRA) 0.10 0.07 1.35 0.18
D(TRA(-1)) 0.11 0.05 2.15 0.03
D(TRA(-2)) 0.09 0.03 2.86 0.00
C -11.88 3.00 -3.96 0.00
Investment and labour force participation are positively related to economic growth which supports a
priori expectations. Capital expenditures enhance productivity and hence are one of the major drivers of
economic growth. Labour force participation rates are a measure of human capital in an economy.
Therefore, the results suggest that higher levels of human capital boost economic growth in SADC
countries. Inflation has a negative impact and significant on economic growth which confirms a priori
expectations as inflation indicates macroeconomic instability in an economy.
The adjustment coefficient implies that 85% of the disequilibrium in the short-run is corrected in the first
period. The coefficient is negative and less than one in absolute terms which is an indication of model
stability. The homogenous short-run coefficients suggest that trade openness has a positive impact
on economic growth in SADC countries. Investment is negatively related to GDP in the short-run
while labour force participation rate has an insignificant effect on economic growth. However, as
mentioned earlier, the PMG model assumes that the short-run coefficients are individual specific and
as such the heterogenous short-run coefficients are estimated.
Table 8: PMG short-run coefficients
Country GDP(-1) INF INV LAB TRA Adjust

Botswana -0.05 0.92 0.17 -10.74 0.39 -0.63
(-1.83) (27.69)* (3.66)** (-0.14) (92.11)* (-4.93)*
Lesotho -0.39 -0.13 0.10 8.87 0.09 0.05
(-10.67)* (-139.98)* (6.57)** (1.41) (71.67)* (7.69)
Madagascar -0.26 -0.03 0.09 5.22 0.47 *
-1.20
(-79.44)* (-28.99)* (17.92)* (3.87)** (350.15)* (-74.38)*
Malawi 0.001 0.30 -0.28 -2.26 -0.36 -0.36
(0.02) (18.48)* (-2.73)*** (-0.77) (-10.47)* (-8.35)*
Mauritius -0.21 0.25 0.22 -2.24 0.13 -0.80
(-9.46)* (11.61)* (5.31)** (-3.84)** (37.26)* (-19.51)*
Mozambiqu -0.11 0.05 -0.15 -3.10 -0.20 -0.84
e (-1.21) (4.40)* (-2.09) (-0.19) (-8.51)* (-3.86)**
Namibia 0.57 -0.18 -0.50 -0.63 0.08 -2.09
(46.79)* (-15.28)* (-16.53)* (-2.39)*** (16.39)* (-57.19)*
South -0.13 0.05 0.14 -0.81 0.23 -0.47
Africa (-2.28) (0.93) (0.67) (-4.35)* (24.30)* (-10.04)*
Swaziland 0.25 0.01 -0.37 -33.40 0.01 -0.61
(10.33)* (0.92) (-16.79)* (-1.10) (7.32)* (-17.64)*
Tanzania -0.45 -0.30 0.12 0.27 0.03 -0.59
(-27.02)* (117.42)* (31.80)* (3.33)** (44.26)* (-20.63)*
Zambia 0.16 -0.14 -0.52 -2.04 0.20 -1.65
(9.27)* (-24.76)* (108.42)* (-27.35)* (127.13)* (-31.17)*
Where: (*), (**) and (***) indicate 1%, 5% and 10% significance levels, respectively.
Figures in parentheses are t-statistics
Source: Researcher’s own computations
The heterogenous PMG results are presented on table 8. Trade openness has a positive
impact on economic growth in nine countries which suggests that trade liberalisation
is growth enhancing only in the short-run. Most of the adjustment coefficients are all
negative and significant. However, the adjustment coefficients for Lesotho, Madagascar
Namibia and Zambia are either positive or greater that one which is an indication of model
instability. In the seven countries with stable models, trade openness has a positive short-run
effect on economic growth in five of the countries.
[TURNOVER]
5 CONCLUSION
This paper served to shed some light on the ongoing controversy over the linkage between economic
growth and trade openness. In doing so, we focus on 11 SADC countries covering the period between
1990 and 2016. The ARDL-bounds test approach and the Pooled Mean Group model are employed
to estimate the long run relationship between economic growth, trade openness, investment, labour and
inflation. The results evidenced a long run relationship between the variables at the 1% level of
significance in all countries with the exception of Malawi, Mauritius, Swaziland and Tanzania. In
Tanzania, the long run relationship is discovered at the 10% level of significance while Malawi,
Mauritius and Swaziland are not cointegrated.
GDP and trade openness have a negative and significant long-run relationship which is against a priori
expectations. A possible reason for the negative impact of trade openness on economic growth is that
SADC countries do not export diversified products which is necessary for trade openness to exert a
positive impact on economic growth according to Ahmed and Suardi (2009). Trade openness has a
positive impact on economic growth in nine countries which suggests that trade liberalisation is
growth enhancing only in the short-run. Most of the adjustment coefficients are all negative and
significant. However, the adjustment coefficients for Lesotho, Madagascar Namibia and Zambia are
either positive or greater that one which is an indication of model instability. In the seven countries
with stable models, trade openness has a positive short-run effect on economic growth in five of the
countries.
From an economic policy perspective, the findings of this study detected that trade openness is hinders
growth in SADC countries in the long run. It is recommended that the government should moderate
its trade liberalisation policies as their economies prove to be weak in absorbing the negative
shocks from external trade. Therefore, suitable monetary and fiscal policies need to be put in place
to protect the economy against the external influences. Furthermore, SADC should diversify the
export structure and export more manufactured products. This will enhance employment and economic
development.
[TURNOVER]
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UNIVERSITY EXAMINATIONS

