Trade Policy Openness and Economic Performance: Cross-country Evidence

Pn Weerasinghe

doi:10.4038/ss.v35i1.1233

Abstract

There is a lack of strong empirical evidence on the relationship between open trade policies and economic performance largely due to problems associated with the measurement of trade policy openness. This paper uses a new measure of trade policy openness along with other available measures in the literature to test the robustness of the relationship using a large cross-country data set .It was found that an increase in openness by ten percentage points would raise growth in output per worker by 0.6 percentage points annually. Of this contribution, almost half of influence operates through improvements in total factor productivity, while the other half operates through accumulating physical and human capital. The contribution of openness to growth via physical capital accumulation is about twice as large as the contribution via human capital accumulation. (JEL F19, O24) DOI: 10.4038/ss.v35i1.1233 <em>Staff Studies </em>Volume 35 Numbers 1& 2 2005 p.33-61

Highlights

The impact of open trade policies on economic performance has been vigorously debated in the literature during the past few decades
The trade bias index (TBI) is averaged over the period 1970-90 while the inverse black market premium (INV-BMP) and the SachsWarner index (SWI) cover the period 1960-90
In the analysis of alternative indicators of trade openness, the trade bias index (TBI) is a direct measure of trade openness, which is significant in the first regression

Summary

Introduction

The impact of open trade policies on economic performance has been vigorously debated in the literature during the past few decades. Multilateral institutions such as The World Bank and International Monetary Fund (IMF) seem to have reached a consensus that open trade policies help promote economic growth. These institutions have started to impose trade liberalization programs as conditions for loans to developing countries. Empirical work still suffers from serious limitations, and does not provide completely robust evidence on the relationship between trade policy openness and economic performance. A growing number of cross-country studies attempting to support open trade policies have been evolving in the literature. Sebastian Edwards produced a series of cross-country studies providing evidence of a positive and robust relationship between trade openness and economic growth.

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Conclusion