Education, Openness and Economic Growth in South Africa: Empirical Evidence from VECM Analysis

Abstract

The abundance of natural resources in sub-Saharan Africa has not led many of the countries in this region out of poverty. Education and trade openness have made significant contribution to economic growth in some developed and emerging countries across the globe. The recent efforts of government in South Africa towards education and trade liberalisation warrant the investigation of the causal relationship between trade openness, education and economic growth. Annual time series data on GDP growth rate, total government spending on education (as percentage of GDP) and trade openness (export plus import as a percentage of GDP) are collected from the 2016 update of World Bank's World Development Indicator (WDI) for the period 1984–2015. The choice of period was constrained by the availability of data on government spending on education and trade openness on WDI. Unit root test and Johansen cointegration test were conducted to determine the stationarity and the existence of long-run relationships among the variables respectively. Afterwards, vector error correction model was adopted to test the long run and short run causality among the variables. The result showed that the series were not stationary at levels but became stationary at first difference. Also, there is long run relationships among the variables as their series were found to be co-integrated with one another, and causality was found from education and economic growth to trade openness; from education and trade openness to economic growth; and from economic growth and trade openness to education in the long run. However, short run causality was only established from trade openness to economic growth with no feedback effects and no other variables showed any form of causality in the short run. The impulse response function also indicated that economic growth reacts more to trade openness than education. The policy implication from this study is that increase in government spending on education and improvement in trade openness especially from the export-side are important ingredients to economic growth in emerging countries like South Africa. This study make policy suggestion that continuous spending on education and trade openness are vital and not negotiable to bring about strengthening local capabilities and institutions which positively affects economic growth and development in South Africa.