Financial Deepening, Trade Openness and Economic Growth in United Arab Emirates: An Empirical Investigation

This paper examines the links between financial development, trade openness and economic growth by using a VECM model in United Arab Emirates (UAE) for the period 1977-2012. The econometric methodology employed was the Cointegration and Granger Causality test. The stationarity properties of the data and the order of integration of the data were tested using both the Augmented Dickey-Fuller (ADF) test and the Phillip-Perron (PP) test. The variables tested stationary at first differences. The Johansen multivariate approach to cointegration was applied to test for the long-run relationship among the variables. The results of cointegration analysis suggest that there are two cointegrated vectors among GDP, financial development and the degree of openness of the economy. Granger causality tests based on error correction models show that there is a causal relationship between economic growth and financial development and between the degree of openness of the economy and economic growth. Implying support for growth-led financial development and support for trade of openness -led growth. Moreover, Money supply was the only instrument of financial development that was seen to cause degree of Trade openness. The findings of the study show that financial development does have positive effect on economic growth due to economic growth having impact on the financial development. Thus, suggesting a need of reforming the UAE financial system, whereby UAE should promote its trade linearization policy, in order to enhance both growths of GDP and financial development.

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