Economic growth, Terms of Trade, and Trade Performance Nexus in Tanzania A time series analysis (1987-2023)

Abstract

This study examines the relationship between Tanzania’s economic growth, terms of trade, and trade performance from 1987 to 2023. Addressing a notable gap in the literature that often overlooks their combined effects, the study aims to evaluate the dynamic interplay among these variables. Guided by the Prebisch-Singer Hypothesis and the augmented gravity model, the analysis employs the Autoregressive Distributed Lag (ARDL) bounds testing approach to capture both short-run and long-run dynamics, complemented by Granger causality analysis. The results reveal that exchange rate appreciation negatively impacts trade performance, while economic growth and governance quality have positive and significant long-term effects. Terms of trade have a short-run positive impact, indicating a limited long-term influence of global commodity prices. Tariff rates reduce trade performance, whereas infrastructure development enhances it. Granger causality results confirm bidirectional relationships between trade and GDP, emphasizing the interdependence of trade and macroeconomic indicators. The study concludes that improving institutional effectiveness, macroeconomic stability, and structural reforms are crucial for enhancing trade performance. Policy recommendations include strengthening governance, investing in infrastructure, promoting export diversification, and maintaining a competitive exchange rate.