Dissertation Christine

COLLEGE OF BUSINESS AND ECONOMICS
SCHOOL OF ECONOMICS
DEPARTMENT OF ECONOMICS
OPTION: MONENTARY ECONOMICS
ACADEMIC YEAR 2018-2019
TOPIC: Econometric exploration of the relationship between exports and economic growth”
CASE STUDY: Case study of Rwanda from 1980 to 2017
A Dissertation submitted to the College of Business and

Economics in partial fulfillment of the requirement for the
award of Bachelor’s degree in Monetary Economics by
the University of Rwanda
PRESENTED BY: - Benjamin NIYOMWUNGERI 216070759
- Christine MUDAHOGORA 216167442
SUPERVISOR: Dr. RUHARA MULINDABIGWI Charles
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DECLARATION
I, Benjamin NIYOMWUNGERI and Christine MUDAHOGORA, hereby declare that, this

dissertation entitled, “Econometric exploration of the relationship between exports and
economic growth”, Case study of Rwanda from 1980 to 2017 is original and has never been
submitted to any University or other Institution or higher learning;
It’s our own research whereby other scholar’s writings were cited and references provided,
we thus declare this work ours and is completed successfully under the supervision of
Dr. RUHARA MULINDABIGWI Charles
Benjamin NIYOMWUNGERI
&
Christine MUDAHOGORA
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CERTIFICATION
I, Dr. RUHARA MULINDABIGWI Charles hereby certify that the research entitled
“Econometric exploration of the relationship between exports and economic growth” was
conducted by Benjamin NIYOMWUNGERI & Christine MUDAHOGORA under my
supervision and guidance.
Signature.................................
Name: Dr. RUHARA MULINDABIGWI Charles
Date: .........../......../................
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DEDICATION
This dissertation is dedicated to our dearly parents for their attentive encouragement, our brothers
and sisters plus our families and friends for being our nicely supporters
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ACKNOWLEDGEMENT
This laborious work would not have been a success had it not been moral, financial support and
guidance from various persons. We would like to express our most sincere gratitude and heart-
felt appreciation firstly, to our almighty God and we wish our sincere gratefulness to our
supervisor Dr. RUHARA MULINDABIGWI Charles, for his incomparable commitment to
supervise our dissertation plus his guidance.
Exceptional gratitude goes to the teachers in the School of Economics at University of Rwanda
who gave us invaluable guidance towards this work. We also would like to express our
appreciation to our parents for their support
May the Almighty God bless all of you.
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LISTS OF ABREVIATION AND ACRONYMS
BNR: National bank of Rwanda
GDP: Gross domestic product
GNP: Gross national product
IDP: Integrated development program
VAR: Vector auto regression
EAC: East African Community
IMF: International Monetary Fund
VECM: Vector Error Correction Model
WDI: World Development Indicator
DK: Dickey Fuller
ADF: Augmented Dickey Fuller
EG: Engel Granger
AEG: Augmented Engel Granger
ECM: Error Correction Mechanism
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Content
DECLARATION ............................................................................................................................................... ii
CERTIFICATION ............................................................................................................................................. iii
DEDICATION ................................................................................................................................................. iv
ACKNOWLEDGEMENT ................................................................................................................................... v
LISTS OF ABREVIATION AND ACRONYMS .................................................................................................... vi
CHAPTER ONE: INTRODUCTION .................................................................................................................. 1
Backgrounds of the study ....................................................................................................................... 2
1.1 Research Objectives .......................................................................................................................... 4
1.2.1 Main Objective ........................................................................................................................... 4
1.2.2 Specific Objective ....................................................................................................................... 4
1.3 Research questions ............................................................................................................................ 4
1.4 Research Hypothesis ......................................................................................................................... 4
1.5 Scope of the Study ............................................................................................................................. 5
1.6 Significance of the research.............................................................................................................. 5
CHAPTER TWO: LITERATURE REVIEW ........................................................................................................... 7
2.1: Theoretical literature ...................................................................................................................... 7
2.1.1: Theory of Mercantilism .............................................................................................................. 7
2.1.2 Theory of Absolute Advantage ................................................................................................... 8
2.1.3Theory of Comparative Advantage:............................................................................................. 8
2.2 The role of export on economic growth ........................................................................................ 10
2.3 Exports and Economic Growth: Empirical Review ..................................................................... 10
2.4 Research Gaps ................................................................................................................................. 13
CHAPTER THREE: METHODOLOGY .............................................................................................................. 15
Theoretical framework ......................................................................................................................... 15
Empirical Models .................................................................................................................................. 15
Data, Data source and Data Description ............................................................................................. 17
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3.4 Data Analysis ................................................................................................................................... 17
3.4.1 Analytical method .................................................................................................................... 17
3.4.2 Comparative Method ............................................................................................................... 17
3.4.3 Econometrics Method .............................................................................................................. 17
3.5 Data processing ............................................................................................................................... 18
3.5.1 Editing ....................................................................................................................................... 18
3.6 Computer programs ....................................................................................................................... 19
3.7 Trends of Exports and Other Macroeconomic Variables in Rwanda ........................................ 19
Table 3.1: Trend of Exports and other macro-economic variables in Rwanda .............................. 20
CHAPTER FOUR: RESULTS AND DISCUSSION .............................................................................................. 20
4.1 Descriptive Analysis of Variables .................................................................................................. 20
Table 4.1: Summary statistics of Variables used In Model ............................................................... 21
4.2 Results of Exports and Economic Growth in Rwanda: OLS Results......................................... 21
Table 4.2: Results of Regression analysis of GDP on its explanatory Variables ............................. 21
4.3 Exports and Economic Growth: Cointegration Test &ECM Results. ....................................... 23
4.4.0 Showing results of Unit root test : Dickey- fuller test for unit root .................................... 23
4.4.1. Exports .................................................................................................................................... 23
Table 4.3:1 Results of unit root test for Exports of Goods and Services ...................................... 23
4.4.2 Foreign direct investment ........................................................................................................ 24
Table 4.3.2: Results of Unit Root Test for Foreign Direct Investment ......................................... 25
Table 4.3.3: Gross Domestic Product .............................................................................................. 26
4.4.4 Remittances .............................................................................................................................. 26
Table 4.3.4: Remittances .................................................................................................................. 26
4.4.5 Secondary School enrollments ................................................................................................ 27
Table 4.3.5: Secondary School Enrollments ................................................................................... 27
4.4.6 Gross Fixed Capital Formation As percentage of GDP ....................................................... 28
Table 4.3.6: Gross Fixed Capital Formation As Percentage of GDP .......................................... 28
4.5 Showing the Results of Cointegration Test ................................................................................... 29
Table 4.4: Results of Cointegration Test ............................................................................................. 29
4.6 Showing the Results of Vector Error Correction Model, VECM ............................................... 30
Table 4.5: Results of Vector Error Correction Model ....................................................................... 30
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4.7 Residual Diagnostic Tests ............................................................................................................... 31
4.7.1 Showing the result of Heteroskedasticity test ........................................................................ 31
Table 4.6: Results of Heteroskedasticity Test ................................................................................. 31
4.7.2 The results of Autocorrelation ................................................................................................ 32
Table 4.7 Results of Breusch-Godfrey LM Test for autocorrelation ........................................... 32
4.7.3.0 Histogram Normality Test.................................................................................................... 32
Table 4.8: Results of Histogram Normality Test ............................................................................ 32
4.7.3.1 Skewness and Kurtosis test for normality .......................................................................... 33
Table 4.9: Results of Skewness and Kurtosis Test for Normality ................................................. 33
CHAPTE FIVE: CONCLUSION OF THE STUDY ................................................................................................ 34
5.1 CONCLUSION ............................................................................................................................... 34
5.2 IMPLICATIONS ............................................................................................................................ 35
REFERENCES ................................................................................................................................................ 36
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Abstract
The nature of the relationship between exports and country’s economic growth has been one of the most
debated topics in the recent past, yet with little accord. Central to this debate is the question of whether
strong economic performance is export-led or growth driven. This question is important because the
determination of the causal pattern between export and growth has important implications for policy-
makers' decisions about the appropriate growth and development strategies and policies to adopt .This
research examines the effect of exports on economic growth of Rwandan, through the application of
econometric technique Granger causality by using real exports of Rwanda, real GDP of Rwanda, secondary
school enrollment and remittances etc. To determine the relationship between export and economic
growth, an attempt will be made to use econometrics techniques of analysis (Granger causality) by using
Stata software package for he timeseries from 1980 to 2017. The results of the findings support the idea
of exports affecting economic growth in the context of the Rwandan economy thus the contribution of
exports to the economic growth in Rwanda is greater in the long run than in the short run
Keywords: Exports, GDP, Growth, Econometric techniques, Causality.
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CHAPTER ONE: INTRODUCTION
The achievement of economic growth is an important macroeconomic objective in all countries

