Trade openness and economic growth in the Asian region
| Pages | 136-152 |
| Date | 06 October 2014 |
| Published date | 06 October 2014 |
| DOI | https://doi.org/10.1108/JCEFTS-05-2014-0006 |
| Author | Muhammad Tahir,Imran Khan |
| Subject Matter | Economics,International economics |
Trade openness and economic
growth in the Asian region
Muhammad Tahir and Imran Khan
Department of Management Sciences,
Comsats Institute of Information Technology, Abbottabad, Pakistan
Abstract
Purpose – This paper aims to focus on the Asian developing countries to examine the impact of trade
openness on economic growth.
Design/methodology/approach – Empirical analysis is carried out with the help of panel
econometric techniques and two-stages least squares method.
Findings – The results show that trade openness has contributed signicantly to the growth process
of the developing countries located in the Asian region. It is also found that domestic investment has
inuenced economic growth for the sampled countries. Further, the results show that human capital has
adversely affected economic growth despite the fact that different proxy variables are used.
Research limitations/implications – No positive relationship between education and economic
growth could be established despite using different measures of education. However, this issue has been
brought to the attention of researchers for further investigation.
Practical implications – Developing countries located in the Asian region, therefore, are suggested
to speed up the process of trade liberalization and also pay favourable attention to other determinants
of economic growth to accelerate long-run economic growth.
Originality/value – The results presented in the paper are original. Some insights about the impact of
education on economic growth have been highlighted.
Keywords Trade openness, Endogeneity, Education
Paper type Research paper
1. Introduction
Whether there is any relationship between trade openness and economic growth is an
important research question among the policymakers and researchers. Trade
liberalization has contributed signicantly to the growth of both the developed and
developing countries during the past few decades. The remarkable growth experiences
of the Tiger economies located in the East Asian region and the recent satised growth
experiences of China and India have forced policymakers, especially in the developing
world, to re-think on the existing import substitution policies and replace them with
outward-oriented growth policies. They believe that the implementation of such policies
would eventually provide an opportunity for them to catch up with the richer countries.
The benets of trade openness can be realized through various channels. The general
perception is that high trade openness leads to high economic growth. The benets
associated with international trade are quite visible and have been widely accepted by
both researchers and policymakers.
Theoretical literature believes that there is, indeed, a relationship between trade
openness and economic growth. According to the absolute advantage theory,
international trade gives access to extended international markets and improves
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JCEFTS
7,3
136
Journal of Chinese Economic and
Foreign Trade Studies
Vol. 7 No. 3, 2014
pp. 136-152
© Emerald Group Publishing Limited
1754-4408
DOI 10.1108/JCEFTS-05-2014-0006
productivity through division of labour (Smith, 1776). Small size of the domestic market
acts like a hurdle to economic growth particularly in the developing countries. Thirlwall
(2000) argues that the major dynamic benet of international trade is that domestic
producers get access to wider markets. The comparative advantage theory believes that
international trade is benecial and brings production gains and consumptions gains to
trading partners (Ricardo, 1817). Similarly, open economies can expand their domestic
industrial sector more rapidly by importing essential inputs, technologies and
machinery from technologically advanced economies easier than closed economies,
thereby positively inuencing economic growth.
The model of Grossman and Helpman (1990) shows that trade structure and
commercial policy might affect the long-run growth only through the channel of
comparative advantage in the R&D sector. Improvement in the R&D sector is important
for an economy to grow. Grossman and Helpman (1994) have also argued that open
economies can access larger technical knowledge base than closed economies. Further,
they have argued that in the process of technological dissemination, trade can play a
vital role. Similarly, Krugman (1985) contended that economies gain from trade through
increasing returns to scale. Carbaugh (2005), for instance, has argued that in the
framework of a new trade theory, economies with similar resource endowments and
negligible comparative advantage may benet from international trade because of
massive economies of scale.
In the endogenous growth literature (Romer, 1986 and Lucas, 1988), the technological
change is endogenous rather than exogenous. Therefore, policies such as trade
openness, R&D expenditures and human capital can enhance economic growth because
of their positive impact on the technological change. Dufrénot et al. (2009) highlighted
the trade–growth relationship in the context of endogenous growth literature and have
concluded that trade openness accelerates economic growth through economies of scale
and the diffusion of knowledge among trading partners. The model presented by
Ben-David and Loewy (2001) has asserted that unilateral and multilateral trade
liberalizations have the potential to enhance the steady-state growth of all trading
partners. The central message of theoretical literature is that there is a positive
relationship between trade openness and economic growth.
The trade–growth relationship is important to analyze for a number of reasons. First,
economic growth matters (Baldwin and Forsild, 1998), and hence, strategies or policies
which enhances economic growth shall be discovered. If trade liberalization positively
impacts economic growth, policymakers will have straightforward options regarding
international trade policy. However, if trade openness does not cause growth (Willard,
2000), alternative strategies would be implemented. Second, economic growth can
contribute to human development. This is considered the prime objective of all economic
activities. Nourzad and Powel (2003) contend that economic growth positively impacts
human development. Their study has also shown that trade openness has contributed to
both economic growth and human development. Third, the problem of absolute poverty
and unemployment can also be tackled through high economic growth. This is
attainable if the domestic economy is more integrated into the world economy. Last, but
not the least, there is no country on earth that can produce each and everything it needs.
It has to be involved in international trade with other countries. It depends largely on its
domestic production capability to meet the domestic demands of the masses. Moreover,
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Trade openness
and economic
growth
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