Trade openness, economic growth and competitiveness. The case of the Central and Eastern European Countries

Vaida Pilinkienė

doi:10.5755/j01.ee.27.2.14013

Abstract

This paper intends to analyze the effects of openness to trade on economic growth and competitiveness of the Central and Eastern European (CEE) countries. Although these countries are at different stages of development and integration with the 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 1 5 - year panel data of 11 CEE countries over the period 2000 to 2014. 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 some 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 a higher gross fixed capital formation. This paper intends to analyze the effects of openness to trade on economic growth and competitiviness of the Central and Eastern European (CEE) 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 1 5 - year panel data of 11 CEE countries over the period 2000 to 2014. 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. DOI: http://dx.doi.org/10.5755/j01.ee.27.2.14013

Highlights

Increasing flows of international trade as well as strong impact of globalisation determine the changes in economic growth and competitiveness of different countries
This paper focuses on the linkages among three groups of macroeconomic indicators: trade openness, economic growth and competitiveness
Trade openness is described by trade openness index (Trade), which is equal to the sum of exports and imports of goods and services measured as a share of GDP

Summary

Introduction

Increasing flows of international trade as well as strong impact of globalisation determine the changes in economic growth and competitiveness of different countries. It is obvious that both large and small economies are dependent on other players in international markets This raises the question to which extent trade openness of different countries contributes to their economic growth and competitiveness, and what impact this interrelation has on economics. The Central and Eastern European Countries (CEEs) are experiencing high growth rates in terms of trade openness. With reference to the data of World Economic Forum, in 2014 Germany, one of the most competitive EU states, occupied 5th position in the global ratings by its Global Competitiveness Index, but had trade openness index equal to 85 percent, i.e. slightly higher than the EU average. It is purposeful to research whether higher degree of country’s competitiveness leads to lower degree of trade openness and vice versa, and define the conditions for this interrelation

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