whether developed or developing. How a country achieves economic growth is an issue that has
attracted considerable debate among policy makers, scholars and researchers. Trade, especially
foreign trade is a potent tool in the process of promoting and stimulating economic growth in
contemporary economies due mainly to globalization (Ogbokor, 2002).
This debate recognizes different strategies for achieving economic growth. One of these strategies
is the export-led growth (ELG) hypothesis which states that exports is a major driver of economic
growth, as exports provide the needed foreign exchange earnings for easing the balance of payment
pressure, and creating job opportunities. The objective of an ELG strategy is to create a mechanism
of export incentives driven by modern technology to assist producers to access and compete in the
world market. Exports have the potentials to, boost intra-industry trade, integrate the domestic
economy into the global economy, and insulate the domestic economy from the impact of external
shocks. The successful economic transformation of the Asian and Latin American countries which
were export-led validate the important role that exports play in economic growth and development
process (About-Stait, 2005).
Historically, trade is and has remained a powerful propeller of economic growth. Trade has
contributed significantly to the effectiveness and efficiency of allocation of resources, as well as,
transmitting growth from one part of the world to another (Anthony, 2000). It was also consistently
observed that as the demand for these countries’ exports increased, investment in these economies
also rose. Trade was considered to be beneficial to both countries that are involved in international
trade. These facts have also been widely acknowledged in the work of Marshall (1890).
Unfortunately, countries belonging to the southern hemisphere are not getting an equitable share
of the anticipated benefits from trade. This is mainly due to a weakening demand for developing
countries’ traditional exports, including the uncompetitive nature of majority of their exports in
foreign markets(Schipke, 2005).
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In 1950s and 1960s, most of the developing countries followed import substitution (IS) policy for
their economic growth. Since mid-1970s, in most developing countries, there has been
considerable shift towards export promotion strategy (EP). This approach postulates that export
expansion leads to better resource allocation, getting economies of scale and production efficiency
through technological development, capital formation, and employment creation and hence
economic growth. The export-led growth has been focus of the economic debate
In developing countries export promotion is a source to fill the imbalances in the external sector.
It also assists the economic planners to ensure about the scale and pace of economic recovery and
in the long run exports promote economic growth in Rwanda as it is in developing countries thus
strong recommendations for the government to diversify the export sector so as to improve terms
of trade.
1.1 Backgrounds of the study
East African countries have come up in different trade operating communities as a way of coming
together to improve the trade terms so as to improve their balance of payment gaps and improve
their economy as a whole as being a leading community amongst African ones. Rwanda being one
of the fast-growing countries plus a growing economy, it has adopted good trading environment
and policies especially those improving the export sector
Since the launch of National Export Strategy, I, Rwanda’s strategic context has changed
considerably. Toward the end of 2012 the Government of Rwanda finalized its second Economic
Development and Poverty Reduction Strategy (EDPRS II), designed to accelerate the progress
already achieved and to shape the country’s development in the future. EDPRS II set out targets
to increase exports revenues from US$1.277 billion in 2013 to US$4.515 billion in 2018 or
approximately 29% average annual growth over the next 5 years. This is a significant revision
upward from the previous export target of 15% growth p.a. planned under Vision 2020, and
captured within NES I. This made it necessary to revise the National Export Strategy to assess the
ability of the country to meet these targets.
Exports are constrained by a lack of goods and services produced in Rwanda and made available
for export. Investment in growing export capacities and volumes of the goods and services sector
is therefore key to unlocking export growth; Rwanda’s merchandise exports remain concentrated
in a few key commodities (traditional exports) sectors – tea, coffee, and minerals. In 2008,
2
Rwanda’s traditional exports amounted to 69% reducing to a still significant 45% in 2014.
Traditional exports averaged 10% growth between 2008-2014 driven largely by growth in mineral
exports. Over the same period non-traditional exports averaged 22% growth, re-exports 22%
growth and informal exports 25%1 per annum.
Merchandise exports averaged 17% growth between 2008 and 2014. Exports remain concentrated
in a few key commodities or traditional export sectors – tea, coffee, and minerals. In 2008,
Rwanda’s traditional exports amounted to US$ 186 million or 69% of Rwanda’s merchandise
exports. However, the level of concentration has reduced over the past 7 years with traditional
export share dropping to 45% in 2014. Traditional exports averaged 10% growth between 2008-
2014, driven largely by growth in mineral exports. Over the same period non-traditional exports
and re-exports both averaged 22% growth with informal exports averaging 25%2 per annum since
2010 when data collection began.
Services exports grew by 10% per annum between 2009 and 2014. The travel sector (including
tourism) has steadily increased its share of total services exports in recent years. In 2014, 76% of
services receipts were generated in the travel and tourism sector, contributing US$ 303 million in
export revenue up from US$ 174 million in 2009. Freight and other transportation services are also
important, accounting for 18% of services export revenue in 2014 or US$72 million. Outside of
these areas, services exports are low. In 2014, other services exports contributed just US$19.8
million to export revenue. The travel sector averaged 12% growth per annum between 2009 and
2014. Other transportation services average 8% growth while freight averaged just 1% growth.
Other private services average -1% per annum.
Between 2008 and 2014, exports of goods and services averaged 10.5% growth per annum The
mineral sector was the largest contributor to export growth, accounting for 23.1%over the past 6
years. Re exports, informal exports, and non-traditional exports were also important contributors
accounting for 22.7%, 21.8% and 15.3% respectively. The services sector as a whole accounted
for 13.2% of total export growth while tea and coffee’s contribution were small at 2.5% and 1.3%
Companies with export turnover above $1 million (Million Dollar Exporters representing 3% of
the number of exporting firms in 2014) accounted for 84% of export value in the same year. These
firms are best able to compete and survive in export markets. Large exporters can emerge through
large-scale investment (domestic or FDI), but a significant number of these businesses have grown
over time from small to large exporters. Of Rwanda’s 64 Million Dollar Exporters in 2013, 26
(40%) grew from being small exporters to MDEs over the past five years and Rwanda should
support firms with the potential in repeating this success.
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1.2 Research Objectives
1.2.1 Main Objective

The main objective of the study is to examine the effect of exports on Rwanda’s economic growth.
1.2.2 Specific Objective
1.To analyze export growth trends in relation to economic growth of Rwanda for the period under
study (1980- 2017)
2. Examine the econometric relationship between exports and economic growth during the period
of study
1.3 Research questions

1.What are the growth trends of exports and economic growth in Rwanda for the period under
study?
2.Do exports affect the economic growth in Rwanda?
3.What is the long-run relationship between exports and economic growth in Rwanda for the
period of study?
Weighing up the thoughts of different researchers and different debates made, the theoretical and
empirical literature about the export and economic growth especially of developing countries, I
hypothesize that exports affect positively economic growth in Rwanda taking into consideration
the trade theories of Adam Smith and Ricardo
1.4 Research Hypothesis

The study focuses on the following hypothesis,
I. H0: there is no significant impact of exports on country’s economic growth
II. H1: there is a significant impact of exports on country’s economic growth
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1.5 Scope of the Study
This study is delimited in scope and time. It is a country empirical study explicitly focusing on
the causal effect and long-run relationship between trade openness on economic growth in
Rwanda for the period from 1980 to 2017. It employs country data (Rwanda) from Rwanda and
World Bank Development Indicators dataset to study the trends of exports, imports, trade
openness and economic growth (proxy GDP Per capita) in Rwanda over the period of the study.
1.6 Significance of the research

