TRADE
OPENNESS AND ECONOMIC GROWTH A STUDY FROM DEVELOPED STATES

 

 

Abstract

 

The paper aims to study the realistic
relationship between trade openness and economic growth of different countries.
The year we are dealing from 1980 to 2010.For this paper we have worked and
maintain secondary data. The methodologies that have been used are related to
panel data. Specific test has been taken to diagnose result about the
dependency of variable. In the study our results proved that trade openness and
economic are significant. The proxies that we used for our variable were as
follows. Trade openness is a multi-dimensional concept and hence measures of
both trade barriers and trade volumes have been used as proxies for openness
and some other proxies of trade openness, we were used such as Import
Penetration ratio (IPR): This is a measure of trade intensity calculated as
total imports as percentage of GDP. Data is founded from World Development
Indicators (WDI). Trade share (TS) % GDP:

 

This is
defined as total trade as percentage of GDP. Data is from world development indicator.
Export of goods and services/Export penetration ratio: its means total export
as percentage of GDP, Data obtained from world development indicator. For
economic growth we were used GDP annual growth as proxy. It means annual
percentage growth rate of GDP at market price on constant of local currency.

 

Keywords: Trade Openness, Economic
Growth, Penal Data, Import Penetration Ratio (IPR), Trade Share (TS), Export
Penetration Ratio (EPR), World Development Indicator (WDI)

 

 

 

INTRODUCTION

 

Researchers have employed various
econometric tools on different objective and subjective measures of trade
openness during the last few decades in order to ascertain a robust
relationship between trade openness and economic growth. The compelling message
from literature is that indeed there is positive relationship between trade
openness and economic growth(Frankel & Romer, 1999). The amazing
performances of the Asian Tigers (Singapore, Taiwan, Hong Kong, South Korea)
unrestraint the duration and the old store future of the whacking big economies
of India and Wed work significant changes in policies especially in the
developing world regarding foreign trade.

 

Lovett
(1993) argues that the last fifty years of experience provides sound support to
the case of free trade. Various issues, however, still exist in the current
literature, which need appropriate approach to handle them, in order to
establish an explicit relationship between trade openness and economic growth.
. However, the existence of such issues does not indicate that the observed
relationship between trade openness and economic growth is delicate Winters).
Winters (2004)) states in his study that despite methodological issues, there
is no evidence that trade liberalization is harmful for economic growth.

 

The
benefits associated with outward-oriented policies are visible & have been
widely accepted by both researchers & owner makers. In general, there is
optimism among most economic policy planners in favor of trade openness(Ruggie,
1982). Reviewing the existing literature on trade and growth shows that there
is not a clear definition of trade openness. For lots of author’s trade
openness implicitly refers to trade policy owner orientation and what they have
an interest in is to evaluate the impact of trade policy owner or trade
liberalization on economic growth. For other authors however, trade openness is
a more complex notion, covering not only the trade policy owner orientation of
countries but and a set of other domestic policies (such as macroeconomic
policies or institutional ones) which altogether make the country more or less
outward oriented. In such a case, what the authors have an interest in is to

 

 

 

 

 

measure the impact of global policy
owner orientation on economic growth. Finally, may adopt an even more global
view of trade openness covering not only the policy owner dimension but also
all other non-policy factors that clearly have an impact on trade and on the
outward orientation of countries. Factors such as geography and
infrastructures, for example, do affect trade and the outward orientation of
countries, whatever their policy owner orientation is. On the one hand,
endogenous growth theory has provided a framework for a positive growth effect
of trade through innovation incentives, technology diffusion and knowledge
dissemination (Grossman & Helpman, 1993).

 

However,
the theoretical considerations and the empirical evidence whether trade
openness accelerates growth is quite ambiguous(Lawrence & Weinstein, 1999).
The purpose of this paper is to examine empirically, using a time series
econometric approach, the relationship between trade openness and growth of
selected countries for the time period 1980 to 2010. The selected countries are
Argentina, Australia, Belgium, Chile, Canada, Denmark, Germany, Greece, Israel,
Hungary, France, Italy, New Zealand, Norway, Portugal, Singapore, United
Kingdom, Sweden and United States, the period before 1970 could not be included
because of data limitations for some of the openness indices. The paper uses
measures of both trade volume and trade restrictions as a proxy for trade
openness. The paper is structured as follows. The next section presents reviews
the literature trade openness and economic growth. And the theoretical
framework of the econometric model while next one reports the results and
conclusion.

