Trade Openness and Economic Growth: Evidence From Mauritius

Mauritius - 30 May 2018

The idea that international trade is an engine of economic growth dates from long back, and even now an overwhelming body of literature affirms a strong and positive link between trade liberalization and economic development. However, most of these studies focused on developed countries. Indeed, while literature from developing countries are scant, those from Small Islands Developing States (SIDS), like Mauritius are almost nonexistent. The long-held belief of an underlying positive association between trade liberalization and growth has prompted trade liberalization to be a prominent component of policy advice in many developing countries. Nevertheless, despite the shift towards greater openness in developing countries, recent evidence suggest that the benefits of trade reforms have either not been as high as expected, or response across countries have been varied - with some benefiting, and others losing from the trade reform. Taking into account the diverging response of trade liberalization in different countries, and the absence of such a scrutiny in a SIDS like Mauritius, the need to rigorously analyze the link between openness and economic development has become unavoidably crucial in the island. This paper endeavors to innovatively scrutinize the relationship between trade liberalization and economic growth in Mauritius, using bi-annual data for the period 1989-2009, through a Vector Error Correction Model (VECM). The stationary properties and order of integration of the data are tested using the Augmented Dickey-Fuller (ADF) test on all the time series data. The variables are stationary at first differences, and so Johansen co-integration tests are then employed to determine whether the variables are co-integrated. In order to examine both the long run and short run relationships between trade liberalization and economic growth, the VECM is then constructed. Finally, the direction of causality between openness and economic growth is determined by applying Granger-Causality tests.