Effect Of Trade Openness On Economic Growth Of East Africa: Panel Data Analysis

Abstract

In the era of globalization, the intricate interconnection among nations highlights the need for rigorous empirical exploration of the relationship between trade openness and economic growth. This study addresses a conspicuous research gap by focusing on East African countries, offering a nuanced examination of the contextual factors influencing the trade-growth dynamic. The conceptual framework employs Real GDP as the dependent variable, investigating the impact of Population Growth Rate, Trade Openness, Human Development Index (HDI), and Official Exchange Rate. Utilizing Stata 15.0 for analysis of 22 years(2000-2022) secondary data, a panel data approach, Pooled OLS (Ordinary Least Squares), fixed effects, and random effects models were assessed, with all necessary tests checked Pooled OLS, fixed effects, and random effects models, is employed to capture individual heterogeneity and address endogeneity concerns. The Hausman test confirms the superiority of the fixed effects model. The study's findings reveal a negative correlation between trade openness and economic growth in East Africa, emphasizing the region's unique challenges. Furthermore, Human Development Index does not emerge as a significant factor, while other variables, including population growth rate, official exchange rate, and Foreign Direct Investment (FDI), exhibit notable impacts on economic growth. The study concludes with policy recommendations, urging policymakers to adopt trade liberalization measures and implement long-term strategies for exchange rate stability. The research contributes valuable insights to the understanding of East African economies, calling for continued exploration into additional determinants of economic growth specific to the region.