Analysis of the Relationship Between Trade Openness and Economic Growth in Kenya

Abstract

Given that policy makers and civil society in Kenya disagree on the contribution of openness to economic growth. It is therefore not clear whether trade openness does or does not promote growth in the case of Kenya. The purpose of this study was therefore to analyze relationship between trade openness and economic growth in Kenya. This study was modeled on Adam Smith’s absolute advantage theory. The study used correlation research design based on annual time series data spanning 30 years from 1980 – 2009. Data was obtained from the World Development Indicators. The study used Vector Error Correction Mechanism to integrate long run and short run dynamics and Granger causality for directional causality. The results indicated significant positive effect and unidirectional causality between trade openness and economic growth in Kenya, with coefficient of 0.98 implying that 1 % increase in trade openness increases economic growth by 0.98% respectively. Economic growth is significantly error correcting at 34.7% annually. The study concluded that in the long run trade openness promote growth in Kenya. In view of this, the study recommends that the government of Kenya to continue pursuing trade openness policies to increase trade volumes to enhance economic growth. Keywords: Trade Openness, Economic Growth, Kenya