The significance of this study is twofold. First, it contributes to this body of knowledge by
examining the causal effect and long-run relationship between exports on economic growth in
Rwanda. I first conduct a baseline OLS model examining the effects of trade openness on
economic growth in Rwanda for the period from 1980 to 2017. Thereafter, address the reverse
causality issue by examining the long-run relationship between trade openness and economic
growth in Rwanda using cointegration test and error correlation model to determine the long-run
causality between the two variables. This approach provides a credible and innovative analytical
approach to address the issue endogeneity and reverse causality in such analytical exercise.
Second, the empirical findings and policy recommendations of this study will increase the
understanding of impact of trade openness on economic growth and will inform policy makers and
scholars to make evidence-based decisions aiming at leveraging more openness of Rwandan
economy for socio-economic growth of Rwanda
1.7 Problem Statement
The role of exports in economic growth has been widely acknowledged. Ideally, exports stimulate
growth in a number of ways including production and demand linkages, economies of scale due
to larger international markets, increased efficiency, adoption of superior technologies embodied
in foreign-produced capital goods, learning effects and improvement of human resources,
increased productivity through specialization (Basu et al., 2000; Fosu, 1990; SantosPaulino, 200
and Giles and Williams, 2000) and creation of employment.
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Over the last decades evidences point to the continued policy stance of Rwanda to open-up its
economy particularly its trade with outside world as means to stimulate its economic growth and
development. This is more apparent in the recent decades mostly after genocide. In numerical
terms Rwandan exports increased progressively over the last three decades. Accordingly, total
exports increased from 105.5 million USD in to 223 million USD in 2017 while imports increased
from 279.1 million USD to 1.11 billion USD in the same period (BNR, 2014)1. Despite the wide
trade deficit as evidenced by high increase in Imports, policy makers continue to pursue for exports
as a measure to reduces trade deficit pressure. And recent evidences point to the slight reduction
in the trade deficits. This seem to have been attributed to policies adopted by Rwandan government
such as regional economic integration (in EAC, COMESA, Africa free-trade area), made in
Rwanda, industrialization policies, attracting investments that local production, value addition for
exports, etc.
However, despite the fact that Rwanda adopted a number of policy initiatives-that have stimulated
export promotion and reduced imports to the country, and accounted the country as an open
country for trade and business, little remain known empirically about the pay-off of exports to the
Rwanda`s economic growth-among policy makers and scholars. Does export growth provide
economic dividend to the Rwanda’s economic performance? Looking at the empirical studies, you
find inconclusive debate, and the underlying point is the causal aspect in the empirical debates and
analysis. Some argue that exports stimulate economic growth, while others argue reversely
claiming that, the rate at which the economy grow influence the effect of exports to the economic
growth- in other words the reverse causality. Then, the underlying empirical puzzle is the
relationship between exports and economic growth in developing country is not exhaustive,
particularly in Rwanda. The empirical literature thinly provides the nature of causality between
exports and economic growth. Failure to do so contributes to the ongoing empirical debate about
the topic. This study considers these mixed empirical debates and contribute to this body of
knowledge by examining the effect of exports on economic growth in Rwanda for the period from
1980-2017 using Rwandan time series data from the World Bank dataset.
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CHAPTER TWO: LITERATURE REVIEW
This chapter discusses literature related to impact of exports on economic growth. The review
particularly focused on theoretical framework and the empirical reviews in line with the objectives
of the study mainly the Impact of exports on economic growth and different drivers of exports.
These are considered as the main pillars in this study.
2.1: Theoretical literature

The relationship between exports and economic growth was, until recently, situated and assessed
in the theoretical framework of international trade and growth theories. International trade is
factored in these theoretical frameworks as a determinant of technological progress and output
growth. This chapter reviews these theories in the len of exports how exports are factored in these
theories to explain economic growth and development. In this chapter I review the classical
theories of international trade by Adam Smith and David Ricardo
The assumptions taken under this theory’ are as follows:

a. There are two countries producing two goods.
b. The size of economies of these countries is equal
c. There is perfect mobility of factors of production within co
d. Transportation cost is ignored
e. Before specialization, country’s resources are equally divided to produce each good
2.1.1: Theory of Mercantilism
Mercantilism is the term that was popularized by Adam Smith, Father of Economics, in his book,
The Wealth of Nations. Western European economic policies were greatly dominated by this
theory. The theory of mercantilism holds that countries should encourage export and discourage
import.
It states that a country’s wealth depends on the balance of export minus import. According to this
theory, government should play an important role in the economy for encouraging export and
7
discouraging import by using subsidies and taxes, respectively. In those days, gold was used for
trading goods between countries.
Thus, export was treated as good as it helped in earning gold, whereas, import was treated as bad
as it led to the outflow of gold. If a nation has abundant gold, then it is considered to be a wealthy
nation. If all the countries follow this policy, there may be conflicts, as no one would promote
import. The theory of mercantilism believed in selfish trade that is a one-way transaction and
ignored enhancing the world trade. Mercantilism was called as a zero-sum game as only one
country benefitted from it.
2.1.2 Theory of Absolute Advantage
Given by Adam Smith in 1776, the theory of absolute advantage stated that a country should
specialize in those products, which it can produce efficiently. This theory assumes that there is
only one factor of production that is labor.
Adam Smith stated that under mercantilism, it was impossible for nations to become rich
simultaneously. He also stated that wealth of the countries does not depend upon the gold reserves,
but upon the goods and services available to their citizens.
Adam Smith wrote in The Wealth of Nations,” If a foreign country can supply us with a commodity
cheaper than we ourselves can make it, better buy it of them with some part of the produce of our
own industry, employed in a way in which we have some advantage”.
He stated that trade would be beneficial for both the countries if country A exports the goods,
which it can produce with lower cost than country B and import the goods, which country B can
produce with lower cost than it.
2.1.3Theory of Comparative Advantage:
Many questions may come in mind after reading the absolute advantage theory that what would
happen if a country has absolute advantage in all the products or no absolute advantage in any of
the product. How such a country would benefit from trade? The answers of these questions were
given by David Ricardo in his theory of comparative advantage, which states that trade can be
8
beneficial for two countries if one country has absolute advantage in all the products and the other
country has no absolute advantage in any of the products.
According to Ricardo, “…a nation, like a person, gains from the trade by exporting the goods or
services in which it has its greatest comparative advantage in productivity and importing those in
which it has the least comparative advantage. ”
This theory assumes that labor as the only factor of production in two countries, zero transport
cost, and no trade barriers within the countries.
Later during the seventeenth and eighteenth centuries the dominant philosophy was mercantilism,
that advocated too many restrictions on Import and aggressive efforts to increase export. Whereby
the resulting export surplus was supposed to enrich the nation through the inflow of precious
metals. (Smith, 1776), has countered mercantilist ideas by developing the concept of Absolute
Advantage. He said that because Exports of one nation is Import of another, it is not possible for
all countries to become rich through gaining simultaneously by following mercantilist
prescriptions. He said that however all countries will gain simultaneously if they practice free trade
and specialized in accordance with their absolute advantage, and he addressed that the country is
said to have absolute advantage than another if it can produce goods and services at low
opportunity cost than other country.
Emeka (2010) asserted that the doctrine that trade enhances welfare and growth has a long and
distinguished ancestry dating back to Adam Smith (1723- 90). In this book, and inquiry into nature
and cause of the wealth of nation(Smith, 1776), Smith stressed the importance of trade as a vent
for surplus production and a mean of widening the market thereby improving the level of
productivity. He asserted that “between whatever places foreign trade is carried on, they all of
them derive two distinct benefit from it. It carries the surplus part of the produce of their land for
which there is no demand among them, and brings back in return something else for which there
is a demand. Emeka (2010) further summarized the absolute advantage theory of Adam Smith that
countries should specialize in and export those commodities in which the trading partner has an
absolute advantage. That is to say, each country should export those commodities it produced more
efficiently.
However, in adopting this classical trade theory, the researcher is not ignorant of its weaknesses,
Thirlwall (2000) mentioned that the trade theory based on the classical ideas of Smith ignores the
balance of payments consequences of trade. If a particular pattern of trade lads to balance of
payments difficulties and the balance of payment is not self-correcting through relative price (i.e
real exchange rate) movements, the gains from trade can easily be offset by the reductions in output
and the increase in unemployment necessary to compress imports. This is an important
9
consideration in thinking about the potential of strategic protection and the speed of trade
openness.
2.2 The role of export on economic growth

Export-led growth is a trade and economic policy aiming to speed up the industrialization process
of a country by exporting goods for which the nation has a comparative advantage. Export-led
growth implies opening domestic markets to foreign competition in exchange for market access in
other countries. Export-led growth is important for mainly two reasons.
The first is that export-led growth can create profit, allowing country to balance their finances, as
well as surpluses their debts as long as the facilities and materials for the export exist.
The second, much more debatable reason is that increased export growth can trigger greater
productivity, thus creating more exports in an upward spiral cycle. (Gorge & David, 2003: page
117- 135).
2.3 Exports and Economic Growth: Empirical Review

