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Research Article
International Trade and Economic Growth: A Cointegration
Analysis for Uganda
*James Kizza1, Amonya David2, Kigosa Nathan3
1,2,3Department of Economics and Statistics, Kyambogo University, Uganda
The focus of the study was to establish whether there exists a long run relationship between
various trade and other macro economic variables for Uganda for the period 1982 to 2018. The
Autoregressive distributed lag (ARDL) model was used to establish the existence of a long run
relationship between economic growth and trade variables. The empirical results suggest that in
the short run, imports reduced development by -0.11 in second lag as P=0.025<0.005, while the
exports increased development by 0.08 in the first lag as the p=0.015<0.005. But this was not true
for the second lag. Lastly at all lags for the short run, inflation had positive run relationship on
development (GDP). However, in the long run inflation reduced development by 0.61 ceteris-
paribus at 5% level of significance.
Key words: International trade, economic growth, cointegration, exports, imports, inflation, GDP, Autoregressive
distributed lag.
JEL Codes: C22, F1, F4
INTRODUCTION
The focus of the study is to establish whether there exists Uganda’s exports can be classified broadly into two. First,
a long run relationship between various trade and other the traditional exports like coffee, cotton, tobacco and tea
macro economic variables for Uganda for the period 1982 that have dominated Uganda’s exports since
to 2018. The study employs the ARDL approach to independence. Second, the non traditional exports that
establish the existence of a long run relationship between came to the limelight from 1986 when the National
economic growth and trade variables. The classical Resistance Movement (NRM) took over power. The non
economists like Adam Smith and David Ricardo held that traditional exports were promoted by the NRM government
trade promoted economic growth by allowing the optimal to boost the country’s export base and increase the
distribution and utilization of resources. Trade enabled country’s foreign exchange earnings. The promotional of
countries to specialize where they have the greatest non traditional exports, such as, fish and fish products, iron
comparative advantage and as well provided an avenue and steel, gold, sugar, maize and flowers was also meant
for countries to get market for their surplus products. Trade to salvage the country from over reliance on a few exports.
is indispensable in any development policy of the country. The key feature in the promotion of non-traditional exports
Trade enables producers to get market for their surplus was the promotion of the hitherto considered food crops,
output (Abdullahi et al., 2013). Trade encourages such as, beans and maize to join the list of the country’s
competition, improves lives through increased choice, exports. This deliberate effort by government to promote
allows specialization and results in improved output and non traditional exports has paid off by gradually helping the
productivity. Clunnies (2009) refer to economic growth as country to transit from a dominantly subsistence economy
an increase in real per capita income which can be to a commercial/market economy. This policy has also
sustained over a long period of time. Uganda like many enabled and boosted the emergence of agri-business
Sub Saharan Africa countries is largely dependent on the related industries mainly involved in the processing of
export of agricultural commodities for its growth which agricultural products.
unfortunately has poor terms of trade and may not be
sustainable in the long run (Bank of Uganda Report, 2019; *Corresponding Author: James Kizza; Department of
Uganda Economic Outlook, 2019; R.Waiswa, Makerere Economics and Statistics, Kyambogo University, Uganda.
University, Kampala,2018) . Email: kizzajames2016@gmail.com; Co-Author 2Email:
david.amwonya@gmail.com 3Email: nathankigosa@yahoo.com
Uganda mostly exports agricultural products that 2014; Oviemuno, 2007) support the existence of a positive
constitute over 80% of the country’s exports. relationship between exports and economic growth. A
Unfortunately, agriculture as an economic activity is largely study by Okuwa et al. (2016) on the effects of international
dependent on weather conditions, where if when trade on West Africa economic growth revealed that a one
favorable, agriculture can spur growth and if not favorable percent increase in export variable will lead to 5.11 percent
may slow the country’s rate of economic growth. (Uganda increase in GDP growth. Several other studies on the
Economic Outlook, 2019). In the study about what type of African continent confirm the significant positive role
exports contribute to Uganda’s economic growth, Waiswa played by exports in the growth of the country’s economy
(2018) noted that much as both traditional and non (Levin and Raut, 1997; Khalifa al-Youssif, 1997). Tigist
traditional exports contribute to Uganda’s economic (2015) study on the role of agricultural exports on
growth, the traditional exports such as coffee and tea had economic growth in Ethiopia confirmed the existence of a
a significant positive effect on economic growth as positive significant effect between agricultural products
compared to the non traditional exports like flowers and such as coffee and economic growth. The growth in
fish. The Bank of Uganda report (2019) authenticate the exports promotes capacity utilization and productivity
findings of Waiswa (2018), and the report further decries gains that may result from technology transfer. However,
the systemic trade deficit the country is facing as a result a study by Usman (2011) found that exports have a
of her dependence on the exports of low value agricultural negative impact on real output.
