Trade openness and economic growth: Evidence from Azerbaijan

Abstract

A review of modern economic literature shows the lack of consensus on the relationship between the trade openness policy and the economic growth of countries. There is also an opinion that the policy of openness in emerging and resource-rich countries presents more opportunities for growth and development. Is this true, and under what conditions does openness lead to growth? Exploring the nature of trade openness and economic growth relationship in resource-rich emerging countries is the purpose of this paper. Therefore, the economy of Azerbaijan, rich in hydrocarbon resources, has been chosen as the object of this study. Next, the VAR model using ADF tests and Johansen’s cointegration was chosen to analyze and evaluate the causal nature of the relationship between openness and growth. Trade openness ratio and GDP per capita growth are model variables. The study covers annual data from 1995 to 2020. It was found that there are no cointegration relationships between variables in the long run. However, there is a unidirectional causal relationship from openness to growth in the short run, and the effect of growth to openness is not statistically significant. The results show that Azerbaijan receives economic benefits from openness by selling oil to the world market. Yet, the short-run nature of such benefits and the lack of feedback from growth to openness suggest specific problems in the diversification and quality of the country’s exports.