A NOTE ON CAUSALITY RELATIONS AMONG ECONOMIC GROWTH, DEVELOPMENT ASSISTANCE AND TRADE OPENNESS IN LOW INCOME COUNTRIES

Year 2019, Volume: 41 Issue: 2, 503 - 515, 06.01.2020

Rıfat Barış Tekin

https://doi.org/10.14780/muiibd.665756

Abstract

This article tests for causality relations among economic growth, official development assistance
and openness-to-trade in low income countries. A recently developed Granger causality testing
methodology based on Bayesian estimation of Seemingly Unrelated Regression (SUR) systems is
employed in this study. Findings suggest a direct, unidirectional causality from official development
assistance to economic growth in Chad, Madagascar, Democratic Republic of the Congo, the Gambia
and Sierra Leone. In Chad and the Gambia, regression coefficients are found to be negative, suggesting
a negative impact of foreign aid on economic growth. We therefore fail to provide clear-cut empirical
evidence in support of aid effectiveness. Test results suggest unidirectional causality from opennessto-
trade to economic growth in Chad, Democratic Republic of the Congo, the Gambia, Rwanda, Mali,
Niger and Togo. In all these countries, except Democratic Republic of the Congo, the mean estimation
beta is positive, providing some support for the trade-led growth hypothesis. For Chad, Rwanda,
Malawi and Madagascar we find evidence for positive, unidirectional causality in reverse direction,
that is, from economic growth to openness-to-trade. Finally, in Benin, Burkina Faso and Mali we find
evidence that foreign aid inflows Granger-cause and enhance openness-to-trade.

Keywords

Development assistance, effectiveness of aid, openness to trade, economic growth, Granger causality, Bayesian estimation of Seemingly Unrelated Regression (SUR) models, low income countries

References

• ANDO, T., ZELLNER, A. (2010). Hierarchical Bayesian analysis of the seemingly unrelated regression and simultaneous equations models using a combination of direct Monte Carlo and importance sampling techniques. Bayesian Analysis, 5: 847–878.
• BAHMANI-OSKOOEE, M., NIROOMAND, F. (1999). Openness and growth: An empirical investigation. Applied Economics Letters, 6, 557-561
• BOBBA, M., POWELL, A. (2007). Aid and growth: Politics matters. Inter-American Development Bank Working Paper, No. 601, Washington, DC.
• BURNSIDE, C., DOLLAR, D. (2000). Aid, policies, and growth. American Economic Review, 90(4): 847-868.
• BREUSCH, T., PAGAN, A. (1980). The LM test and its applications to model specification in econometrics. Review of Economic Studies, 47: 239–254.
• EASTERLY, W., LEVINE, R., ROODMAN, D. (2004). Aid, policies, and growth: comment. American Economic Review, 94(3): 774-780.
• ELLISON, A. M. (2004). Bayesian inference in Ecology. Ecology Letters, 7: 509-520.
• GONG, L., ZOU, H. (2001). Foreign aid reduces labor supply and capital accumulation. Review of Development Economics, 5(1), 105-118.
• GRIFFITHS, W. E. (2003). Bayesian inference in the seemingly unrelated regressions model. in Computer-Aided Econometrics, David E.A. Giles, ed., Marcel Dekker: New York.
• HURLIN, C. (2008). Testing for Granger Non Causality in Heterogeneous Panels, Mimeo, Department of Economics: University of Orleans.
• KAR, M., NAZLIOĞLU, Ş., AĞIR, H. (2011). Financial development and economic growth nexus in the
• MENA countries: bootstrap panel granger causality analysis. Economic Modelling, 28,(1-2): 685–693.
• KEHO, Y. (2017). The impact of trade openness on economic growth: The case of Cote d’Ivoire. Cogent Economics & Finance, 5(1), p.1332820.
• KONYA, L. (2006). Exports and growth: Granger causality analysis on OECD Countries with a panel data approach. Economic Modelling, 2: 978–992.
• MINOIU, C., REDDY, S. (2010). Development aid and economic growth: A positive long-run relation. The Quarterly Review of Economics and Finance, 50 27 39
• PESARAN, M.H., SHIN, Y., SMITH, R.J. (1999). Pooled mean group estimation of dynamic heterogeneous panels. Journal of the American Statistical Association, 94 (446), 621 634.
• PESARAN, M. (2004). General Diagnostic Tests for Cross Section Dependence in Panels. Cambridge Working Papers in Economics No. 0435 Faculty of Economics, University of Cambridge.
• RAJAN, R.G., SUBRAMANIAN A. (2008). Aid and growth: What does the cross-country evidence really show?. Review of Economics and Statistics, 90/4.
• RIGOBON, R., RODRIK, D. (2005). Rule of law, democracy, openness, and income: Estimating the interrelationships. The Economics of Transition, 13, 533–564.
• ROSSI, P. ALLENBY G., MCCULLOCH, R. (2005). Bayesian Statistics and Marketing. John Wiley & Sons.
• SAKYI, D., VILLAVERDE, J., MAZA, A. (2015): Trade openness, income levels, and economic growth: The case of developing countries, 1970–2009, The Journal of International Trade & Economic Development: An International and Comparative Review, 24 (6), 860 – 882.
• TEKİN, R. B. (2012a). Economic growth, exports and foreign direct investment in Least Developed Countries: A panel Granger causality analysis. Economic modelling, 29(3): 868-878.
• TEKİN, R. B. (2012b). Development aid, openness to trade and economic growth in least developed countries: bootstrap panel Granger causality analysis. Procedia-Social and Behavioral Sciences, 62: 716-721.
• TEKİN, R. B. (2018) “Causal nexus among exports, foreign direct investment and economic growth revisited: New evidence from Sub-Saharan Africa” Journal of Research in Economics, 2(2): 208-223.
• TEMPLE, J.R.W. (2010): “Aid and conditionality”, in Handbook of Development Economics, (eds.) Dani Rodrik and Mark Rosenzweig, vol 5. London, Elsevier
• WINTERS, L.A., MASTERS, A. (2013). Openness and growth: still an open question?. Journal of International Development, 25(8), pp.1061-1070.
• VAMVAKIDIS, A. (2002). How robust is the growth-openness connection: Historical evidence. Journal of Economic Growth, 7, 57–80.
• VLASTOU, I. (2010). Forcing Africa to open up to trade: is it worth it? The Journal of Developing Areas, 44, 1, 25-39.
• ZELLNER, A. (1962). An efficient method of estimating seemingly unrelated regression equations and tests for aggregation bias. Journal of the American Statistical Association, 57: 348–368.
• ZELLNER, A. (1971). An introduction to Bayesian inference in econometrics. New York: Wiley.