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The asymmetric effect of trade openness on economic growth in South Africa: a nonlinear ARDL approach

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Abstract

The untested hypothesis of a linear association between trade openness and economic growth in earlier studies may bring about incorrect inferences if indeed the association is nonlinear. This study uses the newly developed nonlinear autoregressive distributed lags (NARDL) framework to re-examine the link between trade openness and economic growth in South Africa over the period 1960–2016, highlighting the asymmetric effects of trade openness using an innovative proxy of trade openness proposed by Squalli and Wilson (World Econ 34(10):1745–1770, 2011). In contrast to previous studies, the new proxy is constructed to take into consideration both South Africa’s trade share of its GDP and its relative size of trade in relation to world trade in a specified period. Adopting this novel approach to capture openness permits the simultaneous testing of short- and long-run nonlinearities through positive and negative partial sum decompositions of trade openness. It also enables us to quantify the short- and long-run impacts of trade openness increases and decreases on economic growth from asymmetric dynamic multipliers. The results show that trade openness has short- and long-run asymmetric effects on economic growth. These results have important policy implications.

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Fig. 1

Source: Constructed from World Bank World Development Indictors (2016)

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Notes

  1. See Shiller (1993, 2005) and Kahneman and Tversky (1979) for more detail.

  2. Most especially from the adjacent topics have extensively used nonlinear ARDL approach and asymmetric cointegration (see for instance: Apergis and Miller 2006; Bussiere 2013; Bahmani-Oskooee and Fariditavana 2015; Al-Gudhea et al. 2007; Grasso and Manera 2007; Borenstein et al. 1997).

  3. Human capital is generally believed to affect economic growth in three ways: as an input factor (e.g., Mankiw et al. 1992), as something that attracts physical capital investment, or something that enhances TFP growth (e.g., Benhabib and Spiegel 1994). In this paper, however, we narrow our focus to the impact of human capital on economic growth, which is currently a hotly debated topic.

  4. Time series data on labour force is not readily available. Thus, we use the economically active population, defined as the number of people who belong to the age group from 15 to 64 years, as a proxy of the labour force.

  5. For a recent review of evidence see Kabuga and Ismail (2018), Keho (2017), Kabuga and Hussaini (2017), Vedia-Jerez and Chasco (2016).

  6. Shin et al. (2014) argue that, because of dependency between the two variables, such a treatment is crucial.

  7. Following Ang and Bekaert (2002), RCM for 2-states is obtained by using the formula: \({\text{RCM}}\left( {M = 2} \right) = 400 \times \frac{1}{T}\sum\nolimits_{t = 1}^{T} {P_{t} (1 - P_{t} )}\). The RCM value ranges between 0 (perfect regime classification) to 100 (no regime classification).

  8. Complete detail of the Jarque–Bera test is available upon request from the authors.

  9. The use of this specification with the Markov shifts in the intercept and the trade openness slope coefficient is retained as the more appropriate specification after estimation of several long-term relationship models with Markov shifts in the intercept and slope coefficients of all of the independent variables.

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Acknowledgements

Valuable comments of two anonymous reviewers are greatly appreciated.

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This study was not funded by any organisation.

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  1. School of Economics, College of Business and Economics, University of Johannesburg, P.O. Box 524, Auckland Park Campus, Johannesburg, 2006, South Africa

    Maxwell Chukwudi Udeagha & Nicholas Ngepah

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  1. Maxwell Chukwudi Udeagha
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  2. Nicholas Ngepah
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Appendix

Appendix

See Table 11.

Table 11 Results of BDS test
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Udeagha, M.C., Ngepah, N. The asymmetric effect of trade openness on economic growth in South Africa: a nonlinear ARDL approach. Econ Change Restruct 54, 491–540 (2021). https://doi.org/10.1007/s10644-020-09285-6

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