Foreign trade and economic growth in Namibia: A time series analysis Cyril Ayetuoma Ogbokor Student number: 24522465 Thesis submitted in fulfilment of the requirements for the degree PHILOSOPHIAE DOCTOR in Economics at the North-West University (Vaal Triangle Campus) Promoter: Dr D.F. Meyer Co-Promoter: Prof W.C.J. Grobler August 2015 DECLARATION I, Cyril Ayetuoma Ogbokor, 24522465, hereby declare that the thesis for PHILOSOPHIAE DOCTOR is my own work, and that it has not been submitted previously for assessment or completion of any postgraduate qualification in any university or for another qualification. Cyril Ayetuoma Ogbokor August 2015 i ACKNOWLEDGEMENTS I would like to extend my deepest appreciation to the following: • My wife, Gladys, as well as my three children, Efemena, Elo and Ogoh for their moral and spiritual support. • My supervisor, Dr DF Meyer, for his time, academic support, advice and in particular his constructive engagement approach. • Prof WCJ Grobler for always reminding me of the need to keep writing. In addition, he provided a number of constructive suggestions during the writing of this thesis. • The University of North-West for granting me the opportunity to undertake a PhD study programme at Vaal Triangle Campus. • The Rector of the Namibia University of Science and Technology (Formerly known as the Polytechnic of Namibia), Prof Tjama Tjivikua, for always emphasising the importance of human capital investment. • Dr Johannes Peyavali Sheefeni Sheefeni of the Bank of Namibia (BoN) for adding value to this thesis through his comments, especially in the areas involving econometric modelling, estimation and analysis. • Above all, the Almighty God for His continuous protection and immeasurable blessings. ii ABSTRACT Foreign trade is increasingly becoming a powerful tool when it comes to the promotion of economic growth in modern economies. This is especially so in the face of the continued rise of globalisation. In consideration of this fact, this thesis assessed the impact of foreign trade on the growth process of Namibia’s economy for the period stretching from 1990 to 2012. This main objective was further developed into primary, theoretical and empirical objectives. In order to realise these multiple objectives, two modern econometric time series techniques were employed, namely vector autoregressive (VAR) and auto- regression distributed lag (ARDL) models. Based on these two techniques, the following procedures featured during the study: Stationary tests, error correction modelling, cointegration tests, Granger causality tests, generalised impulse response functions and generalised forecast error variance decomposition. The following constitutes the main findings arising from this study: First, the study found that there is a positive relationship among the variables that were investigated. Indeed, this positive relationship suggests that the economy of Namibia can be expanded potentially by means of foreign trade. The result is also in line with economic theory. Secondly, the empirical findings also show that export, foreign direct investment and exchange rate endogenously respond to shocks in economic growth. Thirdly, economic growth itself accounted for most of the innovations that occurred during the period under consideration concerning economic growth. Fourthly, amongst the three explanatory variables used in the model, exports and foreign direct investment contributed more towards innovations in economic growth during the forecast period. Initially, exports and foreign direct investment dominated over the forecast horizon with each contributing almost an equal share of over 5 percent after 12 quarters. Thereafter, exports’ contribution relatively exceeded that of foreign direct investment. Fifthly, it is particularly important to note that the exchange rate variable made the weakest contribution towards explaining economic growth for the forecast period of 24 quarters. iii In consideration of the general constraints associated with this study, the thesis puts forward a number of proposals for possible further investigation by any theorist who is keen about probing the issue that the thesis investigated. The thesis considers the following as its significant contributions to the existing literature: First, this study primarily examined the relationship between exports and economic growth. By adding the effect of foreign direct investment and exchange rate to the analysis, this study became more comprehensive. This further widens the scope for policymaking for Namibia, as well as other developing economies on a similar route. Secondly, the study employed two modern econometric time series techniques, namely VAR and ARDL models in investigating the research topic under consideration. Most