Working Paper Series: Special Edition of 2016 to 2018 Interns

Abstract The ECCU is a group of small open and dependent economies such that they are subject to exogenous shocks that continue to affect economic growth performance. Economic growth performance in the Eastern Caribbean Currency Union (ECCU) has been on a decline since the 2008/2009 financial crisis. While there has been some recovery in recent years, the growth performance measured by growth rates and growth levels, has yet to realign with pre-crisis performance Although the ECCU has been an open region from pre-independence and throughout post- independence, the impact of economic openness has yet to be empirically investigated. This paper employs a panel Vector Error Correction Model (VECM) and Granger Causality test to investigate the relationship between economic openness and economic growth in the six independent countries of the Eastern Caribbean Currency Union (ECCU) over the period 1995 to 2013. This method allowed the study to achieve its three main objectives. First, this study utilized two openness indicators, FDI and trade openness, on the ECCU’s economic growth. Second, the study investigated openness in the case of ECCU countries solely such that policies rendered may aid in achieving the ECCU’s goal of increased economic growth. Third, in a contemporary and comparative approach, the study captures trade openness with tourism arrivals against the traditional metric, which is the main export of the ECCU economies. The results indicate that there is a unidirectional long-run relationship running from the economic openness indicators to economic growth, which is validated by the cointegration analysis. Granger Causality analysis also confirms a causal unidirectional relationship from FDI to economic growth, tourism arrivals and economic growth but no causal relationship with respect to the traditional trade openness indicator.

Key terms: Economic growth, FDI, trade openness, ECCU, VECM, Granger Causality

JEL Classification:

82