INVESTIGATING THE EFFECTS OF TRADE OPENNESS ON ECONOMIC

GROWTH
A TIME SERIES ANALYSIS OF ZAMBIA

Bachelor of Economics Research Proposal

By

MUTALE ABRAHAM
201602809

Submitted to the School of Social Sciences

in partial fulfillment of the requirements for the degree of Bachelor of Economics

MULUNGUSHI UNIVERSITY
DECLARATION
This research report is my original work and has not been presented for a degree in
any other University or any other award.

Name …………………………………………………………………………..

Signature ……………………………………. Date ………………………..

APPROVAL
This report has been submitted for examination with my approval as University
Supervisor

Name ……………………………………………………………….

Signature………………………………….Date……………………

I
ACKNOWLEDGEMENTS

Firstly, my gratitude is to the Almighty God for his tremendous guide throughout my
studies. Every research work is a product of collective effort of many people.
However, the contribution of my supervisor was enormous. Therefore, I express my
deep sense of gratitude to Mr. James N. Mulenga who guided and supervised my

II
work despite his many commitments. The door to his office was always open
whenever I ran into a trouble spot or had a question about my proposal. He
consistently allowed this paper to be my own work, but steered me in the right
direction whenever he thought I needed it. I am also grateful to all the lecturers
particularly those in the Department of Economics for being helpful and imparting
knowledge to me in various ways during face-face and beyond.
Finally, I must express my very profound gratitude to Mom, Bupe Mulenga and
Mwamba Mumba for providing me with unfailing support and continuous
encouragement throughout my years of study and through the process of writing this
proposal. This accomplishment could not have been possible without them.

Table of Contents
DECLARATION............................................................................................................I

APPROVAL..................................................................................................................II

ACKNOWLEDGEMENTS.........................................................................................III

CHAPTER ONE............................................................................................................1

III
 1.0 INTRODUCTION.............................................................................................1

1.1BACKGROUND OF THE STUDY...................................................................5

1.2 STATEMENT OF THE PROBLEM...............................................................10

1.3 OBJECTIVES..................................................................................................11

1.3.1 GENERAL OBJECTIVE.......................................................................11

1.3.2 SPECIFIC OBJECTIVES......................................................................11

1.4 RESEARCH QUESTIONS.............................................................................11

1.5 RESEARCH HYPOTHESES..........................................................................11

1.6 RATIONALE OF THE STUDY.....................................................................11

CHAPTER TWO..........................................................................................................13

LITERATURE REVIEW.............................................................................................13

2.0 THEORETICAL REVIEW.............................................................................13

Theory of Protectionism..................................................................................13

Absolute Advantage Hypothesis.....................................................................14

Comparative Advantage Hypothesis...............................................................14

Neoclassical Growth Models..........................................................................15

2.2 EMPIRICAL LITERATURE REVIEW.........................................................15

CHAPTER THREE......................................................................................................21

METHODOLOGY.......................................................................................................21

3.0 INTRODUCTION...........................................................................................21

3.2 RESEARCH DESIGN.....................................................................................21

3.3 MODEL SPECIFICATION............................................................................21

3.4 DATA ANALYSIS.........................................................................................22

REFERENCES.............................................................................................................23

APPENDICES.............................................................................................................26

IV
 CHAPTER ONE:

1.0 INTRODUCTION AND BACKGROUND

Maintaining an open economy with a competitive and market driven exchange rate
regime will remain government policy. The effects of trade openness on economic
growth is a topic that continues to generate debate and amass a huge amount of
research. Many economist support that protectionism may induce faster economic
growth while liberal analysts argue that a higher degree of trade openness leads to a
better economic performance.

It is widely accepted that open economies grow faster compared to closed ones. The
globalisation movement, which accelerated especially in the early 90s when Zambia
embarked on the implementation of Structural adjustment programmes which
included the opening of the economy, enforced this situation to come into view more
clearly. According to (Olufemi:2004), globalisation is defined as the ongoing process
of greater economic interdependence among countries reflected in the increasing
volume of international financial flows and increasing flows of labour. During the
first and second republics, Zambia adopted the import substitution strategies in its
quest to promote economic growth. During this period, Zambia experienced lower
economic growth rate while countries especially in the eastern part of Asia that had
adopted the exported promotion strategies, experienced a higher economic growth

