Trade openness and economic growth in Tanzania: search for a causal relationship, 1970 -2010

The main aim of this study is to explore the relationship between trade openness and economic growth for small low income open economy. Tanzania therefore is used as a case in searching for a causal relationship between trade openness and economic growth over the long period, 1970 to 2010. To address the persistence in series and autocorelationg, amongst other econometric difficulties, this study apply unit root tests, co-integration tests, Error Correction Model (ECM) regression, and Vector Auto Regressive (VAR) that test causality. The ECM estimates, as found in most other studies, have confirmed that trade openness advanced economic growth. Other control variables that include education that measure human capital and population growth have the expected signs and significant. However, investments, both the foreign direct and local private, that capture the physical capital, against the expectation adversely affect economic growth. As this is the long term regression, one possible reason could be that, given Tanzania past history, the private sector is still very small and foreign direct investment is a recent phenomenon. The causality tests find that, the direction of causality run from trade openness to economic growth. These findings imply that, as for advanced economies and high income countries, trade is as well important for promoting economic growth for small open and low income countries like Tanzania, and economic growth due to trade is as good for economic development and poverty reduction.