Analysis of the Relationship Between Trade Openness and Economic Growth in the Caribbean: A Case Study of the 3B2GD Countries

Abstract

In recent times, small island countries in the Caribbean region have been fully devoted to the consolidation and development of both regional and international investments and trade corporations. Likewise, tremendous economic growth has also been witnessed in some of these trade collaborating countries. Thus, it is essential that the effect of the recent boost of economy in the region is empirically analyzed in order to ascertain if this is a product of the recent openness to trade in the region. Therefore, in this study, we applied the Autoregressive Distributed Lag (ARDL) bounds test of cointegration and the Granger causality tests in order to empirically investigate the dynamic relationship between trade openness and economic growth in the Bahamas, Barbados, Belize, Guyana, Grenada and Dominica (3B2GD) for the period from 2000 to 2019. The empirical results show that trade openness has significant effect on economic growth as there exist a long run relationship between trade openness and economic growth.  Also, the results of the bounds test of cointegration confirms that in the 3B2GB economies, there is an existence of a bi-directional causality from trade openness to economic growth. Similarly, an evidence of uni-directional causality between trade openness and output growth is observed from the investigation, mostly with regards to Guyana. To further examine the long- and short-run coefficients, we analyzed the cumulative sum of recursive residuals (CUSUM) and the cumulative sum of squared residuals (CUSUMQ) plots for the respective 3B2GD economies. The results of the residual plots show that the parameters of the estimated ARDL models are stable.

Keywords - Trade openness, ARDL, economic growth, cointegration, CUSUM, Granger causality.

DOI: 10.7176/JESD/11-10-02

Publication date:May 31^st 2020