EMPIRICAL ANALYSIS OF THE INFLUENCE OF TRADE OPENNESS ON ECONOMIC GROWTH: A CASE STUDY OF YEMEN

In spite of the early promise of the premise that open economies committed to liberated trade reform program are supposed to grow faster than closed economies, recent experience suggests that not all open economies with trade reforms program have been as successful as anticipated. The current study major intend is to conduct further empirical investigation for more factors in relation to this concern and provide new evidence revealing the extent to which the efficiency of trade openness on economic growth in developing countries, is influenced by the implementation of economic reform programs. Therefore ,this study aims to explore the empirical relationship between trade openness (liberalisation) and economic growth in the case of Yemen taking into consideration the most modern modelling and econometric specification of trade compositions effects. It incorporates trade openness in the models as endogenous variables, utilising three indicators as proxies for trade openness measures, namely, imports, exports and trade volumes (exports + imports) in the augmented production function framework of Mankiw. It also incorporated more political and social factors. As for the estimation strategy, we initially checked the stationarity properties of the data by the Phillips Perron and augmented Dickey-Fuller unit root tests. Then, we used the autoregressive distributed lag (ARDL) model bounds and Johansen maximum likelihood approaches to test for cointegration. The vector error correction model (VECM) Granger causality was also implied to test the direction of the causality between trade liberalisation and economic growth. ARDL model and Johansen results confirmed the presence of cointegration between economic growth and trade openness and other independent variables. The results of structural analysis prove that the implemented trade reforms in Yemen was mitigated by some political and social factors. Results of VECM Granger causality provides clearer image and found empirical evidence in support of a bidirectional causal relationship between trade volume and imports with the growth of gross domestic product (GDP) of Yemen, but a unidirectional causal relationship was found between exports and GDP growth. The VECM results also show that the effect of trade openness on growth tend to be over the long run with little evidence of a short-run relationship indicating that trade openness is estimated to have long run impact if some policies were implemented. The study recommends encouragement of foreign direct investment and various economic reforms policies shifting towards more imports for more productive uses in the local production and for activating internal exports. This strategy will also be helpful in reallocating economic growth.