The causal relationship between exports and economic growth in Uganda (1960-2009)

Abstract

The study investigates the dynamic relationship between export and economic growth of Uganda for the period 1960-2009. The objectives of study were to investigate the direction of causality, the feedback effect, forecasting and long run relationship between traditional export, nontraditional and economic growth. The research applies popular time series econometric techniques like unit root test, granger causality and co- integration. The individual time series were subjected to unit root test to investigate stationary in series. The research applied co-integration technique for long run relationship. The granger causality method was applied on the finite vector error correction model (VECM) model to show direction of causality and feedback effect. The appropriate lag (1) length for VAR system was chosen based on the minimum alkaike information criteria. The results showed stationary in individual series except for non-traditional exports. Co-integration was confirmed when traditional exports were dependent variable with error correction term coefficient value of (-0.484) at 1% level of significant and no relationship was observed in short run. Finally, augmented Engle Granger test showed bidirectional causality between nontraditional exports and GDP with lag2 at 5% level of significance. Traditional exports showed unidirectional causality to GDP. The forecasted model showed that in longrun on average a unit increase in lagged traditional exports and economic growth would lead to 0.645 and 46.57 increases in traditional exports. The model gives a prediction with an error of 10%. The non- stationary series must be due to unstable prices and seasonal changes in climate. The causation from non-traditional exports to economic growth is as a result of earned foreign exchange from the nontraditional exports and presence of causation from GDP to nontraditional exports at lag 2 indicates that increased technological skills have significantly increased the value and volume of non-traditional exports.