 

LITERATURE REVIEW

 

Trade openness and economic growth is
a quite debated topic within the boom and progress literature. But, this
difficulty is some distance from being resolved. Theoretical growth research
recommend at quality a completely complex and ambiguous relationship between
trade restrictions and boom. The endogenous increase literature has been numerous
enough to offer a exceptional array of models in which trade restrictions can
lower or increase the worldwide rate of increase(Yanikkaya, 2003). note that if
trading companions are uneven countries within the experience that they have
got drastically one of a kind technology and endowments, even supposing
financial integration increases the global increase fee, it may adversely have
an effect on person international locations(Shamsadìni, Moghaddasi, &
Kheirandish, 2010). It’s far worthwhile to note that the theoretical growth
literature has given more attention to the relationship between alternate
regulations and boom rather than the connection among exchange volumes and
growth. Consequently, the conclusion approximately the connection between
alternate barriers and growth can’t be immediately applied to the results of
changes in

 

 

 

 

alternate volumes on increase. Even
though those standards, change volumes and exchange regulations, are very
closely related, their relationship with boom can also differ substantially.
This is due to the fact there are numerous other very crucial factors that have
an effect on a country’s outside area, together with geographical factors, use
length, and profits.

 

In other
words, one must be as clear as possible about which openness degree he makes
use of and what are the precise mechanisms thru which it impacts the increase
(Stulz & Williamson, 2003). we shall speak each openness measure used on
this look at later in the section within the theory of worldwide change, the
static profits from alternate and losses from exchange restrictions were
examined very well. Yet, exchange principle affords little guideline as to the
results of global exchange on increase and technical development. On the
contrary, the brand new exchange theory makes it cleans that the gains from
exchange can rise up from several fundamental assets: differences in
comparative advantage and economy-extensive growing returns.

 

However,
over time, the definition of openness has evolved considerably from one extreme
to another. Even today it is not unambiguous as to what describes ”openness”(Stiglitz
& Charlton, 2005). Kohlberg and Mertens (1989) narrated that how change
liberalization may be performed by using employing guidelines that decrease the
biases in opposition to the export area. it is even extra striking that
according to her definition one us of a will have an open economy with the aid
of using a positive exchange price policy in the direction of its export region
and on the identical time can use alternate obstacles to protect its uploading
sector. Edwards (1993) Stated in his study that “regime may be completely
liberalized and yet appoint particularly high price lists in order to encourage
import substitution” On the other side Edwards (1993); (Yanikkaya, 2003) stated
in his study that he concept of openness, applied to trade policy, could be
synonymous with the idea of neutrality. Neutrality means that incentives are
impartial between saving a unit of foreign exchange through import substitution
and incomes a unit of forex through exports surely, a pretty export oriented
financial system won’t be neutral on this experience, particularly if it shifts
incentives in choose of export production thru gadgets together with export
subsidies. It’s also feasible for a regime to be impartial on common, and yet
interfere in particular sectors. A very good degree of exchange coverage would
seize differences between neutral, inward oriented, and export-selling regimes.

 

These days,
the meaning of ”openness” has end up much like the belief of ”unfastened
change”, that could be a change gadget in which all trade distortions are
removed(Kiberd, 1997). Consequently, it is critical to apprehend this
definition problem because diverse openness measures have extraordinary
theoretical implications for boom and distinct linkages with increase. Wong (2005)
stated in his study that “the literature on the subject has not always

 

 

 

 

 

 

been successful in dealing with
precise definitions of trade regimes, nor has it been able to handle
successfully the difficult issue of measuring the type of trade orientation
followed by a particular country”. A huge range of empirical studies have made use
of a variety of cross-united states boom regressions to check endogenous boom
theory and the importance of change regulations (Bloom & Van Reenen, 2006).