Most of literature reviews have indicated that there is reasonable relationship between export and
Economic growth in different economies and some research have gone further to analyze panel
data on the relationship and have all concluded that there is typical relationship between Export
and Economic relationship of a nation. Hsiao & Hsiao (2006) carried out relationship among
foreign direct investment, export, and gross domestic product for eight East and Southeast Asian
economies using Granger causality test and analyzed annual panel data for the period between
1986 and 2004 and found that there is bidirectional causality between exports and gross domestic
product. Xu (2000) used empirical support for the hypothesis that primary exports positively affect
economic growth. Xu used a VAR approach for 74 countries as a sample over the period 1965-
1992 and found that 55 of the 74 countries demonstrate positive effects of primary export growth
on long-term gross domestic product growth.
Exports are regarded as the engine of growth” (Sharer, 1999). Simultaneously, several other
studies that focused on individual countries over time using econometric time series techniques
have suggested statistically significant relationships between growth in both exports and imports,
including income growth (Greenaway et al, 2002).
There is also the possibility that increased income could lead to greater imports and increased
efficiency could also lead to greater exports. Thus, the causality may run from growth to trade
rather than from trade to growth (Chow, 1987). Another argument in the literature concerning the
relationship between trade and growth points to the fact that growth in exports generally has a
10
positive effect on a country’s growth and development, since it stimulates increased saving and
investment (Krueger, 1998). These effects on aggregate saving could arise in two ways. First, it
could arise from a higher inclination to save in the export sector. Second, it could also result from
the impacts on total saving of any changes in the distribution of income tied to the growth in the
export sector.
Fouad (2005) noted that exports of goods and services represent one of the most important sources
of foreign exchange income that ease the pressure on the balance of payments and create
employment opportunities, increase productivity and enhance the living standard of the citizenry.
Exporting is associated with static gains that include access to larger outside markets, hence
exploiting economies of scale. There are also dynamic gains that include efficiency advances as a
result of knowledge and technological spill overs from exporting experience. Exporting is also
associated with efficiency in resource allocation, employment generation, and relaxing the foreign
exchange constraints (Bbaale and Mutenyo 2011).
Therefore, export expansion can be argued to be a stimulus of economic growth (Agosin, 1999;
Giles and Williams, 2000; Grossman and Helpman, 1991). Additionally, Verdoorn (1949) dwells
on the argument that export growth may generate specialization in the production of export
commodities. By extension, specialization is argued to lead to efficiency gains in the export sector
owing to the rise in skills due to learning-by-doing. Consequently, resources would flow from the
relatively less productive and non-trade sector to the highly productive exports sector, leading to
economic growth. On the same vein, Further, Chenery and Strout (1966), Balassa (1978), Buffie,
(1992) and Riezman (1996), dwell on an indirect argument linking exporting to economic growth.
They argue that exporting activities generate foreign exchange that is required to import capital
goods. Increase in capital goods imports in turn stimulate a country's capacity to produce. This is
more pronounced in developing countries that have an extreme disadvantage in the production of
capital goods. In the same line of argument, it is suggested that the most up-to- date knowledge
and technology is embodied in the capital goods (plants and equipment) imported from
technologically advanced countries. This knowledge transfer through international trade may
increase productivity and, by extension, lead to economic growth and development (Hart, 1983
and Chuang, 1998).
Belso Martinez (2006) studied the relationship between industrial districts (or Clusters) and the
export performance in SMEs. She showed that there is a positive and significant relation between
the firm location in the district and networks (network of competitor and network of institutions)
and the EP of Spanish SMEs in a given area. Mamoru (2005) points out that export- led
industrialization was the backbone of East-Asian economic miracle that began in the 1980s. (Goa
et al., 2010) industry in stability, stage of the industry, technology diffusion and number of rivals
in the industry are important determinants of countries’ export performance.
11
Nicholas Herman (2008) investigated the cause between export, industrial and production of
agriculture in Tanzania using yearly time-series data between 1970 to 2005. Results show that
agricultural growth, increased export. Export is also Granger's cause of industrial production and
agriculture. Hasan et al.(2012) Using state and level of industry data on unemployment rates and
trade protection from India find that unemployment rate declines trade performance. Zalk (2014)
argues that no countries have attained rapid and sustained growth and high-income levels without
industrialization. He further advises that there should be physical transformation of raw materials
into value-added products.
Empirical studies have found a significant and positive relationship between foreign direct
investment and export performance. Kishor Sharma (2003) evaluates India’s export behavior, but
with a focus on the influence of increasing foreign direct investment in India on export supply
capability. Sharma argues that the success of the East and South East Asian countries suggests that
foreign direct investment is important variable of export promotion. Zhang (2006) forward in his
study of foreign direct investment and China's export performance that one of FDI's major potential
growth-contribution is to promote countries' exports. According to world trade organization
(WTO, 1996) annual report which dealt with aspect of the relationship between trade and FDI to
know whether FDI and trade are substitutes (negatively correlated) or complements (positively
correlated) concludes that FDI is positive for both home and host countries’ exports. Generally,
there many other studies indicated that FDI actually have a positive effect on export performance
of host countries.
Exchange rate is also one of important factors that affect export value. In general, depreciation of
a country’s currency tends to encourage its exports. The depreciation of the currency makes its
goods cheaper in international markets to compete other similar goods produced other country in
the world.
Bahmani and Ltaifa (1992) analyzed the effects of exchange rates on exports and results showed
that exchange rates adversely affect exports. Sivri and Usta (2001), while studying the
determinants of export growth in Turkey found that real exchange rate does not appreciably
account for changes in exports. Oztang (2000) revealed total exports to be a function of foreign
income and real exchange rate and results revealed that real exchange rate is a statistically
significant determinant of export performance. Fang et al. (2006) analyzed the impact of exchange
rate depreciation on exports for 8 Asian economies (Philippines, Malaysia, Indonesia, Japan,
Singapore, Chinese Taipei, Republic of Korea and Thailand) and they found that depreciation
contributes exports for most countries, but its contribution to export growth is low and varies across
countries.
12
Wang et al. (2002) his study on exchange rate is one of the most important factors influencing
China’s exports with aggregated data for the period between 1983-1999. Telak and Yeok (1998)
showed that in the presence of high import content, export is not adversely affected by currency
appreciation. Their justification for this result is in the presence of high import content appreciation
results lower import price which in turn reduce cost of export. In response to the Sarkar's (1994),
Nag and Upadhyay (1994) stated that exchange rate and exports performance of India is co-
integrated from 1985 onwards.
The relationship between inflation and trade has been a subject of research, theoretical as well as
empirical. Iyoha (1973) took sample of 33 less developed countries using OLS technique to
estimate the results and found negative relationship between inflation and trade in the less
developed economies. Muhammad (2010) examines relationship between trade openness and
inflation in Pakistan using annual time-series data for the period 1947 to 2007. The empirical
analysis shows that a positive relation between trade and inflation in Pakistan. There are few
studies on relation between export and inflation. This research is going to be one of the first such
empirical evidence regarding to export and inflation.
J Dev Effect (2017) Studied on impact of export processing zones on employment, wages and
labor conditions in developing countries and he has realized that One of the most common
instruments of industrial policy is Export Processing Zones (EPZs). his paper showed the results
of a systematic review of the impact of EPZs on employment, wages and labour conditions in
developing countries. The results of synthesizing 59 studies suggest that there is no robust evidence
that the employment created in the zones is additional. Also, in most cases, EPZs pay higher wages
and do not contribute to increase the gender wage gap. The results regarding labour conditions
such as health and safety, unionization or hours worked are mixed when comparing with firms
outside the EPZ.
In the sum, theoretical and empirical narratives about the relationship between trade and economic
growth remain inconclusive. Though, most claims tend to be in favor of positive effects of exports
on economic growth, some pessimistic theoretical and empirical claims still stand. This seems to
be attributed to the theoretical, empirical and methodological gaps still existing in the field. Some
of these are briefly discussed here below.
2.4 Research Gaps
The scholarship of trade openness and economic growth has been extensively theoretically
explored by early economists. Its empirical narratives however remain inconclusive. This seem to
13
be attributed to the following three main gaps existing in the studies examining the effect of trade
openness on economic growth:
First, the country-specific context. Rodrik (2004) added-in also the geography aspect (for instance
country being landlocked) in the study. Several studies in the field of cross-country analysis tend
to ignore the country specific factors (such as institutional and geographical factors) that do also
influence the rate at which the country opens to the international trade. We already know that
countries differ in terms of policies and institutions that shape the rate and intensity by which
countries open to the international trade.
Second, there is also growing methodological issue of causality. A growing number of empirical
literatures claim the linear relationship between trade openness and economic growth, arguing that
trade openness influence economic growth mostly in developing countries. Contrarily, others
claim that the more the country perform economically-its rate of economic growth influence how
the country is open to trade which in the turn influence economic growth. Here there is a
methodological gap of reverse causality that remain un addressed. We need to determine the causal
path between trade openness and economic growth over time in the empirical analysis. Mostly in
the developing SSA countries like Rwanda.
Third, authors , researchers and scholars don’t stress out the technological gap or the differences
in the technology of countries .In Developed countries ,the improved technology adds value to
their export products hence a growth in the export sector and the economy as well which
contributes to developing country’s poor quality exports products which are not competitive on
international market due to the technological gap
Therefore, this study adopts a realistic and feasible methodological approach to contribute to the
scholarship of exports and economic growth, as well as contributing to addressing the gaps. The
following section discusses methodological and analytical techniques employed in this study to
examine empirical relationship between exports and economic growth in Rwanda.
14
CHAPTER THREE: METHODOLOGY
3.1 Theoretical framework

