Trade Openness and Government Size in Uganda (1986-2017)

ABSTRACT One of the major issues that have dominated policy making in countries all over the world is the need to remove restrictions to trade and cross border financial transactions and there is high possibility for these countries to be exposed to high external risk caused by turbulence in international market, therefore, this study investigated the relationship between trade openness and government size in Uganda From 1986-2017. The following objectives guided the study: i) to determine the long run relationship between trade openness and government size Uganda ii) to determine the short run relationship between trade openness and government size in Uganda;. iii) To determine the extent of causality between trade openness and government size of Uganda. Time series data for Uganda covering the period from 1986 to 2017 was used for the analysis. The data was obtained from World Development Indicator (WDI). Johannsen co-integration test was used to determine the long-run relationships, while the error correlation model was used to determine the short run dynamic interactions between trade openness and the alternative measures of government size (measured by the ratio of total government expenditure to GDP, capital expenditure as a ratio of GDP, and recurrent expenditure as a ratio of GDP). The pair wise causality test was also used to ascertain whether compensating hypothesis holds for Uganda. The results of the study revealed that there is a positive long and short run relationship between trade openness and government size. Furthermore, the Research found out that there is a positive causal link between trade openness and government size; this implies that the compensating hypothesis holds for Uganda. Empirical evidence reveals that government size measured by percentage share of total government expenditure in GDP and share (percent) of recurrent expenditure in GDP significantly affects trade openness in the long run but percentage share of capital expenditure in GDP as a measure of government size does not impact on trade openness in the long run. The results of the standard causality test corroborate these findings. However, the three measures of government size considered significantly affect trade openness in the short run. The major implication for the study therefore is that compensation hypothesis holds for Uganda. Thus, the study Recommend That, the government needs to continue to expand its expenditure in order to cushion the effect of increase in risk caused by rising trade openness. Therefore the study concludes that government size increases significantly as trade openness expand in Uganda. This study recommends that for Uganda to cushion such effect, government should provide more employment, investments and income to dampen the impact of this risk on the economy. This study contributes to existing literature based on the fact that if the compensation hypothesis holds for Uganda then the government must enhance the expenditure of the three measurements (i.e.) total government expenditure, capital expenditure and re-current expenditure to compensate the external shocks.

TABLE OF CONTENTS

DECLARATION ............................................................................................................................. i

APPROVAL ....................................................................................................................................ii

DEDICATION................................................................................................................................iii

ACKNOWLEDGEMENTS............................................................................................................iv

LIST OF ACRONYMS ...................................................................................................................v

LIST OF TABLES..........................................................................................................................ix

ABSTRACT.....................................................................................................................................x

CHAPTER ONE ........................................................................................................................... 1

INTRODUCTION .......................................................................................................................... 1

1.0 Introduction............................................................................................................................... 1

1.1 Background to the Study........................................................................................................... 1

1.1.1 Historical Perspective ............................................................................................................ 1

1.1.2 Theoretical Perspective.......................................................................................................... 3

1.1.3 Conceptual Perspective.......................................................................................................... 5

1.1.4 Contextual Perspective........................................................................................................... 7

1.2 Problem Statement.................................................................................................................... 8

1.3 Purpose of the Study ............................................................................................................... 10

1.4 Specific Objectives of the Study............................................................................................. 10

1.5 Research Questions................................................................................................................. 10

1.7 Scope....................................................................................................................................... 11

1.7.1 Geographical Scope ............................................................................................................. 11

1.7.2 Content Scope ...................................................................................................................... 11

1.7.3 Time Scope .......................................................................................................................... 12

1.8 Significance of the Study........................................................................................................ 12

1.9 Operational Definition of Key Terms..................................................................................... 13

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CHAPTER TWO ........................................................................................................................ 15

LITERATURE REVIEW ............................................................................................................. 15

2.0 Introduction............................................................................................................................. 15

2.1 Theoretical Review ................................................................................................................. 15

2.2 Conceptual Review ................................................................................................................. 20

2.2.1 Trade Openness.................................................................................................................... 20

2.2.2 Exports and Government Expenditure................................................................................. 20

2.2.3 Imports and Government Expenditure................................................................................. 21

2.2.4 Government Size.................................................................................................................. 22

2.3 Empirical Review.................................................................................................................... 23

2.4 Research Gap .......................................................................................................................... 31

CHAPTER THREE.................................................................................................................... 32

METHODOLOGY ....................................................................................................................... 32

3.0 Introduction............................................................................................................................. 32

3.1 Estimation Method.................................................................................................................. 32

3.2 Sources of Data ....................................................................................................................... 33

3.3 Data Analysis.......................................................................................................................... 34

3.3.1 Testing for Stationarity ........................................................................................................ 34

3.3.2. Co integration Test.............................................................................................................. 35

3.3.3 Error Correction Model........................................................................................................ 36

3.3.4 Pair Wise Granger Causality Test........................................................................................ 37

CHAPTER FOUR....................................................................................................................... 38

DATA PRESENTATION, ANALYSIS AND INTERPRETATION .......................................... 38

4.0 Introduction............................................................................................................................. 38

4.1 Descriptive Statistics............................................................................................................... 38

4.1.2 Unit Root Test Results (ADF and PP Tests)........................................................................ 39

4.2.1 Co-Integration Test Results ................................................................................................. 41

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4.3 The Short Run Relationship between Trade Openness and Government Size in Uganda

(OBJECTIVE 2)............................................................................................................................ 45

CHAPTER FIVE ........................................................................................................................ 52

DISCUSSION, CONCLUSION AND RECOMMENDATION .................................................. 52

5.1 Discussion of the findings....................................................................................................... 52

5.1.1 The Long Run Relationship between Trade Openness and Government Size in Uganda... 52

5.1.2 The Short Run Relationship between Trade Openness and Government Size in Uganda .. 52

5.1.3 The Extent of Causality between Trade Openness and Government Size of Uganda......... 54

5.2 Conclusion .............................................................................................................................. 55

5.3 Recommendations................................................................................................................... 55

5.4 Contribution to Knowledge..................................................................................................... 56

5.5 Limitation of the Study ........................................................................................................... 56

REFERENCES............................................................................................................................ 57

APPENDIX I: RESEARCH BUDGET ........................................................................................ 66

APPENDIX II: TIMEFRAME ..................................................................................................... 67

APPENDIX III: MACRO ECONOMIC DATA........................................................................... 68

APPENDIX IV: MACRO ECONOMICS DATA ........................................................................ 69