Causal relationship between trade openness and economic growth: Pieces of evidence from Afghanistan

Trade is the term used to describe the willing swapping of goods or services between economic participants. As these transactions rely on mutual agreement, trade is commonly perceived as beneficial for all parties involved. In earlier times, gold and silver were the main mediums of exchange during trade. However, due to different obstacles, trade was predominantly confined within a country's borders in more recent centuries. Presently, trade has transcended national limits and encompasses a diverse array of activities known as international trade. This type of trade has grown in prominence owing to trade liberalization, with a specific focus on trade openness, therefore this paper attempts to investigate the causal relationship between trade openness and economic growth of Afghanistan. A time series data has been used for the period 2002–2020. The model includes GDP as a dependent variable and total trade and the official exchange rate as independent variables. Augmented Dicky Fuller test has been used to check the stationary of the variables and all variables were found stationary at level. The experimental results of the regression analysis revealed that total trade has a positive and significant impact on the country's economic growth. However, the exchange rate has a negative and insignificant impact on economic growth. The Granger causality test results showed that GDP causes trade and the model had unidirectional causality between trade openness and economic growth. Diagnostic tests confirm that residuals are normally distributed and the model is devoid of autocorrelation and heteroscedasticity. Therefore, based on the empirical analysis of the study it is recommended that the government of Afghanistan should prioritize human capital development, financial sector enlargement, and trade expansion, as well as improved trade policy reforms, to eliminate numerous trade restrictions that traders face during imports and exports of goods and services, and also the government should implement lower trade tariffs and a shift toward liberalization to ensure sustained long-run economic growth.