Based on different research made from different Books, journals, papers among others, researchers & Policy
makers have different debates on the relationship between export and economic growth yet with little
accord. The purpose of this study is to analyze the impact of exports on a country’s economy. This study
was modeled on Adam smith’s absolute advantage theory, and Endogenous Growth Theories which are
based on theoretical model of production function.
3.2 Empirical Models

This section presents briefly the methodological techniques employed to examine the causal
effects of Exports and economic growth in Rwanda. As a baseline analysis, an ordinary least square
technique is employed to examine the effect of Exports on economic growth in Rwanda. .A set of
independent variables such as percentage of; foreign direct investment inflows, remittance inflows,
gross capital formation, summation of exports to GDP per capita and secondary school enrolment
will employed in the model and GDP per capita will used as dependent variable. The above
theoretical model informs the empirical model of OLS model here below.
𝐿𝑜𝑔𝑌𝑖𝑡 = 𝛽0 + 𝛽1 𝑌𝑖𝑡−1 + 𝛽2 𝑅𝑒𝑚𝑖𝑡 + 𝛽3 𝐹𝐷𝐼𝑖𝑡 + 𝛽4 𝐺𝐶𝐹𝑖𝑡 + 𝛽5 𝐸𝑋𝑃𝑖𝑡 + 𝛽6 𝐸𝑁𝑅𝑖𝑡 + 𝜀𝑖𝑡 … … … … . (1)
Where LogYit is measured as the log of real GDP per capita in country I at time T, 𝛽0 is as constant;
; Yit-1 is the logarithm of real GDP per capita lagged one year, Remit is a measure of remittances as
a share of GDP (as % of GDP); FDIit is the measure of foreign direct investments as a share of
GDP used to capture the effect of external sources of capital on growth; GCF is the gross fixed
capital formation as a percentage of GDP used as a proxy for investment in the physical capital;
EXPit is the measure of Export measured as ratio of summation of exports to GDP to capture the
impact of trade, Exports of the economy on economic growth; ENRit is the measure of school
enrollment, measured as secondary enrollments as a percentage of total.
To tease the aspect of reverse causality at the level of OLS, a follow model estimating the effect
of economic growth on trade openness is estimated as follows:
𝐿𝑜𝑔𝐸𝑋𝑃𝑖𝑡 = 𝛽0 + 𝛽1 𝑌𝑖𝑡−1 + 𝛽2 𝑅𝑒𝑚𝑖𝑡 + 𝛽3 𝐹𝐷𝐼𝑖𝑡 + 𝛽4 𝐺𝐶𝐹𝑖𝑡 + 𝛽5 𝑌𝑖𝑡 + 𝛽6 𝐸𝑁𝑅𝑖𝑡 + 𝜀𝑖𝑡 … … … … . (2)
Where,
Β1Yit-1 is the lagged GDP per capita depicting the rate of economic growth in the previous year in
the model 2.
15
For the purpose of addressing the reverse causality between trade openness and economic growth
in Rwanda, I further employ the cointegration test and error correction model (ECM) to examine
the direction of long-run causality between trade openness and economic growth in Rwanda using
annual time series data for Rwanda from year 1980-2017. I test for stationarity using ADF test and
employ Johansen test of co-integration to examine whether the two-series are co-integrated and
have a long-run equilibrium relationship. The underlying main hypothesis is that; there is long-run
relationship between trade openness and GDP per capita, and direction of causality runs from trade
openness to GDP per capita in Rwanda. I test this hypothesis using Johansen test of cointegration
and error correction model. Ssekuma, 2011 cited in Kiganda, 2017) argue that Johansen test of
cointegration procedure builds cointegrated variables directly on the maximum likelihood
estimation instead of relying on OLS estimators and is able to detect more than one cointegrating
relationship if present. The number of cointegrating vectors in Johansen procedure are detected by
the use of two likelihood ratio tests namely; the trace test and the maximum eigenvalue.
In the case of error correction model, we well know that, there is an econometric issue that need
to integrate short-run dynamics and long-run equilibrium. Emeka (2003, cited in Kiganda, 2017:9)
assert that, “though there may be a long-term, or equilibrium relationship between variables, in the
short run there may be disequilibrium.” Therefore, this study employs the Error Correction Model
to validate the existence of long-term relationship and correction of the short run disequilibrium.
Represented by ECM here below:
ΔYt = 𝛽0 + 𝛽1 ∆𝑋𝑡 + γ(𝑋𝑡−1 − 𝑌𝑡−1 ) + 𝜇𝑡 ……………………………………………………………………...(2)
Where; Yt stands for the real GDP per capita
Xt stands for Exports
ΔYt is first differenced variable of GDP per capita, γ, is the coefficient of error correction
term
(Xt−1 − Yt−1 ) is the error correction term and μt has zero mean given ∆Xt Xt−1 , Yt−1
16
are all past values of Xt and Yt. Yt is the Rwandan real GDP per capita and X t-1 are the lags of
Exports The results will determine the causal direction and long-run relationship between Exports
and economic growth in Rwanda for the period.
3.3 Data, Data source and Data Description

In the study, I have used the data obtained from different published documents, books, National Bank of
Rwanda, NISR and MINICOFIN, and world bank data. I have used macro-economic variables such as GDP
per capita (as dependent variable) explained by independent variables; lagged GDP per capita,
percentages of these variables to GDP; remittance inflows, Gross capita formation, foreign direct
investments, ratio of summation of exports and imports to GDP to capture the impact of trade
openness of the economy on economic growth; ENRi tis the measure of school enrollment,
measured as secondary enrollments as a percentage of total; and domestic credit to the private
sector to depict the level of financial development in Rwanda, which in one way or another
influence local and international trade. The study covers a period from 1980-2017.
3.4 Data Analysis

The study used inferential data analysis to analyze this quantitative research data. The techniques
employed included; correlation, cointegration analysis. For the various techniques mentioned data
analysis will be conducted using Econometric estimation software Stata.
3.4.1 Analytical method

This method will be used to analyze the relationship between exports and economic growth and
other related determinants of export.
3.4.2 Comparative Method

This method helped us to look for difference and similarities existing between the variables
explaining the topic. The research compares the level of public expenditures and household
consumption.
3.4.3 Econometrics Method

By use of this method, the computation of Ordinary Least Square (OLS) of variables that influence
the Export those are; Gross domestic Products, foreign direct Investments, Labour force, exchange
rate and inflation. The STATA 13software will be used to compute parameters that will be
identified and findings will be used to test hypothesis in order to determine the level of
significance.
17
3.5 Data processing
After data collection, it was processed. Related information to the hypothesis and objectives of the
study was taken into account, and was transformed such that it had the meaning and been
interpreted. Making analysis and process data, the researcher grouped and processed them shows
that a positive relation between export and Gross domestic Products. There are few studies on
relation between export, inflation, foreign Direct investment, labor force and exchange rates in
Rwanda. This research is going to be one of the first such empirical evidence regarding to GDP
inflation, Exchange rates, Foreign Direct investments, labor force as determinants of exports.
together in variety of ways for having meaning and easy to make the interpretation. This means
that data processing consists of translating raw data for easy interpretation
3.5.1 Editing
Much of the information will not come from one source. Indeed, different publications had to be
explored deeply. So, the figures from National Bank of Rwanda and NISR to be properly arranged
so as to allow for the analysis proceed.
3.5.2 Tabulation
The data from the National Bank of Rwanda have been then arranged into table format. This
exercise allows for comparison between different indicators at the same period. Furthermore, it
becomes possible, tables, to have an idea of trends and their possible causes in time series.
18
3.6 Computer programs
Data analysis will be analyzed with the help of computer programs such as Stata 13 as it will be
used in our data analysis as an appropriate mean in data analysis and data interpretations.
3.7 Trends of Exports and Other Macroeconomic Variables in Rwanda
In this section, we examine the trends of Exports with other external inflows and macroeconomic
variables. As depicted in the figure 4.1 here below imports and Net-official development assistance
to Rwanda have been leading other inflows for the last three decades. As shown in the figure the
growth trends of exports and net-foreign direct investments were affected by the effects of
genocide against Tutsi during 1994 and steeply picked-up right after the genocide until recent
years, but as the graph shows Net-foreign direct investments were fluctuating a much and has
experience huge growth right up I 2000 up to now rising year by the year. Contrarily, in Rwanda,
like in other SSA countries, Net-ODA still takes the lion’s share of external financial inflows,
followed by exports, remittances and foreign direct investments. These trends depict Rwanda’s
political and economic development trajectory in recent decades. The observed steady high level
of Net-ODA indicate that the country still depends on external aids, though the trend is reducing
as other variables like Exports, remittances are taking over in now days. The upward growth trend
of imports indicates that the country is still the net-importer despite huge strides to curb down the
country`s balance of payment deficit in recent years. As depicted by sharp growth trend of export
earnings right after the genocide until recent years. Another upward trend is observed in
remittances and net-foreign direct investments (FDI), but the trend of remittance inflows depicts
steeper and reliant trend than net-foreign direct investments, looking at the last three decades. This
shows that remittances remained resilient and steady despite the crisis of 1994 genocide and the
economic shocks of the global financial crisis of year 2008-2009. This is in line with the remittance
and development discourse, which argues that during a crisis (either security or economic
instabilities) in the recipient country, remittances tend to increase as an alternative source of
income for the affected recipients. They also increase when the economy is doing well, but that is
for socio-economic reasons. Looking at all the growth trends of the variables, growth trend of
exports depicts the high growth trend other variables mostly in the recent years. This demonstrate
the recent progress in terms of policies and institutions geared to promote exports by Rwandan
government- as explained in the sub-section above.
19
Figure 3.7. 1 : Trend of Exports and other macro-economic variables in Rwanda
22
19
18
20
logRemittances
17
18
16
16
15
14
14
1980 1990 2000 2010 2020
Year
logExports logFDInflows
logNetODA ImportsCons_log
logRemittances
CHAPTER FOUR: RESULTS AND DISCUSSION
This chapter presents results and discussions of empirical findings related to the exports and economic
growth in Rwanda. It starts with descriptive analysis of the studied variables as well as correlation of
variables and then presents the results of Exports growth impact in Rwanda using OLS and the result of
Johansen test of cointegration and the error correction model.
4.1 Descriptive Analysis of Variables