Regarding overall economic performance, high copper revenues at independence

helped to produce robust growth during 1964-1969. The real GDP growth rate
averaged 10.9 percent annually and copper revenues as a share of total revenues
averaged above 40 percent. The government tried to spread the benefit of this growth
through the building of roads, schools and hospitals such as the University of Zambia
(UNZA) and University Teaching Hospital (UTH). There were no discernible policy
efforts to use this growth to diversify the economy and the export base despite the
external risk (collapse if the copper prices dropped) that the structure of the economy
posed to the future sustainable growth. According to UNCTAD (2016), Zambia’s
growth process showed signs of unsustainability in 1970 and finally collapsed in
1974. The annual average real GDP fell to 1.5 percent in the 1970s, 1.4 percent in
1980s and 0.2 percent in the 1990s. It was not until 1999 that the economy began to

1
grow again. The real GDP grew by 2.2 percent in 1999. The growth rate has thereafter
accelerated each year, reaching 6 percent in 2009 and 7.3 percent in 2012 (Zambia,
2013). The country is however, yet to achieve the high growth rates achieved during
the late 1960s.

UNCTAD (2016) says that the recent positive growth was brought about by the
restructuring of the economy and improved macroeconomic management fostered by
the reform process initiated by the World Bank and International Monetary Fund
(IMF), high copper prices and increased FDI inflows especially in the copper sector.

Two distinct reform periods can be identified namely, the reform period of the late
1980s and the early 1990 reforms. During the reform period in the late 1980s, there
was growing recognition that the external sector needed opening up and that trade
could play a major role in resurrecting growth in the economy. There was thereafter, a
major effort to reform and design trade policies to achieve that. This was done within
the context of the reform process initiated by the World Bank and IMF. The initial
focus was on increasing the share of non-traditional exports. The issue of reform was
not seen in terms of the overall competitiveness of the economy. Overall
competitiveness ultimately has to do with the way production is organized in the
various sectors of the economy and the way the economy is organized to resolve trade
issues within the country at the border and beyond.

Below is the Zambia’s GDP growth (in percentage) estimates based on alternative
sources for the period 1995 to 2013. As it can be seen from the Figure 1, Zambia’s
real GDP has been on the upward swing from 1999 till 2013 on average.

2
Source: Based on CSO, IMF and UNCTAD, 2015.

The Figure 2 below shows Zambia’s GDP growth, Sub Saharan Africa GDP growth
rate and GDP Global growth rate the period 2005 to 2012.

Source: IMF World Economic Outlook 2013.

Zambia has performed relatively well on regional and global level in terms of GDP
growth.

3
Figure 3 below shows Zambia’s exports of goods and services in billion US$. As it
can be seen, Zambia’s exports has been goods mainly, with very small proportion of
services exports. However, from 2004, the proportion of services exports in total
exports has been increasing gradually. Hence, the nations exports have been
increasing generally.

Figure 4 below shows Zambia’s imports of goods and services in billion US$. As it
can be seen, Zambia’s imports have been goods mainly, with very small proportion of
services exports. However, from 1996, the proportion of services imports in total
nation’s imports has been increasing gradually. Hence, the nation’s imports have been
increasing generally.

4
The above charts shows that Zambia’s engagement with the International community
has been on the rise. However, Zambia has continued to face the same problem of the
dominance of copper exports and the difficulties in exploiting trade opportunities and
diversifying into high value industries (Ministry of Commerce, Trade and Industry,
2005). For instance, Zambia has of late being facing high demanding from foreign
nations for Mukula trees which are used for medicinal purposes, furniture and guns,
the government instead of taking advantage rather decides to impose a ban on
exportation. The other instance was in 2016, upon seeing an increase in exportation of
maize and mealie meal (creating a shortage in Zambia) to neighbouring countries such
as Democratic Republic of Congo and Kenya, the government decided to impose an
export ban. From the above elaboration, this study aims to investigate the effects of
trade openness on economic growth in Zambia.

1.1BACKGROUND OF THE STUDY

Since independence, the type of economy prevailing in Zambia until 1992, though
mixed, was more skewed towards a command economy. Economic variables such as
exchange rates, interest rates, general prices and so forth were government
determined. With fixed variables, the Zambian economy would not systematically
adjust to dynamics at the global level such as demand shocks of the 1970s. Though at
independence the Kwacha was pegged to the value of the British pound, with copper
being the major determinant of foreign exchange, the souring copper prices in the
1970s meant a huge fall in the value of the Kwacha. Government responded by fixing
the exchange rate hence could not get necessary capital investment. There was
depletion in foreign reserves and deficits in the Balance of Payments (BOP).