products that are also weather dependent and the
dependence on fuel imports that are highly priced. In Economic theory posits the existence of a negative
2017, Uganda’s exports stood at $3.339 billion against the relationship between imports and economic growth.
import bill of $5.036 billion. The low revenues obtained Kaberuka et al. (2014) argue that a negative sign is
from the country’s exports as compared to what the expected between imports and economic growth. This is
country spends on imports saw the country’s risk rating supported by a study done by Mongale and Mogoe (2014)
deteriorating from low to moderate risk of debt distress and Usman (2011). However, a study by Okuwa et al.
(Uganda Economic Outlook, 2019) (2016) revealed the existence of a positive but insignificant
impact between imports and the growth of GDP.
continue to play a significant role in most of Sub- Saharan ARDL model is used to estimate variables in their levels or
Africa when compared to manufacturing exports, which non differenced data. Whereas the ARDL approach does
they attribute to the theory of comparative advantage. not require one to pretest for the existence of unit roots
among the study variables, we continue to run unit root
The ARDL model is a cointegration method developed by tests to ensure that the ARDL model is truly appropriate
Pesaran et al. (2001) to test the presence of the long run and gives us valid results. Unit root tests estimated using
relationship between variables. The ARDL approach is the Augmented Dicker –Fuller estimation was done to
credited by various researchers to have many advantages establish the existence of unit roots that are a common
over the classical integration tests (Nkoro and Uko, 2016; occurrence with time series data. The estimation of unit
Baig et al., 2018; Harris et al., 2003; Alimi, 2014). The root tests also helps to forestall the danger of estimating
technique is very useful in determining the long run an irrelevant ARDL model, that is, in case there exists the
relationship between series with different order of possibility of some variables being integrated by I(2). Since
integration. Unlike the traditional cointegration tests, the our variables were of a mixed order only limited to I (0) and
ARDL model does not require pretests for unit roots and is I (1), we continued to apply the ARDL model. We run
recommended in situations where there is a single long run cointegration tests to establish the existence of a long run
relationship between the underlying variables in a small relationship between the study variables. Both the Trace
sample size. A stochastic process Yt is assumed to have Statistic and Maximum Eigen value tests were run. The
a unit root problem if its first difference, Yt Yt 1 is study explanatory variables used to undertake a
stationary. The presence of a unit root implies that a time cointegration analysis in order to establish a link between
series under review is non stationery while the absence of trade and economic growth were: export share of GDP
it implies that a time series is stationery. Nkoro and Uko (EXGDP), import share of GDP (MGDP) and Inflation
(2016) however advise that unit roots be tested to establish (INFL). The study uses annual time series data for Uganda
the possibility of variables that may be integrated by I(2) for the period 1982 to 2018 from the World Bank data
as the presence of I(2) will render the estimations using base. The variables are said to be cointegrated if the
the ARDL invalid. In the ARDL model the dependent residual is stationery. Cointegration between variables
variable is expressed by the lag and current values of the provides evidence of the existence of a long run
independent variable and its own lag value and is one of relationship between the variables. Given that our
the most general dynamic unrestricted model in variables were found to be integrated of I(0) and I(1), and
econometrics. When variables cointegrate, it means the the cointegration tests established the existence of a long
existence of the presence of the steady state equilibrium run relationship between the study variables, we proceed
between variables. to investigate the effects of the different variables under
study on economic growth using the ARDL model. We
conduct diagnostic tests to test the robustness of the
METHODOLOGY model.