The table below shows the summary statistics of studied variables, whereby we calculated Mean, Standard
deviation, Minimum, Maximum(observation). All for the studied variables which are GDP per Capita,
Gross Fixed capital formation, Education and Domestic credit to private sector, Remittance percentage of
GDP, Exports of Goods and Services and Foreign Direct Investment.
20
Table 4.1: Summary statistics of Variables used In Model
. summarize fdigdp EXofGDP gcfgdp RemGDP GDPcon logEduc
Variable Obs Mean Std. Dev. Min Max
fdigdp 36 1.192689 1.139411 .0949419 3.926137

EXofGDP 36 10.15661 3.643937 5.150792 18.24059
gcfgdp 36 17.23608 4.270362 13.14879 25.82028
RemGDP 36 .8897827 .9235624 .0908874 3.176375
GDPcon 36 2.74e+12 1.55e+12 1.19e+12 6.69e+12
logEduc 31 2.919091 .4579029 2.234253 3.70826
4.2 Results of Exports and Economic Growth in Rwanda: OLS Results
Empirical tests of model were carried out in order to obtain a robust fit of the data. Accordingly,
in Table, the lower part shows the estimation results of OLS as the benchmark model estimating
the effect Exports on GDP per capita in Rwanda. In the same analytical framework, The 0.9803
value of the R-squared for the OLS results shows that 98.03% of variation in the real GDP per
capita is explained by variation in the predictor variables used in the OLS model. The results are
presented in the table here below
Table 4.2: Results of Regression analysis of GDP on its explanatory Variables
regress logGDP logExports logFDIGDP logGCFGDP logRemGDP logEduc
Source | SS df MS Number of obs = 31
-------------+------------------------------ F( 5, 25) = 248.29
Model | 6.62084709 5 1.32416942 Prob > F = 0.0000
Residual | .133326401 25 .005333056 R-squared = 0.9803
-------------+------------------------------ Adj R-squared = 0.9763
21
Total | 6.75417349 30 .225139116 Root MSE = .07303
------------------------------------------------------------------------------
logGDP | Coef. Std. Err. t P>|t| [95% Conf. Interval]
-------------+----------------------------------------------------------------
logExports | .4495137 .0671095 6.70 0.000 .311299 .5877284
logFDIGDP | -.0798231 .0229823 -3.47 0.002 -.1271561 -.03249
logGCFGDP | .1506208 .1633174 0.92 0.365 -.1857377 .4869794
logRemGDP | .0827691 .0299992 2.76 0.011 .0209845 .1445537
logEduc | .2241782 .0929414 2.41 0.024 .0327617 .4155947
_cons | 18.639 1.179098 15.81 0.000 16.2106 21.06739
The Table above shows result of effect of Exports on Economic growth (GDP), logarithm of variables was
used to depict the elasticities of the influences of variables on GDP. As results showed; Exports present the
Highest influence on GDP whereby it has highest elasticity of 45% increase in GDP when the exports
increase by 1%, slope/coefficient was statistically significant with P-value of around zero percent that is
lower than 5% significant level. And it is followed by Secondary School Enrollment which had influence
of 22.4% by increase of 1% and the slope/coefficient was statistically significant with P-value of 2.4% that
is lower than 5% significant level. The following influence was by Gross Fixed Capital Formation with the
elasticity of 15.06%, indicating that by increasing GCF by 1% result in increase of 15% in GCP, whereas
the slope coefficient is not statistically significant as indicated by P-value of 36.5% that is greater than 5%
significant level. Result showed that Foreign Direct Investment has Negative relationship whereby
increasing it by 1% will result to a decrease in GDP by 7.9% and as indicated by its P-value the coefficient
is statistically significant with the value of 0.2% that is lower than 5% significant level.
However, it is consistently claimed that OLS results are subject to the endogeneity biases, hence making
them unreliable by the empirical researchers. Therefore, in this study OLS results provides the baseline
result about the effect of Exports and Economic Growth in Rwanda. Having found statistically significant
effect of Export on Economic Growth in Rwanda, I further validate the findings by employing the
Cointegration test and Error correction model techniques to examine the Long-run relationship between
exports and economic Growth.
22
4.3 Exports and Economic Growth: Cointegration Test &ECM Results
The result of Johansen test of Cointegration and error correction model presents the long-run relationship
between remittances and economic growth. The tables below, presents the results of co-integration and
error correction model are also presented.
4.4.0 Showing results of Unit root test: Dickey- fuller test for unit root
Dickey Fuller test helps examine the stationarity in time series data as the error term wil be
uncorrelated. Augmented Dickey Fuller test is conducted to check the correlation in the erro term
by adding lags. All the variables are tested for stationarity and each variable will be analysed
4.4.1Exports
The exports data were tested for stationarity and were not stationary. As shown in first table the
P-value was too high greater than 5% significant level, indicating stationarity. The data remained
non stationary even after performing the first difference whereby the P-value stood at 38.28%, But
after the second differencing, the export value data become stationary as the P-value became 0.34%
which is lower than the significant level hence rejecting a null hypothesis .
Table 4.3:1 Results of unit root test for Exports of Goods and Services
Dickey-Fuller test for unit root Number of obs = 24
---------- Interpolated Dickey-Fuller ---------
Test 1% Critical 5% Critical 10% Critical
Statistic Value Value
------------------------------------------------------------------------------
Z(t) 2.444 -3.750 -3.000 -2.630
------------------------------------------------------------------------------
MacKinnon approximate p-value for Z(t) = 0.9990
23
dfuller Exports_d1
Statistic Value Value Value
------------------------------------------------------------------------------
Z(t) -1.795 -3.716 -2.986 -2.624
------------------------------------------------------------------------------
dfuller Exports_d2
------------------------------------------------------------------------------
Z(t) -7.847 -3.750 -3.000 -2.630
------------------------------------------------------------------------------
4.4.2 Foreign direct investment

Foreign direct investment was not stationary as shown on the table. The P-value is 85.17%
significantly higher than 5% significant level, therefore accepting the null hypothesis, indicating
non-stationarity whereas after performing first difference our data turned to be stationary with P-
24
value of about zero which is too low compared to 5% significant level thus rejecting Null
hypothesis indicating that our data are stationary.
Table 4.4.2: Results of Unit Root Test for Foreign Direct Investment
. dfuller logFDInflows
------------------------------------------------------------------------------
Z(t) -0.681 -3.696 -2.978 -2.620
dfuller FDIn_d1
Statistic Value ValueValue
------------------------------------------------------------------------------
Z(t) -8.947 -3.716 -2.986 -2.624
------------------------------------------------------------------------------
25
4.4.3 Gross Domestic Product
The Gross Domestic Product data was tested for stationarity and the results have shown stationarity
as shown in table of result where the t- statistics is 9.214 which is high compared to critical value
of 3.000 at 5% significant level, indicating rejection of the null hypothesis hence stationarity of
the data
Table 4.3.3: Gross Domestic Product
------------------------------------------------------------------------------
Z(t) 9.214 -3.750 -3.000 -2.630
------------------------------------------------------------------------------
4.4.4 Remittances
Foreign direct investment was not stationary as shown on the table. The P-value is 95.25% which
is higher than 5% significant level, therefore accepting the null hypothesis, indicating non-
stationarity whereas after performing first difference our data turned to be stationary with P-value
of about zero which is too low compared to 5% significant level thus rejecting Null hypothesis
indicating that our data are stationary.
Table 4.3.4: Remittances
dfuller Remittances
------------------------------------------------------------------------------
Z(t) -0.068 -3.696 -2.978 -2.620
------------------------------------------------------------------------------