First Examiner: Dr KO Amusa

STUDENT NUMBER / STUDENTENOMMER

This paper consists of 33 pages, including this cover page.

Make sure that each question or sub question is clearly numbered.

Day of the assessment instructions:

INSTRUCTIONS ON THE DAY OF ASSESSMENT:

QUESTION 1 [25 marks]

Use the table below to answer the questions that follow

(ii) Indicate the commodity of each nation’s comparative advantage and

(iii) If Lesotho exchanges 4W for 4B with Botswana,

(a) How much does Lesotho gain in terms of beef? [2 marks]

(b) How much does Botswana gain in terms of beef? [2 marks]

(c) What is the range of mutually beneficial trade? [3 marks]

QUESTION 2 [25 marks]

You are given the following hypothetical scenario:

QUESTION 3 [25 marks]

QUESTION 4 [25 marks]

(iii) Briefly explain the consideration of trade in SADC’s objectives [3 marks]

Munich Personal RePEc Archive

Trade openness and economic growth in

Moyo, Clement and Khobai, Hlalefang

Trade Openness and Economic Growth in SADC Countries

Nelson Mandela University, South Africa

Nelson Mandela University, South Africa

JEL: F14, F10, C33, C13, C01,

Dava (2012) employed a difference-in-difference technique to explore the linkages between

3 DATA ANALYSIS AND METHODOLOGY

Table 1: Description of the variables

3.1 Descriptive statistics

Table 2: Descriptive statistics

Mean 4.34 13.700 22.88 68.98 87.77

Maximum 26.85 183.31 69.03 89.64 209.89

Minimum -12.67 -9.62 6.18 48.56 33.49

Std. Dev. 3.82 18.94 10.29 13.71 37.18

Source: Researchers’ own computations

3.2 Correlation analysis

Table 3: Correlation analysis

Variables GDP INF INV LAB TRA

INF -0.09 1.00

INV 0.19* -0.19* 1.00

LAB 0.16* 0.21* -0.05 1.00

TRA -0.0003 -0.25* 0.41* -0.42* 1.00

Where: * represents significance at the 1% level

Source: Researchers’ own computations.

3.3 Unit root tests

Table 4: Unit root tests

Source: Researchers’ own computations.

Where: GDP = GDP growth rate

TRA = Trade openness

LAB = Labour force participation

𝜇𝑖 = The country-specific effect

𝜀𝑖𝑡 = Error term

Table 5: Bounds test

Source: Researchers’ own computations

Table 6: Diagnostic tests

Malawi 0.78 0.68 2.07 0.27 1.22 0.45 5.71 0.75

Source: Researchers’ own computations

Table 7: PMG results

Table 8: PMG short-run coefficients