Restricting my attention to 71 developing countries and collecting data from the world databank, i investigate the exact impact of trade openness on economic growth. Financial development, trade openness and economic growth in. Indeed, the results oppose the neoclassical growth models, where trade openness has no impact on the longrun growth rate of an economy. We use panel cointegration tests and panel errorcorrection models. Generally, there are two views trying to explain the nexus between openness in financial services and economic growth. The nature of the relationship between trade openness and growth has long been a subject of controversy among economists. The causal linkage between trade openness and economic.
Since theoretical literature fails to provide a clear picture of the impact of trade on growth, we resort to empirical studies. The causal relationship among trade openness, financial. This paper discusses the impact of trade openness policy on tariff structure, export competitiveness, inflation and economic growth of latin american countries. In this paper, we revisit the empirical evidence on the relationship between trade openness and longrun economic growth over the sample period 19602000. While economic openness is a key driver for prosperity, the challenges associated with it cannot be ignored. Trade openness and gdp growth nexus in south africa. The effects of internet usage, financial development and trade openness on economic growth in south africa. Trade openness and economic growth in sadc countries. In this paper, we revisit the empirical evidence on the relationship between trade openness and longrun economic growth. New insights from a panel causality approach kojo menyaha, saban nazlioglub. The study uses nonstationary heterogeneous dynamic panel models. A skeptics guide to the crossnational evidence abstract do countries with lower policyinduced barriers to international trade grow faster, once other relevant country characteristics are controlled for. In this paper, i will empirically investigate the relationship between trade openness and economic growth for 71 developing and developed countries from 1980 to 2009 using pooled ols regression and panel data techniques.
Financial development, financial openness, and economic growth. As rhythmic as the tide, every four years politicians rekindle the debate over trade policy. Francisco rodriguez1 introduction the period since 1990 has been a decade of trade policy reform. Second, it is established that openness to trade plays a larger role than openness to ideas in increasing income. One of the policy measures of the structural adjustment programme sap introduced in 1986 is trade openness. The dominant message from the empirical literature during 19902000 is that indeed there exists a positive relationship between trade openness and economic growth. New evidence romain wacziarg and karen horn welch a new data set of on openness indicators and trade liberalization dates allows the 1995 sachs and warner study on the relationship between trade openness and economic growth to be extended to the 1990s. African countries have experienced low performances because of colonization.
While trade openness promoted convergence in the 1960s and 1970s, we find that since 1980 the benefits of trade accrued mostly to the richer economies, with little benefit to the less developed economies. Researchers such as bhattacharya and wolde 2009 believe that prevailing volumes of trade of. After all, does trade openness really contribute to economic growth. The relationship between trade openness and economic growth. For 2 a number of crosscountry empirical studies analyze the relationship between trade openness and volatility.
Few questions have been more strongly debated in the history of economic thought. Financial development, financial openness, and economic growth this paper examines the importance of financial development and openness. International trade and its effects on economic growth in china international trade, as a major factor of openness, has made an increasingly significant contribution to economic growth. Financial development, openness in financial services. This might be attributed to the omission of the role of capital stock and labor in the trade growth nexus. The relationship between trade openness and economic growth has been extensively investigated yielding to mixed and inconclusive results. There exists a large empirical literature providing an affirmative answer to this question. However, a similar level of trade openness can hide different types of trade structures. Ejike, anah, and onwuchekwa 2015 conducted a study which was premised on the effect of trade liberalization on the economic growth of nigeria covering a period between 19802015. Freund and bolaky 2008, point out to positive effect of trade openness on economic growth using panel data analysis form more than 100 countries.
The study empirically examined the impact of trade openness on economic growth in nigeria. In spite of the wave of liberalisation studied during the past decades, the debate still remains open on the issue of the trade openness and economic growth nexus. In fact, the gatt final uruguay round which was completed in 1994 prompted the establishment of the world trade organization wto. The determinants of economic growth home anu press. Trade openess and economic growth in nigeria 1981 2009. Financial development granger causes economic growth validating supplyside hypothesis in case of australia. It is a catalyst to economic growth through productivity of export obadan, 1993. Easterly, islam and stiglitz 2001 and kose, prasad and terrones 2003.
The feedback effect exists between international trade and economic growth. The second proxy is the ratio of exports to gdp, while the third proxy is the ratio of imports to gdp. Effect of trade openness on economic growth economics essay. This study investigates how trade openness affects economic growth in developing countries, with a focus on subsaharan africa ssa.