26
. dfuller Remittances_d1
------------------------------------------------------------------------------
Z(t) -7.236 -3.716 -2.986 -2.624
4.4.5 Secondary School enrollments

Secondary school enrollment data were not stationary as shown on the table. The P-value is
11.28% higher than 5% significant level, therefore accepting the null hypothesis, indicating non-
of about zero(0.4%) which is too low compared to 5% significant level thus rejecting Null
hypothesis indicating that our data are stationary.
Table 4.3.5: Secondary School Enrollments
. dfuller logEduc
------------------------------------------------------------------------------
Z(t) -2.511 -3.730 -2.992 -2.626
------------------------------------------------------------------------------
27
. dfuller logEduc_d1
------------------------------------------------------------------------------
Z(t) -3.708 -3.750 -3.000 -2.630
------------------------------------------------------------------------------
4.4.6 Gross Fixed Capital Formation As percentage of GDP

Gross Fixed Capital Formation data was not stationary as shown on the table. The P-value is
11.28% higher than 5% significant level, therefore accepting the null hypothesis, indicating non-
of about zero(0.4%) which is too low compared to 5% significant level thus rejecting Null
hypothesis indicating stationarity.
Table 4.3.6: Gross Fixed Capital Formation as Percentage of GDP
dfuller gcf
------------------------------------------------------------------------------
Z(t) 1.361 -3.696 -2.978 -2.620
------------------------------------------------------------------------------
28
. dfuller gcf_d1
------------------------------------------------------------------------------
Z(t) -4.421 -3.716 -2.986 -2.624
------------------------------------------------------------------------------
4.5 Showing the Results of Cointegration Test
The results of the Johnsen test of cointegration double confirm the existence of cointegration
between Exports and GDP. In other words, there is a long-run relationship between Exports and
Economic Growth in Rwanda. In our model, when r=2, all variables in the model are stationary.
In table. The trace statistics at r=0 of 9.8950* less than its critical value of 15.41, we cannot reject
the null hypothesis of no cointegration equations. The trace statistics at r=1 of less than critical
value of 3.76; we cannot reject the null hypothesis that there is one cointegration relationship
between GDP and Exports in Rwanda. The results indicate that both the trace test and maximum
eigenvalue test in the Johnsen test each detect cointegrating vectors, thus the null hypothesis is
accepted at 5% level of significance, confirming a cointegrating relationship between the two
variables. Implying that the variables of Exports and Economic growth in Rwanda have a
significant positive long-run relationship between the two variables. With these results, I present
here below the results of ECM model here below.
Table 4.4: Results of Cointegration Test
Trend: Constant No of Observations: 36
Sample:1981-2017 Lags: 2
Max Rank Trace Stat Critical Values (at 5%)
0 9.8950* 15.41
1 2.4988 3.76
29
Max Rank Max Statistic Critical Value (at 5%)
0 7.3961 14.07
1 2.4988 3.76
Notes: Standard errors in parentheses: *** p<0.01, ** p<0.05, * p<0.1; No of Obs: 36
4.6 Showing the Results of Vector Error Correction Model, VECM

The Table 4.5 below shows results of Vector Error Correction Model, the results indicate that the
direction of long-run causality runs from Exports to GDP in Rwanda the value of 𝛽1 is 0.0934**
and it is significant at the 5% level. This value represents the short-run coefficient and short-run
equilibrium. This means that the system will correct its previous period disequilibrium at a speed
of 9.34% between Exports and Economic growth. For long-run equilibrium, on the other hand, the
coefficient of error correction term is negative (-0.396***) and it is significant at the 5% level,
indicating the rate at which the system corrects its previous period disequilibrium at a speed of
39.6% annually. The result implies that economic growth in Rwanda changes significantly in short
equilibrium influenced by change in Exports.
Table 4.5: Results of Vector Error Correction Model
(1) (2)
Vec
VARIABLES D_LogGDP D_Log EXP
Error correction term (L._ce1) -0.396*** 0.0934**

(0.131) (0.133)
Lagged D. LogGDP -0.0278 0.710***
(0.165) (0.168)
LaggedD. Log EXP 0.0131 0.160
(0.147) (0.149)
Constant 0.0105 0.0447**
(0.0215) (0.0219)
Observations 36 36
Standard errors in parentheses
*** p<0.01, ** p<0.05, * p<0.1
30
4.7 Residual Diagnostic Tests
Regression is based on certain assumptions some of which refer to the; normal distribution of the
residuals, correlation between the error terms, constant variance of the residuals and correlation
between explanatory variables. The study employed second order tests or econometric tests which
include normality, serial correlation and heteroscedasticity tests to ascertain that the assumptions
of regression analysis with regard to residuals and the correlation between explanatory variables
are satisfied
4.7.1 Showing the result of Heteroskedasticity test

the table below show the result of Heteroskedasticity test which tries to test whether the variance
of residuals does not change as time passes. The I have used graph test and from the graph it can
be readily seen that the residuals exhibits homoskedasticity. And the table also shows that the
residuals are homoscedastic as evidenced by P-value of 94.16% that is far greater than 5%
significant level, implying that we can not reject the null hypothesis which state that there is
homoskedasticity in residuals.
Table 4.6: Results of Heteroskedasticity Test
.2
.1
Residuals
0
-.1
-.2
28 28.5 29 29.5
Fitted values
. estat hettest
Breusch-Pagan / Cook-Weisberg test for heteroskedasticity

Ho: Constant variance
Variables: fitted values of logGDP
chi2(1) = 0.01
Prob > chi2 = 0.9416
31
4.7.2 The results of Autocorrelation
The table below shows the results of autocorrelation test and has deployed Breusch-Godfrey test
technique. As seen by the result it shows that P-value is 3.23% which is lower than 5% implying
that we cannot reject the null hypothesis which states that there is no serial correlation. Concluding
that there is no serial correlation in our data.
Table 4.7 Results of Breusch-Godfrey LM Test for autocorrelation
Breusch-Godfrey LM test for autocorrelation
---------------------------------------------------------------------------
lags(p) | chi2 df Prob > chi2
-------------+-------------------------------------------------------------
1 | 0.494 1 0.0323
---------------------------------------------------------------------------
H0: no serial correlation
4.7.3.0 Histogram Normality Test

A histogram plot also indicates normality of residuals. A bell-shaped curve shows the normal
distribution of the series. In order to generate the histogram plot, follow the below procedure.
Table 4.8: Results of Histogram Normality Test
6
4
Density
2
0
-.2 -.1 0 .1
Residuals
32
The figure above shows a bell-shaped distribution of the residuals. X-axis shows the residuals,
whereas Y-axis represents the density of the data set. Thus, this histogram plot confirms the
normality test results from the two tests in this article
4.7.3.1 Skewness and Kurtosis test for normality

Skewness is measure of the asymmetry of the probability distribution of a random variable about
its mean. It represents that amount and the direction of skew. On the other hand, Kurtosis
represents the height and sharpness of the central relative to that of a standard bell curve. The
figure below shows the results obtained after performing Skewness and Kurtosis test for
normality in STATA.
Table 4.9: Results of Skewness and Kurtosis Test for Normality
. sktest resid
Skewness/Kurtosis tests for Normality

joint
Variable Obs Pr(Skewness) Pr(Kurtosis) adj chi2(2) Prob>chi2
resid 31 0.1447 0.2080 3.95 0.1384

