Trade openness and economic growth: Evidence from the Economic Community of Western African States region

Abstract

Orientation: The establishment of the African Continental Free Trade Area has raised a new question regarding the link between gross domestic product (GDP) per capita and trade openness among economists and policymakers. Research purpose: The purpose of this research is to provide an understanding of the potential free trade agreement between Economic Community of Western African States (ECOWAS) countries. Motivation for the study: Trade liberalisation is seen as an avenue for African countries to achieve social and economic advancement. Therefore, establishing the contribution of trade to economic growth is of paramount importance to society, especially for developing economies. Research approach, design and method: This study used two econometric tools – the autoregressive distributed lag (ARDL) bound testing approach and the pool mean group (PMG) model – to assess the link between trade openness and GDP per capita in ECOWAS. The data set covers the 15 ECOWAS member countries over the period 1990–2016. Main findings: The study indicates the existence of a long-run relationship between the variables at 1% in all countries except for Ghana, Guinea-Bissau, Mali, Senegal and Togo. This implies that the variables are cointegrated; hence, the PMG can be used. The estimation reveals that trade openness has a negative impact on GDP per capita in the long run. The findings have important implications for policymakers in the ECOWAS region and other developing countries. Practical/managerial implications: The paper invites policymakers in the region to carefully consider the outcome of the agreement in each member country and adjust accordingly with tariff barriers. Contribution/value-add: Even though trade liberalisation can be beneficial, the lifting of trade barriers in all sectors among ECOWAS members will not contribute to growth. ECOWAS countries must decide the sectors they want to liberalise and also add value to their production of goods and services in order to fight poverty and boost income.

Keywords

• trade openness
• economic growth
• ARDL model
• PMG model
• ECOWAS