The IMF tried to revamp the Zambian economy by introducing Structural Adjustment
Programs (SAP) in the late 1980s. However, response was poor since most variables
were fixed. The IMF advised the country towards taking radical reforms if it would
get the economy back on track. This meant making the economy more free by
loosening commands on most economic variables such as the exchange rate. With the
introduction of SAPs, in 1992, the government embarked on the privatization of state
owned companies in order to liberalize the economy. This meant making appropriate

5
adjustments in monetary, fiscal and trade policies. The initially dictated prices became
market determined.

According to Cheelo (2005), the specific objectives for liberalization included

promoting private sector participation in economic activities, reducing public sector
dominance in commercial activities, compressing imports, encouraging international
competitiveness and improving general economic performance and many more.
Except for petroleum, all trade was left to the private sector. The maximum tariff was
reduced to 40 percent and the minimum tariff was generally increased to 20 percent.
Despite this reform, Mwiinga (2013) says that trade policies still made it difficult for
non-traditional exporters and many import-competing firms to be competitive because
they were heavily dependent on imported capital and intermediate goods that faced
duties of between 20 to 40 percent.

Traditionally, it is believed that the openness of an economy to international trade

coupled with increased investment in human and physical capital and the rate of
population growth is one of the key determinants of economic growth (Bergheim,
2005). Countries that successfully participate in international trade open themselves to
FDI and attract foreign workers tend to post higher economic growth than countries
that do not (Zombe, 2014).

Trade liberalization has been central to the discussion of development policy in recent
decades. In 1990s, the Washington Consensus, a set of 10 major development policy
recommendations Washington-based institutions such as the IMF and the World
Bank, regarded trade openness as essential to achieve higher economic growth. Trade
policy, according to the Washington Consensus should focus on lowering tariffs on
imports, especially cheap intermediate inputs that give countries competitive
advantages in export industries. Although acknowledging the negative effects this
type of policy could have on competing domestic industries, the Consensus believed
that protection would create “costly distortions that end up penalizing exports and
impoverishing the domestic economy while generating a massive potential of
corruption” (Williamson 1990). This pro-trade liberalization view garnered early
support from academia as evidenced through a host of cross-country econometric
studies by Sachs and Warner (1995), Harrison (1996) and Edwards (1998) among
others.

6
Historically, countries did indeed lower their barriers to trade in the early 1990s.
Figure 1 below shows the trends in global average tariff rate from 1986 to 2009.

We can see that except for high income non-OECDs countries whose tariff levels
remained the same during the period, other groups (developing countries and high
income OECDs) have reduced their average tariff rates significantly since 1992,
especially among the developing nations. Overall, the world tariff level also fell by a
great margin (around 15 percent) from 1992 to 2009 (Dao, 2015)

In 2001, the World Trade Organization (WTO) further advanced liberalization efforts
by introducing the Doha Development Agenda, its ninth round of multilateral
negotiations carried out after World War II. The Doha round advocated by developing
countries aimed at creating a global commitment to reduce tariffs and adhere to a new
set of trade rules across the board for agricultural, industrial and services products. It
was met however, with resistance in the developed world especially from farmers and
labour unions who faced declining profits and wages when competing with much
cheaper products from the third world. Thus, after 13 years of negotiation, no
agreement has yet been reached among the WTO members. At the same time in
academia, a once overwhelming consensus on the positive growth effects of trade
liberalization was now being seriously challenged. Rodrik (2006) in his “Learning
from Reform” review for the World Bank which he entitled “Goodbye Washington
Consensus, Hello Washington Confusion”, argued that the focus needs to shift from

7
getting policies right to getting institutions right (which he called the Institution
View). He believes that the set of policies suggested by Williamson is superficial in
the sense that it did not require deep-seated institutional changes.

According to Rodrik (2006), policy reform in his opinion would not be able to
produce lasting effects unless the institutions in place are up for it. For example, trade
liberalization would likely fail when fiscal institutions fail to compensate for lost trade
revenue, capital markets fail to supply sufficient funds to expanding sectors, customs
officials are corrupted and incompetent, labour-market institutions fail properly
handle transitional unemployment and so on. Rodrik and Rodriguez (2000) also raised
questions about the validity of methodologies used in previous empirical studies on
trade liberalization and economic growth.

