The Impact of Trade Openness on Economic Growth of Ghana (1986 – 2017)

Abstract

Trade openness is considered a medium for economic growth. Economic theory supports the assertion that trade enhances competition, promotes large market, transfers of technology which then propels economic growth. In recent times, developing countries have embraced trade liberalization as a means to boost economic growth and development. Ghana implemented import substitution industrialization as a way to promote economic growth, but after few years of policy implementation, the economy experienced a massive recession. Consequently, the Britton Woods Institutions was adopted to help stabilise the economy. Further, Ghana implemented the World Bank and IMF Structural Adjustment Programme (SAP) in 1986 which had trade liberalisation as one of the reforms. The main purpose of the liberalisation policy was to open up the economy to the rest of the world to increase competition and in turn improve efficiency in domestic industries to facilitate economic growth. This study, therefore, focused on ascertaining the impact of trade openness on the economic growth of Ghana from 1986 – 2017. Using annual series data, the study employed the autoregressive distributed lag (ARDL) model as the estimation technique. The study found that trade openness had a negative impact on economic growth both in the long- and short run. Broad money, inflation and population growth were found to exert a negative impact on economic growth in both the short and long run. Gross fixed capital formation had a positive impact on economic growth in the short run. Based on the findings, the study recommended that policymakers and other stakeholders should institute measures to minimize the importation of goods and expand the exportation of secondary goods. These measures if properly executed are likely to ensure a positive impact of trade openness on the economic growth of Ghana.