Theoretical and Applied Economics
No. 3 / 2023 (636), Autumn
The nexus of foreign trade and economic growth in Tanzania. Examining the influence of COVID-19 pandemic. Evidence from vector error correction model
The Mwalimu Nyerere Memorial Academy, Dar-es-Salaam, Tanzania
Abstract. The study intended to study the relationship between foreign trade on economic growth (GDP) of Tanzania by examining the influence COVID-19 pandemic with evidence from Vector Error Correction Model. Dummy variable was used to capture COVID-19 impact. The study period spanned from 2002 to 2021. Foreign trade was defined by using export, trade openness and tariffs. The findings indicate that COVID-19 dummy variable (dmy) and tariffs (tr) are negatively significant at 1 percent and 10 percent respectively. While, export (exp) and trade openness (to) are statistically insignificant as a result the COVID-19 pandemic. The coefficient of the Error- Correction Term for the estimated GDP equation is both statistically significant and negative, implying that, it will rightly act to correct past deviations from the long- run equilibrium. The findings of this study have revealed a long run relationship between foreign trade and economic growth of Tanzania (GDP), while in the short-run, there is causality running from COVID-19 to GDP, unlike other independent variables, that is export, trade openness and tariffs that do not seem to have a short run relationship with GDP. For this reason, we recommend for reviewal of trade policies to fit the current global trading trend. Moreover, as the findings highlight that tariff have become more sensitive to foreign trade and economic growth, therefore, policy makers and practitioners are recommended to keep an eye on tariffs but also, re-setting the tariffs rates may be useful in this period. To boost export of a country, the government of Tanzania is advised to support domestic production through subsidies and other incentives.
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