The last proxy is an index of trade openness, which accounts for the country size and geography. In the standard neoclassical model of exogenous growth, changes in trade openness can only affect the pattern of product specialisation but not the longterm rate of economic growth. Get an answer for what is trade openness and what is the effect of trade openness on economicfinancial development. According to major international trade theories and under certain assumptions, more trade liberalization is pro growth and hence expected to reduce unemployment rate. Trade openess and economic growth in nigeria 1981 2009 an. These results, therefore, suggest that the promotion of policies that support international trade is relevant in the south african economy. The theoretical propositions reveal that while trade openness leads to a greater economic efficiency, market imperfections, differences in technology and endowments may lead to adverse effect of trade liberalisation on individual countries. Trade openness and economic growth in the developing. The link between openness and longrun economic growth. Trade, foreign direct investment and economic growth.
Fdi, trade openness, capital formation, and economic growth. Investments, labour and inflation are incorporated in the model to form a. Trade openness and economic growth in latin american. The desire to achieve faster economic growth and move out of poverty is important for countries in the subsaharan african region. The effects of internet usage, financial development and. This article investigates the relationship among foreign direct investment, trade openness and economic growth in ghana taking the period of postliberalization covering 19752017. Like in the case of technical progress and innovation, trade openness produces efficiency gains through a schumpeterian creative destruction. However the benefits of greater economic openness cannot arise without economic change. Pdf impact of trade openness on economic growth among. Financial development, financial openness, and economic. The study employs the autoregressive distributed lag ardl bounds testing approach to investigate the dynamic impact of trade openness on economic growth.
Economic openness, in political economy, the degree to which nondomestic transactions imports and exports take place and affect the size and growth of a national economy. The study finds that trade openness is a possible avenue to reduce the resource curse. We use a dynamic growth model with data from 42 ssa countries covering 1980 to 2012. The development model adopted by morocco since the 80s is characterized by the opening and conduct of structural reforms in favor of the conclusion of many free trade agreements, has had a significant impact both on depth strategic country and the. A time series analysis abstract this study estimates the effects of internet usage, financial development and trade openness on economic growth using annual time series data for south africa for the period 199120. Fourth, it investigates the linkage between fdi, trade openness, capital formation, and economic growth which is rarely studied in the context of bangladesh. The relationship between international trade openness and.
Based on the long run empirical results, this study finds that trade openness has a positive and significant impact on economic growth when the ratio of total trade to gdp is used as a proxy, but not when the three. The relationship between trade openness and economic growth is ambiguous from both theoretical and empirical point of view. It discusses the results of an empirical analysis between both variables and economic growth. Based on the long run empirical results, this study finds that. International trade and its effects on economic growth in. Trade and investment analytical papers topic 2 of 18. Openness increases an economys susceptibility to external shocks and could lead to higher volatility in trade flows and economic growth. There has been a lot of literature done on openness and economic growth. The relationship between openness infinancial service trade and economic growth has long been studied but the relationship remained controversial. The most important fact about the relationship between trade openness and economic growth is that trade openness drives growth. The aim of this paper was to enrich the way of measuring trade openness taking into account two different dimensions of countries integration in. A potential advantage of this approach is that it is directly informative about the role of trade policy for growth.
Openness to international trade was seen to positively influence economic growth and grangercausality test revealed a bidirectional causality between openness and economic growth. These findings suggest that the causality is running from trade openness to economic growth instead of the other way round willard, 2000. The study employed ordinary least square regression to find out the relationship between trade openness and economic growth. This study has proposed a new measure of trade openness to the literature, as the available measures are flawed. A crosscountry empirical investigation bulent ulasan. The results provide evidence that there exists a positive longrun equilibrium relationship between trade openness and economic growth, which is an indication that trade openness is beneficial to economic growth in bangladesh. Our results confirm previous findings that specialization in primary exports is bad for growth. Openness to international trade and economic growth. My results show that trade liberalization has a positive and. Does trade openness cause growth an empirical investigation. Third, is to provide empirical evidence on the relationship between international trade, fdi and economic growth in transition countries. Rodriguez and rodrik,2001, 2624 pointed out that there is no strong conditional correlation between economic growth and a number of direct measures of trade policy, such as weighted and unweighted tariffs, import quotas, or other non tariff barriers. Trade openness is the liberalization that has generated new markets.
However, in the short run, when the first three proxies of openness are used, the study finds trade openness to have a positive impact on economic growth, but not so when the trade openness index is employed. Simple measures of trade policies such 2 a level effect occurs when, for example, a tariff reduction increases income in a given period but not in subsequent periods. Empirical analysis of the effects of trade openness on. Mellon center for curricular and faculty development, the office of the provost and the office of the president. The link between openness and longrun economic growth web version. May 08, 2014 trade openness and economic growth 197 growth rate of export and change in export to gdp ratio with the economic growth by using the data from 1960 to 1981 for a sample of 70 developing countries. However, these studies are based on crosssection growth models where the average growth 4 in figure 1, we use the average data of real gdp per capita and oil rent % of gdp for countries with high oil.
