TRADE OPENNESS AND ECONOMIC GROWTH: EMPIRICAL EVIDENCE FROM INDIA

Qazi Muhammad Adnan Hye,Wee-Yeap Lau

doi:10.3846/16111699.2012.720587

Qazi Muhammad Adnan Hye, Wee-Yeap Lau

Open Access

https://doi.org/10.3846/16111699.2012.720587

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Abstract

The main objective of this study is to develop first time trade openness index and use this index to examine the link between trade openness and economic growth in case of India. This study employs a new endogenous growth model for theoretical support, auto-regressive distributive lag model and rolling window regression method in order to determine long run and short run association between trade openness and economic growth. Further granger causality test is used to determine the long run and short run causal direction. The results reveal that human capital and physical capital are positively related to economic growth in the long run. On the other hand, trade openness index negatively impacts on economic growth in the long run. The new evidence is provided by the rolling window regression results i.e. the impact of trade openness index on economic growth is not stable throughout the sample. In the short run trade openness index is positively related to economic growth. The result of granger causality test confirms the validity of trade openness-led growth and human capital-led growth hypothesis in the short run and long run.

Highlights

The theoretical literature indicates that trade openness plays a vital role in the process of economic growth in the developing countries
The available empirical literature indicates that the researchers have used the various proxies like export divided by gross domestic product (GDP), import divided by GDP, and export plus import divided by GDP to check the impact of trade openness on economic growth
Through the level of export we capture the effect of allocation of resources, share of exports in GDP is used as a proxy of trade openness to catch the length of trade openness related to scale economies

Summary

Introduction

The theoretical literature indicates that trade openness plays a vital role in the process of economic growth in the developing countries. The stories of flourishing economic growth (of East Asian countries) convey the importance of trade openness policies. The development of endogenous (new) growth theories offers a theoretical basis for empirical investigation of the association between trade openness and economic growth. In contrast the neo-classical growth theory recognizes no association between trade openness and economic growth. It shows that the economic growth is exogenously defined by the technology, which proposes that long term economic growth cannot cause by the interaction with other countries. The new growth theories indicate that trade openness increases economic growth by enhancing the scale of spillover (Romer 1990)

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