Economic Growth and Trade Performance in Tanzania

Abstract

Economic growth is the increase in merchandise or services production over a definite period of time. Economic growth is enhanced by land, labour, capital and entrepreneur. The study examinedwhether Trade Performance can effectively generate employment and participate fully in the reduction of poverty in Tanzania. Using Ordinary Least Square method (OLS) of data encompassing a period of forty three years (1971-2013) and utilizing the econometric tool of co-integration analysis and error correction model, the study through empirical observationinculcated a firm nexus between Economic Growth and Trade Performance.The result of the study brings outa strong connectionbetween real GDP and the independent variables. The coefficient of net export -1.189868 has a negative and significant impact on real GDP growth. There is an inverse relationship between net export and real GDP growth which implies a 1% increase in net export leads to approximately 1.2% decrease in real GDP growth in Tanzania. Unlike net export, the coefficient of FDI 0.083152 has a positive and significant impact on real GDP growth. There is a direct relationship between GDP growth and Foreign Direct Investment inflows. This implies that a 1% increase in FDI can lead to approximately 0.08% increase in real GDP growth in Tanzania. There is an inverse relationship between exchange rate and real GDP growth which implies a 1% increase in exchange rate leads to approximately 0.04% decrease in real GDP growth in Tanzania.

Similarly, the coefficient of inflation -0.199134 has a negative and significant impact on real GDP growth. There is an inverse relationship between inflation and real GDP growth which implies a 1% increase in inflation leads to approximately 0.20% decrease in real GDP growth in Tanzania. In the same manner, in the short run correction model the adjusted R- squared value is 0.932361, implying that approximately 93% of the variation in economic growth is explained by the independent variables, which is an indication of a very good fit. The remaining 7% is captured by the error term. The Durbin-Watson statistic suggests that there is no first order autocorrelation which among the variables. The overall equation is highly statistically significant as shown by the probability value of the F-statistic (0.000000).The study therefore suggests the quest of policies that would ameliorate Economic Growth and Trade Performance in Tanzania.

Key words: Economic Growth; Net Export; Real GDP; Foreign Direct Investments; Tanzania