Trade Openness, Government Consumption, and Economic Growth Nexus in Saudi Arabia: ARDL Cointegration Approach

Abstract

This study intends to examine the influence of trade openness on economic growth in the Kingdom of Saudi Arabia including government consumption and labor force as control variables. Using time-series yearly data from 1985 to 2019, the study applies the Auto-Regressive Distributed Lag (ARDL) cointegration regression and the Toda-Yamamoto (T-Y) Granger causality check to achieve the objective of the study. The ARDL model estimation discloses the positive contribution of trade openness and labor force to economic growth in the short and long run as well; government consumption causes economic growth positively in the short-run, while in the long its impact is insignificant run. The T-Y Granger causality test outcomes have demonstrated several bidirectional and unidirectional causalities. There are three feedback relations; “trade openness-economic growth,” “economic growth-government consumption,” and “government consumption-labor forces.” Three are an equal number of unidirectional causalities; “labor forces to economic growth,” “labor forces to trade openness,” and “trade openness to government consumption.” The outcomes have implications for the policymaker to boost the Kingdom’s trade openness to benefit further from trade, rationalize its government’s size to promote private sector growth to raise the latter’s effective contribution to GDP, and accelerate income growth.