of the related studies that were reviewed either utilised ordinary least squares (OLS) or VAR or ARDL approach on its own. By implication, the results obtained from this study, therefore, are from a technical point of view more robust. Thirdly, through constructive comments, this thesis made valuable contributions to the relevant empirical literature as reviewed during the course of the study. Fourthly, since this study has a focus on Namibia, it provided the opportunity for the thesis to present a comprehensive analysis on issues pertaining to Namibia specifically. Lastly, the various recommendations put forward by this thesis will assist Namibia, as well as other developing countries, on a related path when it comes to formulating policies for the promotion of exports in particular and economic growth in general. Keywords: foreign trade, economic growth, macroeconomic time series data, Namibia, vector autoregression technique, autoregression distributed lag technique, causality, cointegration iv OPSOMMING Buitelandse handel raak sonder twyfel al meer invloedryk in die bevordering van ekonomiese groei in modern ekonomieë. Dit is veral duidelik wanneer die huidige toename van globalisering in ag geneem word. Hierdie proefskrif het ten doel gehad om die impak van buitelandse handel op die groeiproses van Namibië se ekonomie tydens die periode van 1990 tot 2012, met bogenoemde in ag geneem, te ondersoek. Hierdie hoofdoel is verder uitgebrei in primêre, teoretiese en empiriese doelwitte. Om hierdie veelvuldige doelwitte te verwesenlik, is twee moderne ekonometriese tydreeks-metodes gebruik, naamlik Vektor Outo-regressief (Afrikaans VOR, Engels VAR) en Outo-regressiewe Verspreide Nalope (Afrikaans ORVN, Engels ARDL). Met gebruik hiervan is die volgende prosedures gedurende hierdie studie ten toon gestel: Stasionêre toetse, Foutregstelling-modellering, Mede-integrasie toetse, Granger-oorsaaklikheidstoetse, Algemene Impulsreaksie-funksies en Algemene voorspelling foutvariansie-ontbinding. Die volgende hoofbevindinge kan uit hierdie studie gelig word: Eerstens, het die studie bevind dat ekonomiese groei reageer op skokke in uitvoere, direkte buitelandse belegging en die wisselkoers – op ʼn positiewe manier. Hierdie positiewe reaksie dui aan dat Namibië se ekonomie moontlik deur middel van buitelandse handel uitgebrei kan word. Hierdie bevinding volg algemene ekonomiese teorie. Tweedens, wys die empiriese bevindinge ook dat uitvoere, direkte buitelandse belegging en die wisselkoers op endogene wyse reageer op skokke in ekonomiese groei. Derdens, was ekonomiese groei self verantwoordelik vir meeste van die opgemerkte veranderinge wat tydens die relevante periode plaasgevind het. Vierdens, is daar opgemerk dat uit die drie verklarende veranderlikes wat in die model gebruik is, uitvoere en direkte buitelandse belegging in ʼn meerdere mate bygedra het tot innoverings in ekonomiese groei gedurende die voorspellingtydperk. Aanvanklik het uitvoere en direkte buitelandse belegging die vooruitskattingsuitsig oorheers, met elkeen wat amper in gelyke deel bygedra het tot meer as 5 persent na 12 kwartale. Na hierdie tydperk het uitvoere se bydra heelwat meer geraak as dié van direkte buitelandse belegging. Vyfdens, is dit beduidend om te merk dat v die wisselkoers-veranderlike die swakste bydra gemaak het ter verduideliking van die ekonomiese groei wat in die voorspellingstydperk van 24 kwartale plaasgevind het. Laastens, met die algemene beperkinge wat met hierdie studie gepaard gaan in ag genome, bring die proefskrif ʼn aantal voorstelle na vore; vir moontlike verdere ondersoek deur enige teoretikus wat graag dieper wil delf in hierdie kwessie. Die volgende aspekte word beskou as belangrike bydraes deur die proefskrif tot die bestaande literatuur: In die eerste plek het die studie die verhouding tussen uitvoere en ekonomiese groei ondersoek. Die studie is toe selfs meer omvattend gemaak deur ook die effek van direkte buitelandse belegging en die wisselkoers deel te maak van die analise. Hierdeur word die omvang vir beleidskepping in Namibië en ander ontwikkelende ekonomieë selfs verder vergroot. Tweedens, het die studie gebruik gemaak van twee moderne ekonometriese tydreeks-metodes, naamlik VOR en ORVN, om die navorsingsonderwerp te ondersoek. Meeste van die verwante studies waarna gekyk is, het óf die gewone kleinstekwadratemetode, óf VOR, óf ORVN alleen gebruik. Gevolglik kan gesê word dat die resultate van hierdie studie, vanuit ʼn tegniese oogpunt, meer robuus is. Derdens, het die proefskrif, deur middel van konstruktiewe kommentaar, waardevolle bydraes gemaak tot die relevante empiriese literatuur wat deur die loop van die studie geraadpleeg is. Vierdens, het hierdie studie gefokus op ʼn enkele land, in hierdie geval Namibië.