Thus, the effects of trade openness on growth is far from settled within both the
policy-making realm and academia. There is need to acknowledge however, that
international trade has become more and more integral to economies around the
world. According to a report from the World Bank, world trade has grown more than
three times from 1980 to 2002 while world output has only doubled (Dean and
Sebastia, 2003). During this period, the trade to GDP ratio defined as the sum of
exports plus imports over GDP has increased significantly across countries, with Asia
leading at 50 percentage points, followed by the Euro area, the UK and Latin America
at 15 percentage points. The only exceptions are Japan, the United States (US) and
Eastern Europe with less than a 10 percentage point increase in trade share of GDP
(Dao, 2015). During the same period however, growth has experienced a mixed
pattern (Berry and Serieux, 2006). Overall, the average annual growth rate of real
world output decreased from 3.81 percent in the 70s to 2.86 percent in the 80s and
then 2.46 percent in the 90s. The average annual growth rate of real output among
developing countries declined from 4.75 percent in the 70s to 3.59 percent in the 80s
but rose to 4.63 percent in the 90s. For industrial countries, the growth rates declined
from 2.14 percent in the 70s to 2.75 percent in the 80s and went down further to 2.41
percent in the 90s (Dao, 2015). These mixed outcomes bring the questions of whether
greater global economic integration can actually positively affect economic growth.

Karim and Islam (2014), ask a similar question “Do open economies grow faster than
closed economies?” The answer of this question is intuitively yes because of almost
all empirical growth studies have provided a positive answer to the question. The

8
main reason for this answer is strong bias in favour of trade liberalization is partly
based on the conclusions of wide range of empirical studies which claimed that
outward-oriented economies consistently have higher growth rates than inward-
oriented economies (Yanikkaya, 2003). Furthermore, trade and growth theories have
generally prescribed a positive relationship between openness to international trade
and economic growth.

Romer (1993), Grossman and Helpman (1991) and Barro and Sala (1995) among
others argue that countries that are more open have a greater ability to catch up
leading technologies of the rest of the world. Chang et al (2005) point out that
openness promotes the efficient allocation of resources through comparative
advantage, allows the dissemination of knowledge and technological progress and
encourage competition in domestic and international markets.

Karim and Islam (2014), add that there are a number of channels through which trade
openness is thought to influence economic growth. Firstly, a liberal trade regime
enhances efficiency through greater competition and improved resource allocation.
Secondly, greater access to world markets allows economies to overcome size
limitations benefit from economies of scale. Thirdly, imports of capital and
intermediate goods can contribute to growth process by enlarging the productive
capacity of the economy. As a result, at present time, it is not surprising that the
proposition that more open economies tend to grow faster has gained wide acceptance
in academic as well as policy circles (Din et al, 2003).

On the other hand, other studies have shown that trade openness can be injurious to
economic growth. It is argued that increases participation of an economy in
international trade exposes it to increased competition which reduces the expected
profits. This in turn discourages innovation by domestic firms (Sarkar, 2008).
Moreover, openness may reduce long run growth if an economy specializes in sectors
with dynamic comparative disadvantage or in which technological innovations or
learning by doing are exhausted. Thus, if protection encourages investment in
research-intensive sectors, this invention could facilitate economic growth in the long
run (Lucas, 1988: Yanikkaya, 2003). For instance, Yanikkaya (2003) showed that
trade barriers were positively and in most specifications, significantly associated with
growth especially for developing countries.

9
1.2 STATEMENT OF THE PROBLEM

The proponents of the trade led growth hypothesis argue that economies that open to
international trade are able to achieve more growth than those that are closed
(Bergheim, 2005). Thus, they support trade liberalization policies. It is believed that
increased trade enhances export earnings, promotes industrialization and encourages
diversification of the economy (Mudenda and Ndulo, 2004). This view has been
supported by the endogenous growth theories which are typically based on models of
endogenous technological change. The theories show that trade openness provides
access to imported inputs embodying new technology, raises the returns on
innovations of domestic producers by increasing the effective size of the market they
face and facilitate a country’s specialization in research-intensive production. Thus, a
more open economy faces more competition from its trading partners which
stimulates productivity and this kindles economic growth (Romer, 1989). It was
because of the above benefits that the IMF and World Bank advocated for trade
openness in the early 1980s.

