Trade Liberalization, Export and Import Growth: Evidence from Uganda

Abstract

The study explores the impact of trade liberalization on export and import growth in Uganda. A number of developing countries have opened up their own economies to take full advantage of the resultant opportunities for economic development through trade. Proponents of trade liberalization envisage positive results emanating from the increased competition in the sector. For instance, liberalization aids competition in the market, by increasing the basket of goods and services with better quality and lower prices. However, trade liberalization in developing countries has been criticized for increasing import penetration on the pretext of opening up the sector to more competition. The reason is that trade policy reforms tend to have a more immediate effect on the imports than on the exports. This concern has motivated researchers to investigate whether or not the impact of trade liberalization has been greater on export growth than on import growth. This is because Uganda is one of the countries to have implemented significant economic reforms, including the liberalization of the trade regime, over the last two decades and a half. These reforms have been both external and domestic. Substantial progress has been made to reduce tariff and non-tariff barriers through the EAC. The study investigated the issue using macro and micro analysis of the Ugandan economy. The macro analysis was employed by estimating the export and import models estimated using Vector Error-Correction modeling (VECM) using time series macroeconomic data for the period 1981-2009. The results of the study suggest that trade liberalization has led more to growth in imports than exports. The macro study findings are in line with previous observations made by Morrissey, et al., (2003); Santos-Paulino (2003); Santos-Paulino & Thirlwall (2004) and Hye & Mashkoor (2010). With regard to the micro analysis several, issues under the trade sector were highlighted that could be linked to the macro evidence which were; larger growth in imports than exports. Such critical issues included the adverse effect of the dismantling of the marketing boards, the inadequacy of the trade sector infrastructure, the low value addition and limited research and dissemination of the ever-changing trends in international trade regarding the products on high demand, the standards required to access such markets as well as the absence of value chains in the tradeables sectors. These have served to inhibit export growth. These issues were manifested at a macro level analysis for instance in the weak significance of the coefficient of the foreign income as well in that of the reel exchange rate in the export growth model. This specifically is in terms of the inability for exports to substantially respond to changes in foreign income as well as prices. The findings point to a number of policy implications that require attention.

The need for vigorous marketing campaigns for Uganda’s exports and improvements in the physical infrastructure in terms of road, rail and port as well as the trade mechanism specifically, the need to streamline production and marketing in order to boost the country’s export potential. This strictly calls for the development of value chains in the entire tradable sectors. A very good case of best practice that would potentially increase Uganda’s exports is that of Good African coffee which is operational in one sub region in the coffee sector. This needs to be replicated across all tradeable sectors in a scrupulous manner. This in addition also involves expansion and harnessing the production and export of new dynamic products such as fish, vegetables and cut–flowers away from the traditional commodity exports. Such interventions according to the authors are among the means to close the gap between export and import growth following trade liberalization. Any interventions short of these may not in any way help to close the ever increasing trade deficit which has been discussed at length in the background to the economy section of the study.