Empirical Analysis of the Effects of Trade Openness on Economic Growth: An Evidence for South East European Countries

Abstract

This paper intends to analyze the effects of openness to trade on economic growth of South East European (SEE) countries. Although these countries are at different stages of development and integration with European Union, there are not highlighted differences on trade openness. Trade policies of them have been oriented towards regional trade cooperation and also integrating into the global economy. The empirical analysis of this study consists on 16-year panel data of 10 SEE countries over the period 1996 to 2012. The system GMM is used as the most appropriate estimation method that addresses various econometric challenges, including endogeneity problems. The growth rate of the sample countries is modelled as dependent on trade openness and a set of control variables such as: initial level of income per capita, human capital, gross fix capital formation, FDI, labour force and a number of interaction variables with trade openness. The estimation results indicate that the positive effects of trade openness on economic growth are conditioned by the initial income per capita and other explanatory variables, otherwise there is not robust evidence between these two variables. Moreover, the trade openness is more beneficial to countries with higher level of initial income per capita, as well as trade openness favours countries with higher level of FDI and with higher gross fixed capital formation.