The Relationship between Trade Openness and Economic Growth in Laos: Evidence from ARDL Bounds Testing Approach

Abstract

The relationship between trade openness and economic growth, both theoretical and empirical investigations have shown varied results. Broadly speaking, trade openness has both positive and negative impacts on the economy in three major ways: (1) by increasing competition, (2) by increasing export opportunities, and (3) by lowering production costs due to cheaper imported inputs. This paper applies the autoregressive distributed lag (ARDL) bound testing approach to investigate the relationship between trade openness and economic growth in Laos during the period 1990 to 2018. The empirical results show that in the long run trade openness has positive effects on economic growth in Laos. However, in the short run, no positive influence has been observed in economic growth. Other variables such as foreign direct investment, human capital, and labor force also have positive effects on economic growth in the long run. There is only inflation has a negative impact on economic growth in both the short and long run. Laos is a middle-income nation in ASEAN, and thus the government of Laos must enhance trade openness by effectively controlling import levels in order to boost economic growth through international trade.