Impact of Trade Liberalization on Economic Growth in Ethiopia

Abstract

The World Trade Organization and the World Bank discourages the banning of imports since it does not conform to the idea of globalization. Globalization involves the removal of restrictions on across the border trade and investments. In recent years, World Bank group experts help countries compete in international markets. Trade growth is focused on establishing an environment conducive for the emergence of firms that are competitive in both exports and domestic markets and an industry remain competitive only if its prices are kept in line with the markets. According to World Bank Brief (2014), competitiveness is central to Job creation and ultimately to the World Banks goal of eliminating poverty and increasing incomes through better paid jobs. A nations’ level of competitiveness reflects the extent to which it is able to provide rising prosperity to its citizens. More competitive economies tend to be able to produce higher levels of income for their citizens. The main purpose of this study was to investigate the impact of trade liberalization on Ethiopia economic growth using annual time series data from 2000 – 2020. to estimate the relationship between trade liberalization and economic growth in the country during the study , the data was collected from national bank of Ethiopia and ministry of finance and economic development. The vector error correction modeling (VECM) analysis revealed that, the a 1% improvement in a country’s level of export increase economic growth by 2.32%; while a 1% increases in import decreases growth by 1.25% which results in worsening of trade balance. The econometric results of the study revealed that, trade liberalization have positive and significant impact on economic growth of Ethiopia. The results showed that, import, export, foreign direct investment, exchange rate have significant effect on real growth domestic product. Therefore, based on the result of this study it’s suggested that the government has to promote more liberal forms of trade policy in order to enhance the economic growth rate of the country.