ASSESSMENTS OF INTERNATIONAL TRADE AND ITS EFFECT ON ECONOMIC GROWTH IN ETHIOPIA

Abstract

This study assessed the role of international trade and its effects on economic growth in Ethiopia for the period 1979/80-2017/18 by empirically testing the long run and short run relationship and causality between export, import and economic growth, using popular time series econometric techniques of co-integration, Vector Error Correction Estimation and Granger causality test. The results from unit root test show that all variables are order one integrated; and Johansen co integration shows the existence of long run relations among the variables. Furthermore, the Granger causality test conducted indicates that in the short run there is no causality among variables but in the long run there is bidirectional causality among the three variables, including: GDP, Export and import. The short-run dynamic results shows that import have a positive significant effect on the growth of real GDP during the study period. At the same time export has a negative significant effect. Finally the coefficient of equilibrating Error Term (ECM) suggests that the speed of adjustment (feedback effects towards the long run equilibrium) takes few years for full adjustment when there is a shock in the system. In order to sustain long run growth the government or policy makers should design appropriate policies to promoting exports by producing quality goods to be competitive in international market and discourage import like food items and encourage import like raw material and capital goods.