‘sktest’ shows the number of observations (which is 31 here) and the probability of skewness
which is 0.1447 implying that skewness is asymptotically normally distributed (p-value of
skewness > 0.05). Similarly, Pr(Kurtosis) indicates that kurtosis is also asymptotically distributed
(p-value of kurtosis > 0.05). Finally, chi(2) is 0.1384 which is greater than 0.05 implying its
significance at 5% level. Consequently, the null hypothesis cannot be rejected. Therefore,
according to Skewness test for normality, residuals show normal distribution.
33
CHAPTE FIVE: CONCLUSION OF THE STUDY
5.1 CONCLUSION
The study contributes to the ongoing mixed theoretical and empirical narratives about the development
econometric relationships between Exports and Economic Growth in Rwanda for the period between 1980
and 2017. Specifically, this study examines; where there is significant impact of exports on country’s
economic growth and the Trends of Exports, trade policies and Economic growth in Rwanda for
the period of study.
The study finds that country policy and institutional environment conditionally influence the
growth-driven export. That is, the presence of good policies and institutions influence positively
the growth impact of exports in developing country like Rwanda. The descriptive analysis of this
study point to the fact that, the positive growth trends of exports are evident right after the
Genocide against Tutsi, contrary to the prior years when the country was characterized by political
instabilities and weak policy and institutional framework. Which means, when the country gained
political stability put in place institutions and trade driven policies, local and international trade
started picking-up, and effect of trade on economic growth started to be evident.
The study also employed different econometric techniques to analyze the short-run and long-run
relationship between exports and economic growth in Rwanda, among the techniques are
Cointegration test, Vector Error Correction Model. Evidently this study reveals that there is long-
run relationship between exports and economic growth In Rwanda.
The analytical framework of this study is embedded in the theoretical and empirical debate
between three Theory of Mercantilism, Theory of Absolute Advantage, Theory of Comparative
Advantage. The study finds that above three theories are complementary and mutually exclusive
in explaining the relationship between Trade (Exports) and economic growth. They however
provide frameworks such as endogenous growth theories through which empirical studies examine
the growth impact of Exports. The is still however the remaining challenge of explaining the
direction of causality between the Exports and Economic growth.
The findings of study reveal a positive and statistically significantly impact of exports on
economic growth by 44.96% in Rwanda. The result of Johnsen test of cointegration double confirm
the existence of cointegration between GDP and Export. Implying that there is a long-run
relationship between trade and Economic growth in Rwanda. The results of Error Correction
Model reveal that the direction of long-run causality runs from Exports to GDP in Rwanda. The
value of error correction term (𝛽1) is 0.0934** and it is statistically significant at 5% level. And
represent the short-run equilibrium effect. Which means that the system will correct its previous
period disequilibrium at a speed of 9.34% between Exports and Economic growth. For the lung-
run equilibrium on the other hand. The coefficient of error correction term is negative of -0.396***
34
and it is statistically significant at level of 5%, indicating the rate at which the system will correct
its previous period disequilibrium at a speed of 39.6% annually. The result implies that economic
growth in Rwanda changes significantly in the short equilibrium influenced by the changes in
Exports.
5.2 IMPLICATIONS
The findings of this study reveal that Exports positively impact economic growth in Rwanda. And
the growth trends of trade components-mostly have been growing lineally over the last two
decades in Rwanda. Exports affect economic growth by increasing Rwanda`s foreign earnings and
trade competitiveness locally and internationally. The evidence from this study seem to suggest
that the institutional and policy framework are equally important in causally conditioning the
overall growth impact trade openness in Rwanda. this means that, policies and institutional
effectiveness matter in influencing the growth and development impact of opening up in
developing countries such as SSA countries that are heavily dependent on the export of primary
commodities. The analysis of this study suggests the following policy implications in order to
maximize the growth impact of trade openness in SSA countries and Rwanda in particular.
From the findings and discussion, I can suggest that the country could promote export by
developing possible infrastructures to support the promotion either soft or Hard infrastructure. The
promotion of exports could be on diversification way, and they should consider all exports
promotion strategies such as Made in Rwanda brand, modern exports, exports processing zone as
well as maintaining exchange rate policies to ensure continuous promotion of export as a major
tool to facilitate economic growth
35
REFERENCES
1. Ahmad, J., &Harnhirun, A. (1996). Cointegration and causality between exports and economic
growth: Evidence from ASEAN countries. Canadian Journal of Economics, 29, 413-416.
2. Edward, S. (1993). Openness, trade liberalization, and growth in developing countries. Journal
of Economic Literature, 31(3), 1358-1393.
3.Furuoka, F. (2007). Do exports act as “engine” of growth? Evidence from Malaysia. Economics
Bulletin, 6(37), 1-14
4.Harrison, A. (1996). Openness and growth: A time series, cross country analysis for developing
countries. Journal of Developing Economics, 48, 419-417.
5. Ahmadi, R., & Mohebbi, N. (2012). Trade openness and economic growth in Iran. Journal of
Basic and Applied Scientific Research, 2 (1), 885-890.
6. Ulasan, Bülent (2008) Trade openness and economic growth: a cross-country empirical
investigation. PhD thesis, University of Nottingham.
7. Kiganda, E.O.1 el. (2017) Analysis of the Relationship Between Trade Openness and Economic
8.RAYMOND ABABIO (2015), Exports and Economic Growth in Sub-Saharan Africa: The Roles
of Intra- and Inter-SSA Exports; Thesis. University of Ghana
9.Chen, S.W. (2007). Exactly what is the link between export and growth in Taiwan? New evidence from
the Granger causality test. Economics Bulletin, 6(7), 1-10.
10.Edward, S. (1993). Openness, trade liberalization, and growth in developing countries. Journal of
Economic Literature, 31(3), 1358-1393.
11.Furuoka, F. (2007). Do exports act as “engine” of growth? Evidence from Malaysia. Economics Bulletin,
6(37), 1-14.
12.Furuoka, F., & Munir (2010). Does export dependency hurt economic development? Empirical evidence
from Singapore. Economics Bulletin, 30(1), 204-218. European Journal of Social Sciences – Volume 32,
Number 3 (2012) 460
13. Harrison, A. (1996). Openness and growth: A time series, cross country analysis for developing
countries. Journal of Developing Economics, 48, 419-417. [9] Khilifa, Y., & Al-Yousif (1997). Exports and
economic
36

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COLLEGE OF BUSINESS AND ECONOMICS

OPTION: MONENTARY ECONOMICS

ACADEMIC YEAR 2018-2019

CASE STUDY: Case study of Rwanda from 1980 to 2017

A Dissertation submitted to the College of Business and

PRESENTED BY: - Benjamin NIYOMWUNGERI 216070759

- Christine MUDAHOGORA 216167442

SUPERVISOR: Dr. RUHARA MULINDABIGWI Charles

I, Benjamin NIYOMWUNGERI and Christine MUDAHOGORA, hereby declare that, this

Name: Dr. RUHARA MULINDABIGWI Charles

May the Almighty God bless all of you.

BNR: National bank of Rwanda

GDP: Gross domestic product

GNP: Gross national product

IDP: Integrated development program

VAR: Vector auto regression

EAC: East African Community

IMF: International Monetary Fund

VECM: Vector Error Correction Model

WDI: World Development Indicator

DK: Dickey Fuller

ADF: Augmented Dickey Fuller

EG: Engel Granger

AEG: Augmented Engel Granger

ECM: Error Correction Mechanism

Keywords: Exports, GDP, Growth, Econometric techniques, Causality.

The achievement of economic growth is an important macroeconomic objective in all countries

1.1 Backgrounds of the study

1.2.1 Main Objective

1.2.2 Specific Objective

1.3 Research questions

1.4 Research Hypothesis

I. H0: there is no significant impact of exports on country’s economic growth

II. H1: there is a significant impact of exports on country’s economic growth

1.6 Significance of the research

1.7 Problem Statement

2.1: Theoretical literature

The assumptions taken under this theory’ are as follows:

b. The size of economies of these countries is equal

c. There is perfect mobility of factors of production within co

d. Transportation cost is ignored

2.1.1: Theory of Mercantilism

2.1.2 Theory of Absolute Advantage

2.1.3Theory of Comparative Advantage:

2.2 The role of export on economic growth

2.3 Exports and Economic Growth: Empirical Review

2.4 Research Gaps

3.1 Theoretical framework

3.2 Empirical Models

𝐿𝑜𝑔𝑌𝑖𝑡 = 𝛽0 + 𝛽1 𝑌𝑖𝑡−1 + 𝛽2 𝑅𝑒𝑚𝑖𝑡 + 𝛽3 𝐹𝐷𝐼𝑖𝑡 + 𝛽4 𝐺𝐶𝐹𝑖𝑡 + 𝛽5 𝐸𝑋𝑃𝑖𝑡 + 𝛽6 𝐸𝑁𝑅𝑖𝑡 + 𝜀𝑖𝑡 … … … … . (1)

𝐿𝑜𝑔𝐸𝑋𝑃𝑖𝑡 = 𝛽0 + 𝛽1 𝑌𝑖𝑡−1 + 𝛽2 𝑅𝑒𝑚𝑖𝑡 + 𝛽3 𝐹𝐷𝐼𝑖𝑡 + 𝛽4 𝐺𝐶𝐹𝑖𝑡 + 𝛽5 𝑌𝑖𝑡 + 𝛽6 𝐸𝑁𝑅𝑖𝑡 + 𝜀𝑖𝑡 … … … … . (2)

Where; Yt stands for the real GDP per capita

Xt stands for Exports

3.3 Data, Data source and Data Description

3.4 Data Analysis

3.4.1 Analytical method

3.4.2 Comparative Method

3.4.3 Econometrics Method

CHAPTER FOUR: RESULTS AND DISCUSSION

4.1 Descriptive Analysis of Variables

Variable Obs Mean Std. Dev. Min Max

fdigdp 36 1.192689 1.139411 .0949419 3.926137

logEduc 31 2.919091 .4579029 2.234253 3.70826