Contrary to the expected results, Zambia experienced reduced output as a result of

shutting down of industries; this also led to high unemployment levels and ultimately
increasing urban poverty. In addition the average annual price index increased from
37 percent in 1984 to 52 percent and 82 percent in 1985 and 1986 respectively. As a
result, the World Bank re-classified Zambia from middle-income to a low-income
country (Nafziger, 1993). Although, the country enjoyed positive growth rates from
1999 to 2013, the results are not very satisfactory as they are not near the growth rates
of the period before 1970. Furthermore, the growth rates are below the required rate
(7-10 percent) to enable Zambia to be a prosperous middle income country by 2030.
Besides, the country has continued to experience reduced output, high unemployment,
increased poverty levels and low GDP growth rates (a rate of 4.1 percent for 2017).
The nations has continued to perform badly against major foreign currencies (US
Dollar, Euro, and British pound) mostly trading at more than K9 per foreign currency.
It is therefore important that we investigate the causal interactions between trade
openness and economic growth to be able to understand why Zambia’s economic
growth has been unsatisfactory despite been an open economy.

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1.3 OBJECTIVES

1.3.1 GENERAL OBJECTIVE

 To investigate the effects of trade openness on economic growth in Zambia

between 1985 to 2017.

1.3.2 SPECIFIC OBJECTIVES

 To investigate the effects of trade openness on economic growth.

 To assess the effects of exchange rates on economic growth.

 To determine relationship between FDI and economic growth.

1.4 RESEARCH QUESTIONS

 What is the effect of trade openness on economic growth in Zambia?

 What is the effect of exchange rate on economic growth in Zambia?

 What relationship is there between FDI and economic growth in Zambia?

1.5 RESEARCH HYPOTHESES

 Trade openness has a positive effect on economic growth

 The exchange rate has a negative effect on economic growth

 There is a positive relationship between FDI and economic growth

1.6 RATIONALE OF THE STUDY

Many researchers have focused on ascertaining the existence and actual direction of
the nexus between trade openness and economic growth. In Zambia, very few studies
have been done which have provided the proof of existence of the link between trade
openness and growth but they have divergent views. Most of the researchers have

11
undertaken similar study by using imports and exports mostly as explanatory
variables with few studies adding FDI. This study will measure trade openness as a
ratio of Imports plus Exports to the nations GDP. In addition, it will add exchange
rates and FDI as addition explanatory variables in line with openness of an economy.
Therefore, this study is motivated and seeks to add to the existing body of knowledge
in Zambia by empirically investigating the effects of trade openness on economic
growth. This is important for policy makers in that they will know whether there is
need to continue with policies that promote economic openness or to pursue other
policies that lead to sustainable economic growth especially that Zambia is trying to
accelerate towards vision 2030.

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 CHAPTER TWO:

LITERATURE REVIEW

2.0 THEORETICAL REVIEW

International trade and economic growth have been explained through “old” and
“new” trade and growth theories that explicate why nations trade among each other.
Neoclassical theories include comparative advantage and Heckscher-Ohlin theories in
order to explain the basis for trade. On the other hand Comparative advantage theory,
postulates that as trade becomes more open, any country specialises in producing
goods in which it has a comparative productivity advantage, which arises in
differences in technology or natural resources.

Theory of Protectionism

The theory of protectionism has its roots in mercantilism of the 17th and 18th centuries.
It argues that the only way for nation to become richer was to restrict imports and
stimulate exports (Salvatore, 1983). Thus, according to this school of thought, a
nation would benefit from trade if and only it was to import cheap raw materials and
export final goods that receive a much higher price so that a country can have a trade
surplus (Bjornskov, 2006). The resulting trade surplus would be settled by an inflow
of gold and silver into a country which in turn would make the recipient nation richer
and more powerful. Therefore, the government had to stimulus the nation’s exports
and discourage and restrict imports (particular the import of luxury consumption
goods). However, since all nations could not simultaneously have a trade surplus and
the amount of gold and silver was fixed at any particular point in time, one nation
could only gain at the expense of other nations. Therefore, the mercantilist’s argued

13
that the state should exercise much control over all economic life, chiefly through
corporations and trading companies (Salvatore, 1983).

