Does trade openness affect economic growth in India? Evidence from threshold cointegration with asymmetric adjustment

Smruti Ranjan Behera,Lingaraj Mallick,Juan Sapena

doi:10.1080/23322039.2020.1782659

Abstract

This paper investigates the long-run equilibrium relationship between economic growth and trade openness in India during the period 1960–2018 using the asymmetric error-correction model with threshold cointegration. To evaluate the robustness impact of trade openness on economic growth under different regimes, we divide the full sample period into two sub-periods, i.e., pre-trade reforms period 1960–1990, and post-trade reforms period 1991–2018. The study indeed confirms the evidence of asymmetric cointegration between economic growth and trade openness in India during the period under evaluation and over the different sub-periods. The estimated asymmetric error-correction model exhibits a different speed of adjustment in trade openness in response to positive and negative economic growth shocks in the short-run. More specifically, during the pre-reforms period, deviations from the long-run equilibrium due to a relative increase in economic growth have a lower speed of adjustment in comparison to deviations caused by a corresponding decrease in economic growth in India.

Highlights

The importance of trade openness has been gaining momentum since the time of globalization
Using threshold autoregressive (TAR) models in the full-sample period 1960–2018, and fol lowed by the Chan (1993) method, results indicate that the estimated threshold values of consistent TAR (C-TAR) and consistent MTAR (C-MTAR) are −1.421 and −3.422, respectively
The Akaike Information Criterion (AIC) suggests the third lag for the C-TAR and C-MTAR models

Summary

Introduction

The importance of trade openness has been gaining momentum since the time of globalization. The trade openness has been regularly contributing to economic growth in both developing and developed countries in less or to a greater extent. On this backdrop, theoretical models show that trade openness facilitates the efficient allocation of resources through comparative advantage, leading to increased income levels (Grossman & Helpman, 1991). Despite its positive effect on growth, some theoretical studies claim that trade openness may hamper economic growth, where tech nological innovations or learning by doing are primarily exhausted, or where selective protection may foster faster technological advances (Lucas, 1988)

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Results