The relationship between the trade openness and general price level as an indicator of inflation and robustness of this relationship has been explored in the study. It is assumed that the rate of depreciation is four per cent and k. While trade openness promoted convergence in the 1960s and 1970s, we. A large number of empirical studies have made use of a variety of crosscountry growth regressions to test endogenous growth theory and the importance of trade policies.
This paper intends to analyze the effects of openness to trade on economic growth of south east european see countries. Trade openness, economic growth and unemployment reduction in. This paper aims to establish a relationship between trade openness and economic growth in the context of the developing countries. Trade openness is a better strategy for rapid economic growth. The economic impact of trade openness, however, remains persistent in most policy debates in ghana. However, in nigeria trade openness has a negative but insignificant effect on economic growth.
Pdf trade and financial openness and economic growth in. The arguments in favor of openness are well known and date back at least to adam smiths analysis of market specialization. With regard to methods haven used to determine the importance of financial development and or trade openness to economic growth, there are two main methods. Does trade openness matter for economic growth in niger. In this paper we study the relationship between international trade, foreign direct investment and economic growth using the open economy version of the expanding product variety growth model that combines crucial features of neoclassical and endogenous growth models. Wto is aimed to improve the standard of living of people in the member countries, ensure full employment and broad. The relationship between trade openness and economic. For many authors trade openness implicitly refers to trade policy orientation and what they are interested in is to assess the impact of trade policy or trade liberalization on economic growth.
What is trade openness and what is the effect of trade. Francisco rodriguez1 department of economics wesleyan university 1 this paper was prepared as a background note for the united nations 2006 world. Most of the dynamic benefits of trade are obtained through productivity growth. Impact of fdi and trade openness on economic growth. This is one of the most widely accepted beliefs the economics literature the countries with lower barners to international trade experience faster economic growth, this view is widely been investigated ill thc economic literature, far example. Reviewing the existing literature on openness and growth shows that there is not a clear definition of trade openness.
Trade openness allows countries to obtain competitive prices for their resources in the international market and access advanced technologies to extract resources more. The impact of degree of trade openness on economic growth proves to. An alternative indicator of openness is a measure of trade policies. The growthopenness connection is also still an open question in the empirical literature. We investigate the relationship between economic growth and foreign trade, testing whether the benefits of trade vary over time and across countries. Although these countries are at different stages of development and integration with european union, there are not highlighted differences on trade openness.
Finally, the study employs a new estimation technique like vector autoregressive var approach to examine whether the linkage between variables is longterm, unidirectional or bidirectional. Unlike some previous studies, the current study uses four proxies of trade openness, with each proxy addressing a different aspect of trade openness. Our result suggest that the positive sign of the coefficient of non oil. Redlinb f university of paderborn, germany abstract this paper examines the shortterm and longrun dynamics between per capita gdp growth and openness for 158 countries over the period 19702009.
This study assesses the impact of trade openness on economic growth among ecowas countries uses secondary data from 1975 to 2017. The degree of openness is measured by the actual size of registered imports and exports within a national economy, also known. Sultan 2008 stresses that trade policies must be integrated with economic growth and development strategies. Foreign direct investment, trade openness and economic. They developed a model which specified gdp growth a function of growth rates of openness export plus import, domestic investment and population. For instance, ghana inherited industrial sector was underdeveloped mainly. Multilateral institutions such as the world bank, imf, and the oecd regularly promulgate advice predicated on the belief that openness generates predictable and positive consequences for growth. Empirical results on the links between trade openness and economic growth often suggest that, in the long run, more outward. This result has implications for development economics and policy. Chinese international trade has experienced rapid expansion together with its dramatic economic growth which has made the country to target the world as its market. Openness and growth openness international trade accelerates development. Furthermore, in their paper aimed to identify, in the context of the relationship between openness and growth, factors that can account for the poor growth performance of subsaharan african ssa countries, mbabazi j. Facilitates global integration into global markets iyoha and oviakhi, 2002.
Trade openness raises economic growth more open countries. In ghana trade openness has a positive impact on economic growth and significant at the 1% level. The augmented dickeyfuller adf test for unit root, regression analysis, descriptive analysis, and pearson correlation was used to investigate the relationships. Fundamental to these policy debates is the issue of trade openness on the economic growth volatility. Evidence from mena region countries 3 two benefits working together result in a countrys real wage increasing in response to higher home inflation levels. Finally, this paper suggests new evidence that openness to ideas and openness to trade are partial substitutes.
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