Absolute Advantage Hypothesis

As noted above, the Mercantilists believed that a nation can only gain from trade at
the expense of another nation. However, Adam Smith refuted this claim and
advocated for free trade. He argued that trade between two nations is based on
absolute advantage. According to him, when one nation is more efficient than (or has
an absolute advantage over) another in the production of one commodity but is less
efficient than (or has an absolute disadvantage with respect to) the other nation in
producing a second commodity, then both nations can gain by each specializing in the
production of the commodity of its absolute advantage and exchanging part of its
output with the other nation for the commodity of its absolute disadvantage. By this
process, the resources of both nations are utilized most efficiently and the output of
both commodities will rise. The increase in the output of both commodities measures
the gains from specialization in production available to be divided or shared between
the two nations through trade Salvatore (2013).

Comparative Advantage Hypothesis

The failure of absolute advantage hypothesis to explain trade among the developed
nations led to the development of another theory of trade, the law of comparative
advantage. Ricardo (1817) argued that even if one nation is less efficient than (has an
absolute disadvantage with respect to) the other nation in the production of both
traded goods, there is still a basis for mutually beneficial trade. The first nation should
specialize in the production of and export the commodity in which its absolute
disadvantage is smaller (this is the commodity of its comparative advantage) and
import the commodity in which its absolute disadvantage is greater (this is the
commodity of its comparative disadvantage). Irwin (2009) adds that even if a
developing nation lacks an absolute advantage in any field, it will always have
comparative advantage in the production of some goods and will trade profitably with
advanced economies.

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Neoclassical Growth Models

The neoclassical economists pointed out that it is not possible for a nation to continue
to maintain a positive balance of trade indefinitely. They were of the opinion that
exchange of goods and services between nations would generate productivity gains
through increased division of labour and specialization by nations. This means that,
each country would produce and export those commodities whose internal
opportunity costs are small and import those commodities whose internal opportunity
costs are high. They further showed that countries have to focus on acquiring foreign
capital and technology. In sum, the classical economists thought that participation in
foreign trade could be a strong positive force for economic growth. On the other hand,
Hecksher (1919) and Ohlin (1933) argue that for an economy to go into trade with
another country, they must have identical technology, constant returns to scale and
given factor-intensity relationship between final products. The nation with abundant
capital will able to produce and export relatively more capital-intensive good while
the nation with abundant labour will be able to produce and export relatively more of
the labour-intensive good.

2.2 EMPIRICAL LITERATURE REVIEW

A study by Yaboah et al (2012) found that trade openness has a positive relationship
with in 38 countries in Africa between 1980 and 2008. Likewise, Nduka (2013) found
that trade openness has a significant impact on economic growth in Nigeria. Olufemi
(2004) found a unidirectional relationship between openness and economic growth.
Bigsten et al (2000) found that exports had a positive effect on productivity growth in
Ghana, Kenya and Zimbabwe. Kwame (2013) investigated trade liberalization and
economic growth in Ghana over the period 1986 and 2010 and found that trade
liberalization enhances GDP growth in Ghana in the long run but hampers growth in
the short run using an Auto-regressive Distributed Lag (ARDL) approach.

Keho (2017) established a positive effect of trade openness on economic growth in

Cote d’Ivoire over the period 1965 and 2014 using the ARDL bounds test to test for
co-integration and the Toda and Yamamoto causality tests. Frankel and Romer (1999)
point out to positive growth effect of trade openness using Ordinary Least Square

15
(OLS) technique. Yanikkaya (2003) and Dollar and Kraay (2004) found a positive
impact of trade openness on economic growth especially on developing countries
using panel data analysis.

Ademola et al (2013) carried out an empirical study to examine the impact of trade
openness on economic growth in Nigeria. The study explored OLS regression to find
out the relationship between the variables. Their results show a positive sign of the
coefficient of non oil export, trade openness underscore their increasing relationship
with GDP. They found a negative relationship between exchange rate and GDP. In
their paper, Cuadros et al (2001) employed a Vector Auto-regressive (VAR) model to
examine the causal relationship between output level, inward FDI and trade in
Argentina, Brazil and Mexico. They found that though FDI had significant impacts on
growth, their results failed to find evidence in support of export led growth. They
concluded that the fragility of their results may stem from the omission of other
relevant mechanism through which openness can promote growth. Goldberg and
Klein (1999) had also opined that if capital flow is significant, focusing only on
export as proxy for openness may be misleading. Using data from some Asian
countries, Sinha and Sinha (2001) also reiterated that omitting import from trade
openness measure creates a missing variable bias. Using data from imports and
exports to capture openness, they found positive effects of openness on economic
growth for some Asian countries.

