The African Financial Review July-August 2014 | Page 60

Introduction

Sub-Sahara African (SSA) countries have implemented a series
of economic reforms, including trade liberalization, with the
aim of improving on the level of their economic growth. The
theoretical motivation for these reforms is that trade liberalization
is expected to increase trade, which in turn raises the rate of
economic growth. However, the empirical evidence from the
large and growing literature on trade and growth remains mixed
(Chaudhuri et al. 2008; Chandra et al. 2010; Claustre et al. 2010;
Du 2010). Some studies suggest that trade liberalization is not
associated with growth while others conclude that trade openness
may even retard growth. For example, while Dollar and Kraay
(2003) argue that trade openness helps to increase the speed of
convergence; the evidence from the study by Easterly (2008)
suggests that increased openness to trade has led to income
divergence rather than convergence in African countries. In fact,
Rodrik (2001) argues that, regarding trade openness and growth,
“the only systematic relationship is that countries dismantle trade
restrictions as they get richer.”

The issue of whether trade and increased openness of trade
would lead to higher rates of economic growth is an age-old
debate between pro-traders and anti-traders over the years.
Early proponents of free trade have lauded the gains from trade
through the specialization of countries in the production of goods
in which they have comparative advantage and engage in trade
and exchange to meet their other needs. But the anti-traders
see trade to be the main cause of dumping of goods that have
affected the developing countries adversely. New development
theorists contend that openness to trade stimulates technological
change by increasing domestic rivalry and competition, leading
to increased innovation; and that trade liberalization by allowing
new goods to flow freely across national borders increases the
stock of knowledge for technological innovations which spur
growth (Alege, 1993; Ahmed and Sattar, 2004).

It has been observed from literature that one of the causes of
the limited growth effects of trade liberalization is the weakness
of institutions. Indeed, one strand of the literature on growth
has argued for the primacy of institutions in economic growth

The issue of whether trade and increased
openness of trade would lead to higher rates
of economic growth is an age-old debate
between pro-traders and anti-traders over
the years.
(Easterly and Levine, 2003; Dollar and Kraay, 2003; Rodrik,
Subramanian and Trebbi, 2004). Findings from empirical studies
have concluded that institutions are crucial for the success of
economic reforms in developing countries (Acemoglu, Johnson
and Robinson, 2003; Dollar and Kraay, 2003; Addison and
Baliamoune-Lutz, 2006). This evidence suggests that the failure of
trade reforms to promote trade and growth in sub-Sahara African
countries may be attributable to the poor quality of institutions.
In a study by Addison and Baliamoune-Lutz (2006) on North
African countries, the results from their study show that the
growth effects of economic reforms depend to a large extent
on the quality of institutions. This paper examines whether this
finding can be generalized to all African countries. The paper
estimates a growth model including measures of institutional
quality and indicators of openness in addition to conventional

60 | The African Financial Review

correlates of growth. The paper employs the use of panel data
comprising a sample of thirty (30) African countries selected
across the regions of sub-Sahara Africa covering the period 19852012. The econometric technique employed for the analysis is the
least squares dummy variable (LSDV) and the Generalized

Method of moments techniques.

Therefore, the objectives of this paper includes; (i) to examine
the effect of trade liberalization and institutional quality on
economic growth in selected African countries; and (ii) to
explore the validity of the theoretical argument that one of the
causes for the limited growth effects of trade liberalization is the
weakness of institutions in the African continent. The hypothesis
formulated in this study stated in the null form is: H0: There
is no significant relationship between trade openness and
institutions and economic growth in the selected SSA countries.
The remaining part of this paper is structured as follows: section
II is the literature review and theoretical framework. The next
is the methodology in section III. Data analyses and discussion
are in section IV. Summary of findings, Recommendations and
Conclusion are in section V.

Literature review and theoretical framework

Economic theory predicts that trade openness should promote
trade, which in turn boosts growth in the long run. Theory
suggests that trade openness expands trade opportunities,
improves efficiency of allocation of resources (towards the most
efficient sectors) and accelerates technological development
especially through liberalization of imports. It is expected that
high-technology imports enhance domestic innovation, thus
raising productivity and growth. However, after decades of
liberalization experiments in Africa and in developing countries in
general, the evidence on the growth effects of trade liberalization
remains mixed (Easterly and Levine 2003; Dollar and Kraay 2003;
Rodrik et al. 2004). Various arguments have been advanced to
explain the limited effects of trade openness on growth. In this
review we only stress some of the possible reasons for the weak
empirical evidence on the growth effects of trade openness.

There has been several studies in the literature that have
contributed to a better understanding of the determinants of longrun economic growth by identifying a set of growth-enhancing
policies and institutions on top of the traditional influences of
physical capital accumulation and human capital in the form of
education or health (Solow, 1957; Mankiw et al., 1992; Cohen
and Soto, 2007; Aghion et al., 2011). A number of studies
stress the importance for economic growth of trade openness
(Frankel and Romer, 1999; Wacziarg and Welch, 2008), of the
level and the structure of taxation and government expenditures
(Easterly and Rebelo, 1993; Lee and Gordon, 2005), of research
and development activity (Vandenbussche et al., 2006), of welldeveloped financial markets (King and Levine, 1993; Levine,
2005), of economically friendly institutions or cultural traits
(Tavares and Wacziarg, 2001; Djankov et al., 2003; Acemoglu
et al., 2005; Aghion et al., 2010). One consensus reached in these
studies is the fact that institutions play a great role in bringing
about the effect of trade openness to be feasible on economic
growth.

The theoretical base of this study is premised on the new
endogenous growth theory which was developed as a reaction
to omissions and deficiencies in the Solow neoclassical growth
model. The theory explains the long-run growth rate of an