The impact of trade openness on economic growth in East Africa

Abstract

This study examines the effect of trade openness on economic growth in the founding members of the East African Community Kenya, Tanzania, and Uganda over the period 2000–2023. Unlike previous studies, the study explicitly accounts for time-specific shocks and cross-sectional dependence, revealing that the growth effects of trade openness are conditional on structural and institutional constraints. Using secondary panel data on GDP, trade openness, interest rates, inflation, official exchange rates, and exports, the analysis employs descriptive statistics, pairwise correlation, unit root tests, and panel regressions (pooled, fixed, and random effects). The Hausman test identifies the fixed-effects model as the preferred specification, with Driscoll-Kraay standard errors addressing cross-sectional dependence and serial correlation. Results indicate that trade openness has a significant negative effect on GDP growth, potentially due to natural trade barriers, competition affecting domestic firms, and reliance on primary commodities. Exports, however, positively contribute to growth, while interest rates negatively affect it, and inflation and exchange rates are not significant. These findings underscore the importance of trade composition over aggregate openness and provide insights for policymakers aiming to design strategies that enhance sustainable economic growth in East Africa.