Trade Openness and Economic Growth in Tanzania 1970-2021, A Search for Causal Relationship.

Abstract

The purpose of this paper is to analyse the relationship which exist between trade openness and economic growth in Tanzania as well as uncovering the direction of causality between trade openness and economic growth. The study applies the Vector Autoregressive (VAR) Model which is time series model applicable in capturing dynamic interrelationship among variables. Data analyzed were yearly time series data covering the period of 1970 to 2021. The contribution of this paper is on the evidence of whether trade openness affect growth and the direction of causality between trade openness and economic growth. The empirical results shows that trade openness lagged to one period positively and significantly affect economic growth in Tanzania. The growth rate of GDP lagged to two period have a significant positive influence on growth rate of GDP, the gross national savings measured as a percentage of GDP lagged to two period is statistically significant and negatively related to the growth rates of GDP and in addition, the paper found a negative and statistically significant relationship between inflation lagged to two period and growth rate of GDP in Tanzania.

As regards to the causality test, the findings reject the null hypothesis of no evidence of Granger causality between trade openness and economic growth however the test could not account for the magnitude of causality. Based of on the findings, the paper recommends measures to foster trade liberalization by pursuing policies that promote trade such as reducing tariffs, streamlining custom procedures, eliminating non-tariff barriers to trade, encouraging Foreign Direct Investment (FDI) and investing in infrastructure development, optimal savings and controlling higher inflation so as to promote economic growth by implementing policies which target inflation reduction and promote economic stabilization.