Inflation was found to be stationery at 10% level of was only stationery at both the 5% and 10% level of
significance. To ensure all variables were stationery, we significance. All variables were thus integrated of order
proceeded to difference all the variables and the results one 1(1) which made it possible to conduct cointegration
showed that all variables became stationary at first tests on the variables (Table 2)
differencing at all levels of significance except GDP which
Table 2: Augmented Dickey Fuller (ADF) Test Results after 1st Differencing
Variable t- ADF Statistic Critical 1% Critical 5% Critical 10% p-value Conclusion
dLGDP -3.593 -3.689 -2.975 -2.619 0.0059 Stationary
dLINFL -8.479 -3.743 -2.997 -2.629 0.0000 Stationery
dLMGDP -6.853 -3.682 -2.972 -2.618 0.0000 Stationary
dLEXGP -6.601 -3.682 -2.972 -2.618 0.0000 Stationary
dEC -18.438 -3.682 -2.972 -2.618 0.0000 Stationary
To test for cointegration, the Engle –Granger approach dependent variable. The null is thus rejected at 5% level.
was used with an OLS regression run on the variables to From the cointegration Tables 3 and 4, both the trace
find out their stationarity, where forth, all variables were
statistic and maximum Eigen value statistic indicate the
found to be integrated of order one I(1), residuals werepresence of cointegration at 5% level of significance
saved and an ADF test was performed on the residuals implying the existence of a long run relationship between
which were found to be stationery. The equation was run the explanatory variables and the dependent variable.
in natural logs and in the form: Johansen and Juselius (1990) suggest that where Trace
Statistic and Maximum Eigen value tests produce different
LGDP = results, it is preferable to use the results of the trace test.
0 1LEXR 2 LINFL 3 LMGDP 4 EXGP In our study, results in both tables 3 and 4 yields the same
results and no need to make a choice between them.
real output. Whereas, studies by Waiswa (2018) and given that the country is predominantly an agro based
Bbaale and Mutenyo (2011) support the existence of a economy.
significant positive role played by agricultural exports to a
country’s development, several other studies are in The ARDL model showed that exports increased
disagreement. The Bank of Uganda report (2019) and the development by 0.08 in the first lag as the p=0.015<0.005.
Uganda Economic Outlook (2019) attribute the But this was not true for the second lag. This attest to the
deteriorating country’s risk rating on her dependence on fact that much as exports are associated with positive
low value agricultural products. The study finding implies effects on growth, this effect may not have sustainable
that if Uganda is to have sustainable benefits from her results. This is because Uganda basically exports low
exports, she must pay attention to the structure of her value agricultural products that fetch little foreign
exports which should move towards targeting the exchange and imports high value products. We
exportation of high value manufactured products. recommend that the government seriously considers
investment in industries that promote high value addition
The model indicated that at all lags for the short run, agricultural processing export products. The government
inflation had positive run relationship on development should diversify her export base from the current
(GDP). However, in the long run inflation reduced exportation of largely low value primary products to include
development by 0.61 ceteris-paribus at 5% level of the exportation of high value manufactured products.
significance. This finding agrees with economic theory
where in the short run, low levels of inflation are known to The model indicated that at all lags for the short run;
stimulate growth (Tobin, 1965; Mongale and Mogoe, 2014) inflation had positive run relationship on development
while persistent levels of inflation are associated with (GDP). However, in the long run inflation reduced
negative growth effects (Stockman, 1981; Lucas and development by 0.61 ceteris-paribus at 5% level of
Stokey, 1987; Andres and Hernando, 1997; Fischer, 1993; significance. It is recommended that the government
De Gregorio, 1993). The monetarists’ neutral view on continues with its path of ensuring positive macro
inflation is not supported in this study. Inflation lowers the economic stability as this is key in building and maintaining
value of a country’s currency, discourages her exports and investor confidence which is an essential component to
makes the country’s imports less competitive which sustainable growth.
worsens the country’s balance of payments position. This
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