Trade Liberalization, Institutions, and Economic Growth in Malawi

Abstract

The study provides an empirical assessment of how institutions and trade liberalization affect Malawi’s economic expansion. It tackles the absence of empirical research into how institutions affect economic growth and how trade liberalization policy affects institutions’ influence on growth (interaction effect). The study also seeks to find out if economic growth, however, affects institutions as theories differ on causality. The study uses a time series analysis and autoregressive distribution lag (ARDL) technique to obtain short-run and long-run results. The study was conducted from 1988, the official inception year of trade liberalization in Malawi, to 2014. The empirical results show that political and economic institutions, as well as trade liberalization, affect Malawi’s economic growth in both the short term and the long term. Trade liberalization and political institutions negatively affect economic growth in the short run and long run, whereas economic institutions positively affect economic growth in the short run and long run. The findings also show that when strong economic institutions rather than strong political institutions are present, the effect of trade liberalization on economic development is more prominent (positive). Finally, the study also finds that it is institutions that affect economic growth in Malawi and not the other way around.