Regarding the Sub-Saharan African countries the evidence is also mixed. Deme
(2002) validates the trade-led growth hypothesis for Nigeria. Meierrieks (2009)
investigated 16 Sub-Saharan African countries and found no significant long run
relationship between the variables for most if the sample. He also found evidence that
economic growth causes trade openness in Ethiopia, Gabon, Kenya, Mauritius,
Senegal, Sierra Leone and Togo whereas a feedback causal relationship exits for
Cameroun, Cote d’Ivoire, Nigeria and Rwanda. On the contrary, no causal
relationship between trade and growth was found for Burundi, Ghana, Madagascar,
South Africa and Gambia.

For a sample of 34 African countries, Vlastou (2010) finds that openness to trade has
a negative impact on economic growth. He also reports a causal relationship running
from openness to growth. In a study of 27 African least developed countries, Tekin
(2012) finds no significant causality between foreign aid, trade openness and real per

16
capita GDP. Asfaw (2014) analyzed the impact of trade liberalization on economic
growth in a sample of 47 Sub-Saharan African countries. The results reveal that
openness to trade stimulates both economic growth and investment. Besides, trade
policies such as average weighted tariff rate and real effective exchange rate affect
economic performance through trade.

In a more recent work, Brueckner and Laderman (2015) employ the instrumental
variable approach to a panel of 41 Sub-Saharan African countries. They find that trade
openness increases economic growth both in the short and long run. Musila and
Yiheyis (2015) investigate the case of Kenya and find that trade openness has positive
effect on investment ratio but not on the rate of economic growth. Polal et al (2015)
find that trade openness impedes economic growth in South Africa. Lawal et al (2016)
apply the ARDL methodology to Nigeria and find a negative long run impact of trade
openness on economic growth but a positive growth effect in the short run.

Tsangarides (2010) apply the quartile regression approach to explore the trade-growth
nexus for 75developing countries. Their results indicate that the effect of openness on
economic growth is higher in low-growth countries relative to high-growth countries.
The low-growth economies include countries from all the continents, but a majority is
in Africa (Benin, Cote d’Ivoire, Madagascar, and Zambia) and Latin America. Kim,
Lin, and Suen (2011) use instrumental variable threshold regressions to examine
whether the trade-income relationship varies with the level of economic development.
Their results show that trade openness has positive effects on financial development,
capital accumulation and economic development in high-income countries. In low-
income countries, however, the effect is negative and significant.

Kim (2011) shows that openness to trade has positive effects on economic growth and
real income in developed countries but negative effects in developing countries.
Furthermore, the real effect of trade also depends on the level of financial
development and inflation. Openness to trade has negative effect on growth in
countries with low financial development but has insignificant impact in countries
with high financial development. Trade openness is conducive to economic growth in
low-inflation countries but has insignificant impact on growth in high-inflation
countries.

17
Kim et al (2012) provide evidence that trade promotes economic growth in high-
income, low-inflation, and non-agricultural countries but has a negative impact in
countries with the opposite attributes. For a panel of 46 countries, Huang and Chang
(2014) find that the growth effect of trade depends on the extent of stock market
development. Trade enhances economic growth only when the country reaches a
threshold level of stock market development. Sakyi et al (2015) provide evidence of
positive bi-directional causal relationship between trade and economic growth for a
sample of 115 developing countries. Were (2015) finds that trade exerts a positive and
significant effect on economic growth rate in developed and developing countries, but
its effect is not significant for least developed countries which largely include African
countries. In a study of China, Hye et al (2016) show that trade openness is positively
related to growth in the long and short run.

