OPENNESS AND GROWTH

DOES INTERNATIONAL TRADE CAUSE ECONOMIC GROWTH AND PROSPERITY?

This book analyzes the relationship between openness and economic growth. The study is done despite the vast existing literature on the subject. The theoretical literature does not provide a clear answer to the relation between openness and economic growth and therefore creates the demand for additional empirical work.

The central aim of this book is to figure out whether openness generates economic growth or not. There are two major steps. First, an index for measuring openness will be introduced. This task, as easy as it may sound, is not a straightforward procedure. Different economists have used various indexes to categorize countries according to the degree of their openness among which Sachs and Warner (1995), and Edwards (1997) are to name a couple. These indexes all generally have the disadvantage of not being able to represent a real measurement of openness. By not real we mean that they do not take all determinants of openness into account. The reason is in part related to the fact that it’s an impossible task to define and measure all these determinants. Sachs and Warner, for example, use a binary method to classify countries into two categories. According to their index a country is either open or closed and one cannot conduct an inter-country openness comparison. Other measurements include measurement of the black market premium, average tariff rates, or average non-tariff barriers all of which only look at one aspect of being open and define openness accordingly as opposed to assessing the general bias of countries towards trade and trade policy. This book attempts to construct an index for trade intensity that can rank countries according to the degree of their openness measured in terms of government interventions with trade and policy effects. To do so, openness will be measured with respect to the bilateral trade volumes between a given country and all its trading partners using an index first introduced by William A. Stewart (1999).

It is very difficult to take all trade and trade policy determinants into consideration. This problem is, to some extent, overcome in Stewart’s index by measuring all bilateral trade flows. This is, in fact, a whole new approach to the problem. Instead of identifying and measuring all trade determinants and policy indicators, such as tariffs and quotas, we will measure their effects on trade volumes by including every single bilateral trade flow between all countries in the sample. This index will be explained in detail in chapter 3, Theoretical Essentials.

The second step in this book is to measure economic growth. There are two common ways of accomplishing this task. One way is to measure growth in terms of growth in real per capita GDP and the other is to consider it as the growth in Total Factor Productivity (TFP). TFP or Solow Residual is the growth generated by all factors of production other than Labor and Capital. More information will be provided on growth measurement in chapter 3 but for now it suffices to mention that for an international study like this one, that involves measurement of growth for 53 countries, GDP per capita growth is the best method to choose. The reason is the lack of data on Capital Labor ratios for most developing countries.

Once openness and growth indexes for all sample countries have been measured the book moves on to examining how much of the measured growth can be explained by relevant openness coefficients. This involves a series of cross-sectional statistical analyses and tests. Chapter 4 will shed more lights on these topics. The data is gathered for a sample of 53 countries. The panel data, which includes a time-series and cross-sectional data set, spans over the period of 1970 to 1992. For reasons mentioned in chapter 4, the trade intensities of all countries will be measured relative to the intensity of trade of the United States.

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