 

A great
degree of a rustic’s openness could be an index that includes all of the
barriers that distort global exchange inclusive of common tariff rates and
indices of non-tariff limitations. Stiglitz and Charlton (2005) explained that
”trade restrictiveness index”, which in principle incorporates the effects of
both tariffs and non-tariff barriers. However, it is not available for a large
sample of countries. We divide the present openness measures into 5 classes and
overview each category one at a time in the rest of the section. First, the
most basic measure of openness is the simple trade shares, which is exports
plus imports divided by GDP. “In addition, export shares and import shares in
GDP are also used and enter positively in cross-country growth regressions. Our
results for these variables are consistent with these existing studies. Hence, we
believe that the inclusion of export and import shares in the growth
regressions has been an important step towards understanding of the
relationship between international trade and growth proposed by the new growth
and new trade theories”

 

Figure 1. Research Framework

 

TRADE OPENNESS

 

TS:
Trade share (% of GDP) IPR: import Penetration ratio  ERP:
export penetration ratio

 

 

 

 

 

 

 

ECONOMIC GROWTH

(GDP annual growth)

 

 

 

 

RESEARCH METHODOLOGY

 

The sources of the data collection for
the selected set of the major dependent and independent variables are through
official websites is world development indicators (WDI). The time period for
the study is from the year 1980 to 2010.

 

Econometric Model

 

In our Present study analysis, the
various measures of economic growth as dependent variables and trade openness
as independent variable. The easy way to understand regression equation for the
panel data sets of 20 countries over 1980 to 2010 which is quite clear and
highly flexible

 

 

 

 

 

having
distinct slope coefficients and parameters for each period of the study
observed our cross sectional units over time series period is as under:

=   0 +  
1  1 +   2  2 …
. .

 

Where,
denotes the dependent variable or respond variable of the present study which
is related with economic growth and the x is used for predictor or independent
variables and the term B stand for beta.

 

 

ANALYSIS AND DISCUSSIONS OF RESULTS

 

The
results describe the statistical analysis and discussion of our report for
which we have used descriptive statistics, regression analysis, regression
outcomes Housman test and Breusch and Pagan Langrangian multiplier test for
random effects (LM) results.

 

 

Table 1: Descriptive Statistics

 

Variable

obs

Mean

Standard deviation

min

Max

 

 

 

 

 

 

GAG

620

2.682735

3.126161

0

21.82889

 

 

 

 

 

 

TS

620

74.60603

70.56195

0

439.6567

 

 

 

 

 

 

IPR

620

37.00597

33.8166

0

209.3877

 

 

 

 

 

 

EPR

620

38.22464

36.87831

0

230.269

 

 

 

 

 

 

 

 

Table
above describe the outcomes of descriptive statistic of the study. Here we can
see that the mean value for trade share (total trade as % of GDP) is maximum
which 74.60602901 is and GDP annual growth has a minimum value of mean which is
2.682734625. The value for the standard deviation is min for GDP annual growth
which is 3.126160614. The min value for majority of the variables is zero while
the maximum value is 439.6566811.

 

Table 2: Correlation Matrix

 

 

GAG

TS

IPR

EPR

 

GAG

1

 

 

 

 

TS

0.3167

1

 

 

 

 

0.0000***

 

 

 

 

IPR

0.3225

0.9966

1

 

 

 

0.0000***

0.0000***

 

 

 

EPR

0.3051

0.9941

0.9843

1

 

 

0.0000***

0.0000***

0.0000***

 

 

 

*, **, ***
demonstrate that correlation is significant at 10, 05 and 01 % respectively

 

 

Before going for the further analysis
it is going obvious to check the level of correlation between the selected set
of variables; the problem of multicollinearity. Table above describe the

 

 

 

 

correlation
matrix between all the major variables which were selected for the present
study analysis. From the above table it can be seen that the relationship
between trade share and GDP is positive and moderate and it is highly
significant. IN the next variable the relationship of import with GDP is
moderate with trade is good and they show highly highly significant. The
relationship of export with GDP is low, trade is high, and with import is also
and they all show highly significant. After this we have selected all the
variables for the further analysis.

 

Table
3: Regression Analysis

 

 

 

 

 

SS

 

Df

MS

MS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Model

659.1519

 

3

219.7173

219.7173

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residual

5390.261

 

616

8.750424

8.750424

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

6049.413

 

619

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of obs =  
620

 

 

 

 

 

 

 

 

F (3,  616) =

25.11;  Prob >
F

= 0.0000

 

 

 

 

 

R-squared

= 0.1090

 

 

 

 

 

 

 

 

Adj R-squared = 
0.1046

 

 

 

 

 

 

 

 

Root MSE

= 2.9581

 

 

 

 

 

 

 

 

 

 

 

 

 

Table 4: Regression
Outcome

 

 

 

 

 

 

 

 

 

 

 

 

GAG

Coef.