On the trade and growth nexus, there are very few studies that have been done to
understand this relationship in Zambia. For example, Musonda (2007) sought to
investigate the validity of the export-led growth hypothesis in Zambia. Her findings
suggest that exports cause economic growth. Zombe (2014) carried out a study to
investigate the causal relationship among financial development, trade openness, and
economic growth in Zambia from 1965 to 2011. To fully understand this relationship,
two measures of financial development were used: broad money and domestic credit
to the private sector, each as a ratio of gross domestic product (GDP). In this regard,
two models were developed for each indicator. Using Augmented Dickey-Fuller
(ADF) and Phillips-Perron (PP) stationarity tests he found that all the variables were
integrated of order one. Furthermore, Johansen’s test forco-integration indicated that
the variables in each model had one co-integration relationship. Therefore, the vector
error correction model (VECM) was employed to examine the short-run and long-run
dynamics among the variables in each model. The results indicated that relationship
among financial development and trade openness positively affect economic growth
though this is sensitive to the financial development indicator chosen.

Ever since Adam Smith (1937) and David Ricardo (1973), economists have
acknowledged the positive role of openness to trade on economic growth. Trade can
directly increase per capita income when countries specialise in producing goods in
which they have a comparative advantage but it also can indirectly encourage
development via other channels such as technology transfer, product diversity,

18
increasing scale economies. However, not everyone agrees that openness to trade is of
outstanding significant. Rodriguez and Rodrik et al (2002) demonstrate that the strong
effect of trade on growth comes from their choice of measuring openness, which
always results in positive biased estimations of openness on growth. In addition to
this, it is important that omitted variables may create a positive relationship between
openness and growth. Another group of literature supports that trade openness
effectively fosters economic growth, only by the improvement of particular policies
and sectors or by the existence of specific preconditions.

19
20
 CHAPTER THREE:

METHODOLOGY

3.0 INTRODUCTION

This chapter presents the methodology to be used in the study. It will present the
model specification, the econometric approach and estimation procedure as well as
the tests to be undertaken to ensure the model is justified. A description of data
sources will be given as well.

3.2 RESEARCH DESIGN

This research study will mostly be quantitative in nature. The study will apply time
series analysis as the variables involved are time series in nature. It will use secondary
data obtained from central statistics office, Ministry of Finance, Bank of Zambia and
World Bank. The time series data will be annual spanning from 1985 to 2017. The
reason for the period of study is that it was after 1985 when the IMF and World Bank
started to intervene in the Zambian economy by advocating for trade openness.

3.3 MODEL SPECIFICATION

In order to produce an empirical study we need to establish a functional relationship

between trade openness and economic growth. Therefore, the functional model
specification will be represented mathematically as follows:

Economic Growth = f(Trade openness, Exchange rate, Foreign Direct Investment)

Where; Economic Growth will be measured using GDP,

Trade Openness = TOP will be measured as a ration of Imports plus Exports to GDP,
Exchange rate (EX) will be measured as the domestic price of the foreign currency,
Foreign Direct Investment (FDI) will be measured as the Total investment by foreign
nationals.
From this, the econometric model can be expressed stemming from above:

21
Where = The error term

3.4 DATA ANALYSIS

The data collected will be subjected to regression analysis and the method of Ordinary
Least Squares (OLS) will be employed as estimation criteria. The variables will first
be subjected to stationarity test considering that time series data are mostly non-
stationary. Co-intergration tests will be undertaken to check for long run relationships
among the variables. Diagnostic tests such as autocorrelation, heteroscedasticity
model specification and normality tests will also be undertaken to check for the
validity of the results.

22
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APPENDIX 1: BUDGET
Description Quantity Unit Cost Total Cost (K)

1 hr. for 10
Internet fees K2 per min. 1,200
days
Refreshments 10 days K20 per day 200

27
Ream of plain paper 1 unit K45 each 45
Pencils 2 units K2 each 4
Writing Pad 1 unit K10 each 10
4GB Flash Disc 1 unit K100 each 100
Transportation costs 14 days K10 per day 140
Talk time (Credit) 14 days K10 per day 140
Proposal: Typing and Printing 25 pages K3 per page 75
Binding 2 copies K12 per copy 24
Contingencies 200
GRAND TOTAL K1998

APPENDIX 2: GANTT CHART

MONTHS

Oct Nov Dec Jan Feb March April May June

28
ACTIVITY 2018 2018 2018 2019 2019 2019 2019 2019 2019

Research
Topic
Submission

Research
Proposal
Writing

Data
Collection

Data
Analysis
using E-
Views

Report
writing and
Proof
reading

Submission
of Thesis

29