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How does trade openness influence budget deficits in developing countries?

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Author Info
Jean-Louis Combes
Tahsin Saadi-Sedik

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Abstract

This paper analyses the effects of trade openness on budget balances by distinguishing the effects of natural openness from those of trade policy. Revealed indicators of natural openness and trade policy are computed. Using GMM-system estimator, the econometric analysis focuses on 66 developing countries over 1974--98. The results show that trade openness increases a country's exposure to external shocks. This enforces the negative impact on budget balances of terms of trade instability. Additionally, trade openness influences budget balances through several other channels: corruption, income inequalities, etc. Then natural openness and trade policy have opposite effects: the former deteriorates budget balances whereas the latter enhances them.

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Publisher Info
Article provided by Taylor and Francis Journals in its journal The Journal of Development Studies.

Volume (Year): 42 (2006)
Issue (Month): 8 (November)
Pages: 1401-1416
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Handle: RePEc:taf:jdevst:v:42:y:2006:i:8:p:1401-1416

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Keywords: H62 F02 F13

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References listed on IDEAS
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Hans P. Lankes & Azim M. Sadikov & Jean-Jacques Hallaert & Dustin Smith & Katrin Elborgh-Woytek, 2006. "Fiscal Implications of Multilateral Tariff Cuts," IMF Working Papers 06/203, International Monetary Fund. [Downloadable!]
  2. David A. Grigorian & Hamid Reza Davoodi, 2007. "Tax Potential vs. Tax Effort: A Cross-Country Analysis of Armenia's Stubbornly Low Tax Collection," IMF Working Papers 07/106, International Monetary Fund. [Downloadable!]
  3. David Cowen & Hemant Shah & Ranil Salgado & Leslie Teo & Alessandro Zanello, 2006. "Financial Integration in Asia: Recent Developments and Next Steps," IMF Working Papers 06/196, International Monetary Fund. [Downloadable!]
  4. Martin Petri & Tahsin Saadi-Sedik, 2006. "To Smooth or Not to Smooth - The Impact of Grants and Remittances on the Equilibrium Real Exchange Rate in Jordan," IMF Working Papers 06/257, International Monetary Fund. [Downloadable!]
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