Std. Err.

t

P>|t|

95% Conf.

interval

 

 

 

 

 

 

 

 

 

TS

0.0164

0.048181156

0.340462754

0.733624141

-0.078215

0.11102

 

 

 

 

 

 

 

 

 

IPR

0.04567

0.061771968

0.739373848

0.459961671

-0.075637

0.16698

 

 

 

 

 

 

 

 

 

EPR

-0.0466

0.042947049

-1.084067761

0.278758866

-0.130898

0.03778

 

 

 

 

 

 

 

 

 

cons.

1.54839

0.186579885

8.298812512

6.65553E-16

1.1819817

1.9148

 

 

 

 

 

 

 

 

 

 

 

 

 

 

In
the above table are the different results of panel data analysis for the
dependent variable which TS, IPR, EPR of the currently GAG in selected
countries.. The results shows that among all models, the coefficient value of
trade openness and economic growth are significant at 05%. These results are
showing that all these variables have a significant impact on trade openness
and economic growth.

 

Table 5: Fixed or Random: Housman test Results

 

 

 

Fixed

Random

difference

S.E.

 

 

 

 

 

 

 

TS

-.795442

-.0088698

-.0706744

.1937878

 

 

 

 

 

 

 

IPR

.1684274

.0877418

.0806856

.1919227

 

 

 

 

 

 

 

EPR

.0282154

-.0360172

.0642326

.1977171

 

 

 

 

 

 

 

 

 

 

 

b = consistent under Ho and Ha;
obtained from xtreg

 

B = inconsistent under Ha, efficient
under Ho; obtained from xtreg Test: Ho: difference in coefficients not
systematic

 

Chi2 (3) =
(b-B)'(V_b-V_B)^(-1)(b-B)  =   0.65

 

Prob>chi2
=

0.8849

 

Housman test Results for fixed or
random effect model shows that the value 0.8849 is not less than 0.05 which
concludes that we should use the (random effect model). Meaning in the model we
will control the effects on variables.

 

 

Table
6: Breusch and Pagan Lagrangian Multiplier Test For Random Effects (LM):

 

Var

Sd

Sqrt(var)

 

 

 

GAG

9.77288

3.126161

 

 

 

E

8.02764

2.833309

 

 

 

U

.9215856

0.9599925

 

 

 

 

 

Test: Var (u) = 0 chibar2 (01) = 59.36
Prob > chibar2 = 0.0000

 

According to result we accept
alternative hypothesis as the entities are not zero. The probability outcome is
0.000 so it means there 99% level of confidence that are dependent variables
are highly affected by independent variable.

 

 

CONCLUSION

 

From the discussion it could be
concluded that trade openness is effected by other factors and is not
independent in nature. The factors that have major contribution in trade
openness are ipr and epr, we get no confirmation that openness is straight and
vigorously linked with economic growth in the long run. We further evaluate
various individual measures of openness, namely, current openness, real
openness, the fraction.

 

It turns
out that our main finding is strong to these alternative measures of openness
and none of them is robustly correlated with long-run economic growth. The lack
of statistically robust association between trade openness and long-run growth
suggest that policymakers should not follow trade-openness-enhancing policies
based purely on growth objectives. The data evidence also indicates that
economic institutions and macroeconomic uncertainties related to inflation and
government consumption are key determinants of long-run economic growth. A
failure to go after sound and steady fiscal and monetary policies and to put up
good institutions is detrimental to long-term growth prospects.

 

 

 

Employing both
current openness and real openness as a dependent variable, we estimate this
model by OLS. The link between trade openness and economic growth has been
proven to be difficult in analyzing since they exist many studies that
contradict each other regarding the positive or negative effect of trade
openness on economic growth. However, the majority of these studies advocate
positive impact of openness in economic growth.

 

Considering
that this is the first attempt of establishing a causal linkage between trade
and GDP per capita growth for this set of countries, the findings are crucial
for the current discourse for this region as they underpin the importance of
regional and international trade related development.

 

In spite of
the limited size of the sample, the model performs well for this analysis.
However we contend that our study provide only a promising step towards developing
a more comprehensive empirical research which will capture more variables
typical for this issue and also by extending the size of the sample.