Cloves Export Response to trade liberalization in Tanzania: A Cointegration Analysis

Abstract

This paper investigates the cloves export response in Tanzania before and after trade liberalization from 1970 to 2010. The econometric and nonparametric techniques have been applied. Econometric techniques include cointegration, error correction modeling approach as well as the trend analysis. Error correction modeling approach its empirical findings revealed that there exists a long run or equilibrium relationship amongst the variables that is cloves export earnings, world price and real exchange rate. The short run (short term dynamic behavior) of Tanzania’s cloves export response to trade liberalization has been investigated through the error correction model. Empirical results on error correction model were found to be correctly signed. The coefficient estimate of the error correction term in this model indicates a high speed of adjustment of variables to equilibrium.  This implies that variables adjusting to equilibrium at the speed of 78 percent per annum as such confirming the validity of the long run equilibrium relationship. World price also has been found to be correctly signed and statistically significant at 5 percent as such is one of the important determinants of cloves export supply. On other hand real exchange rate as well found with correct sign but statistically insignificant and dummy variable which captured the effect before and after trade liberalization found to be an important determinants of cloves supply since it has a positive sign, however it is statistically insignificant. Trend analysis of cloves export earnings found to be improving. Generally, robustness has also found in error correction model used in this study since it provided with relevant information about diagnostic tests. A non parametric technique revealed that shift of trade policy in Tanzania is statistically significant at 5 percent level.

Keywords: Trade liberalization, export response or performance and agricultural export.