Effects of Terms of Trade and Its Volatility on Economic Growth in Sub-Saharan Africa

Abstract

This paper investigated the effect of terms of trade and its volatility on economic growth in sub-Saharan Africa. The study employed dynamic panel data models of difference and system Generalized Method of Moments (GMM), which could account for biases associated with endogeneity of explanatory variables and problems induced by, unobserved country-specific characteristics. The study used both net barter terms of trade and income terms of trade as a measure of terms of trade for the analysis of the entire data for this paper. Using data from 1985 to 2014, the study found that the improvement in both net barter terms of trade and income terms of trade is growth-enhancing, whereas its deterioration is growth-retarding. As the majority of the sample countries are primary commodity exporters, their terms of trade shows deterioration through time and this adversely affects economic growth. Furthermore, the result proved that volatility of net barter terms of trade and income terms of trade has a negative and significant effect on economic growth. Finally, the use of alternative data set contributed to the result being robust.