The relationship between international trade openness and economic growth in the developing economies. Some new dimensions

Pages123-139
DOIhttps://doi.org/10.1108/JCEFTS-02-2015-0004
Publication Date01 June 2015
AuthorMuhammad Tahir,Toseef Azid
SubjectEconomics,International economics
The relationship between
international trade openness and
economic growth in the
developing economies
Some new dimensions
Muhammad Tahir
Department of Management Sciences, Comsats Institute of Information
Technology, Abbottabad, Pakistan, and
Toseef Azid
Department of Finance and Economics, College of Business and Economics,
Qassim University, Qassim, Kingdom of Saudi Arabia
Abstract
Purpose – This paper aims to establish a relationship between trade openness and economic growth
in the context of the developing countries. This study has proposed a new measure of trade openness to
the literature, as the available measures are awed.
Design/methodology/approach Empirical analyses are carried out with the help of panel
econometric techniques.
Findings The main nding of the paper is that the relationship between trade openness and
economic growth is positive and statistically signicant for developing countries. Besides trade
openness, other determinants of economic growth such as investment and labour force are also
signicantly related with economic growth and carry expected coefcients. Further, it is found that
frequent uctuations in prices are detrimental to long-run economic growth.
Practical implications – Therefore, the developing countries are suggested to speed up the process
of trade liberalization and also pay favourable attention to other determinants of economic growth to
achieve high economic growth.
Originality/value The authors have used a new measure of trade openness apart from the
conventional trade volume measure of trade openness.
Keywords Economic growth, Panel data, Trade openness, Education, Fixed effects
Paper type Research paper
1. Introduction
While economies are striving hard to achieve high economic growth, it becomes more
important to answer the question what actually determines their economic growth.
Trade openness has recently been considered as an important determinant of economic
growth. It has been witnessed during the past couple of decades that international trade
openness has played a signicant role in the growth process of both developed and
developing countries. International organizations such as World trade organization,
International Monetary Fund and World Bank are constantly advising, especially
developing countries, to speed up the process of trade liberalization to achieve high
The current issue and full text archive of this journal is available on Emerald Insight at:
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Trade
openness and
economic
growth
123
Journalof Chinese Economic and
ForeignTrade Studies
Vol.8 No. 2, 2015
pp.123-139
©Emerald Group Publishing Limited
1754-4408
DOI 10.1108/JCEFTS-02-2015-0004
economic growth. High economic growth is the ultimate goal of all economic activities
because it improves the standard of life of people which is desirable. The general
perception is that high trade openness leads to high economic growth (Anderson and
Babula, 2008;Tahir and Norulazidah, 2014).
Rodriguez and Rodrik (2001) have casted doubt on the earlier literature (Dollar, 1992;
Sach and Warner, 1995;Edwards, 1998;Frankel and Romer, 1999) by highlighting
issues related to the measures of trade openness and used methodologies.
Huchet-Bourdon et al. (2011) have reported recently that the measures of trade openness
used in the earlier studies and the methodologies used to estimate models that link
openness to growth are still open to doubt. Researchers have used various tools of
analysis on different objective and subjective indices of openness over the years to nd
the link between trade openness and economic growth Tahir and Norulazidah (2014).
These consequent efforts in the literature have further made it difcult for the
researchers to select appropriate measures of openness and choose the best
methodology of estimation. According to Greenaway et al. (2002), the use of diverse
indices of liberalization coupled with the problem of miss-specication could be
responsible for the inconsistent evidence regarding the growth effects of liberalization.
Hallak and Levinsohn (2004) have suggested that the future research efforts shall focus
on identifying the mechanisms by which trade openness inuences economic growth.
On the contrary, Fiestas (2005) has argued that, despite methodological issues, there is
no evidence that trade liberalization is harmful for economic growth.
Corresponding to this remark, the main objective of this paper is to test whether high
trade openness is associated with high economic growth in the context of the developing
countries. If trade openness really matters for achieving high economic growth, then the
process of trade liberalization shall speed up to grow fast. The study proposes a new
measure of trade openness to the existing trade–growth literature and also pays
attention to address the endogeneity issue associated with the trade–volume measure of
trade openness. The researchers have not come to a conclusion whether trade openness
leads to economic growth (Matadeen et al., 2011;Ulasan, 2012;Dava, 2012). Therefore,
the results of our study might be useful for policymakers in the developing countries.
The current paper has demonstrated a positive and statistically signicant
relationship between trade openness and economic growth using different measures of
trade openness with the help of panel econometric techniques. The analysis also nds
that labour force and domestic investment are the key determinants of economic growth
for developing countries. In addition, it is found that human capital has not contributed
signicantly to the economic growth of the sampled countries. Further, the study found
that ination volatility has adversely inuenced the economic growth, indicating that
the developing countries should ensure macroeconomic stability to grow faster in the
long run.
The reminder of the paper is organized as following. In Section 2, we have briey
reviewed the literature on the relationship between trade openness and economic
growth to provide a prelude for subsequent discussions. Discussion on the measures of
trade openness is provided in Section 3. The specication of the model, variables
specication, data sources and the issue of endogeneity are discussed in Section 4.
Section 5 includes methodology of estimation. Results of the study are analyzed in
Section 6. In the penultimate section, the robustness issue of the results is addressed.
Conclusions are drawn and policy recommendations are advised in Section 8.
JCEFTS
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