THE IMPACT OF TRADE OPENNESS AND REAL EFFECTIVE EXCHANGE RATE ON ECONOMIC GROWTH: THE CASE OF EAST AFRICAN COUNTRIES

Abstract

Different researchers and scholars define trade between countries is based on the absolute advantage, comparative advantages, based on the economic growth and distance between trading countries. This researchers categorized based on their major findings as trade promotes economic growth and the other is trade may not promote economic growth specially for developing countries as a result the impact of trade on economic growth is still continuing in debate. The study measures trade openness as a ratio of trade from GDP and real effective exchange rate is the competitiveness of countries domestic currency against a basket of trading partners of foreign currency the data is obtained from WB, WDI,UNCTAD & Federal Reserve Bank.This study analyzes the impact of real effective exchange rate and trade openness on economic growth in 13 selected East Africa countries economy using longitudinal panel data for the period 2004-2018.The analysis is with the help of both fixed and random effect model of longitudinal panel data analysis techniques. The studyfound that the impact of trade openness on economic growth in East Africa is insignificant and the impact of real effective exchange rate on economic growth positive and significant but the impact of real effective exchange rate on trade openness is negative and significant. In addition foreign direct investment and external debt have positive and significant impact on economic growth. Implies that devaluation of domestic currency leads to reduce the export and import volume and value in east Africa country where as this devaluation promotes foreign investors to invest in domestic countries because of access to cheap labor, land and other inputs to invest in it.Policy like devaluation of currency promotes investment and economic growth but negatively affects trade openness. For those countries developing domestic investments and shifting the demand for domestically produced goods and services is recommended.