A NOTE ON CAUSALITY RELATIONS AMONG ECONOMIC GROWTH, DEVELOPMENT ASSISTANCE AND TRADE OPENNESS IN LOW INCOME COUNTRIES

Year 2019, , 503 - 515, 06.01.2020

Rıfat Barış Tekin

https://doi.org/10.14780/muiibd.665756

Abstract

This article tests for causality relations among economic growth, official development assistance
and openness-to-trade in low income countries. A recently developed Granger causality testing
methodology based on Bayesian estimation of Seemingly Unrelated Regression (SUR) systems is
employed in this study. Findings suggest a direct, unidirectional causality from official development
assistance to economic growth in Chad, Madagascar, Democratic Republic of the Congo, the Gambia
and Sierra Leone. In Chad and the Gambia, regression coefficients are found to be negative, suggesting
a negative impact of foreign aid on economic growth. We therefore fail to provide clear-cut empirical
evidence in support of aid effectiveness. Test results suggest unidirectional causality from opennessto-
trade to economic growth in Chad, Democratic Republic of the Congo, the Gambia, Rwanda, Mali,
Niger and Togo. In all these countries, except Democratic Republic of the Congo, the mean estimation
beta is positive, providing some support for the trade-led growth hypothesis. For Chad, Rwanda,
Malawi and Madagascar we find evidence for positive, unidirectional causality in reverse direction,
that is, from economic growth to openness-to-trade. Finally, in Benin, Burkina Faso and Mali we find
evidence that foreign aid inflows Granger-cause and enhance openness-to-trade.

Keywords

Development assistance, effectiveness of aid, openness to trade, economic growth, Granger causality, Bayesian estimation of Seemingly Unrelated Regression (SUR) models, low income countries

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