Trade Liberalization and Economic Growth in Kenya : An Empirical Investigation (1975-2013)

Sammanfattning: This paper examines trade openness and economic growth. What has been the effect of openness to trade on economic growth in Kenya? Kenya’s trade policies have emerged since independence, it has improved from import substitution to progressive liberalization through emergence of export processing zones, reduction of tariffs levels, eliminated price controls and licensing requirements leading to modest growth in trade Republic of Kenya (2005). Although the country has improved in it’s trade policies, it is still counted as mostly unfree. Empirical evidence suggests that free trade leads to a better economic performance in different channels, however the evidence has been questioned because of the doubts on how trade openness of a country should be measured and methodology estimation. The study uses trade intensity as a measure of trade openness. Applying Ordinary least squares using a time series data obtained from the World Development Indicators a negative relationship is seen between trade openness measure and Gross domestic product in Kenya. A Granger causality test is done also to determine whether trade liberalization can be used to give significant information about the economic growth of Kenya or vice versa. Vector Auto regression model (VAR) is used to determine the Granger causality. In the OLS regression model measures of openness, labor and capital are significant.