Trade Liberalization and Economic Growth in Ethiopia: Abound test Approach

The purpose of the study is to analyze the relationship between Ethiopia's economic growth (RGDP) and trade liberalization (OPEN), using the time series data during 1971/72-2003/04. In the estimation of the long run and the short run relationships among the variables, the newly developed ARDL-ECM bound test procedure (Pasaran, 2001) is employed. This approach is capable of testing for the existence of a long run relationship regardless of whether the underlying time series are individually I(0) or I(1) or whether the underlying time series are mutually I(1) or I(0). This enhanced the stability and robustness of our results. Accordingly, the results indicate that there exist a long run relationship between real GDP per capita and openness (trade/GDP). The long run estimated coefficient suggests that the impact of trade liberalization on economic growth has positive and significant but others variables real exchange rates (RER) and labour force (LF) are insignificant impact on real GDP per capita. Further, the feedback coefficient indicate that a very high rate of adjustment towards long run equilibrium. The CUSUM and CUSUMQ stability test also indicate that the estimated long run coefficients remain stable over the period of the study. Since trade liberalization is the long run process, from the study we can suggests that in order to enhance growth the country should continuing liberalize their trade.