The relationship between trade openness, terms of trade and economic growth in Zimbabwe: a VAR approach.

Abstract

The objective of the paper is to investigate whether the conventional wisdom of openness as a panacea to economic development applies in Zimbabwe. To investigate this issue, vector auto-regressive and Granger-causality methods of testing for causality were applied. Using trade openness index and terms of trade as trade indicators, it was established that the three variables Granger caused each other, except for Terms of trade and GDP growth which showed unidirectional causality running from GDP growth to terms of trade. Variance decompositions, however, show that the variance of GDP are mostly from GDP itself while the variance decompositions of terms of trade emanates also mainly from GDP changes. The Zimbabwean government is therefore urged to pursue liberalisation so as to attain its development goal. This is so because trade openness was found to Granger-cause GDP growth. Since variance decompositions showed that GDP was found to add more to variations in GDP, the government is recommended to minimise the variations in GDP especially those in the negative.