Capital Flows and the Openness-Growth Nexus: Toda-Yamamoto Causality Modeling

This article tests for the causal direct and interactive association between capital inflow, aid and domestic savings, and the trade-led growth nexus within the context of a market-oriented economy. We applied the Toda-Yamamoto (1995) causality test which eludes the shortfalls associated with the standard Granger (1969) causality test. The MWALD results revealed bi-directional causality between aid and growth and between trade openness and growth. One way causality is concluded between aid and openness, where the former Granger causes the latter. The reverse is not correct. As practical implications, the results reinforce that aid and trade openness are predominant conditions for economic growth. Given the shortfall in domestic savings, capital inflow can be motivated by investing in export oriented sectors to have improved competiveness. More innovative mechanisms are needed to increase the contribution of aids towards education and infrastructure. For trade, technical support programs are needed, i.e., building public awareness on trade strategies, assessing periodically the legislations of trade, and upgrading the capacities of local businesses.