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Openness and Growth: The Long Shadow of the Berlin Wall

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  • Claudia M. Buch
  • Farid Toubal

Abstract

The question whether international openness causes higher domestic growth has been subject to intense discussions in the empirical growth literature. This paper addresses this issue using the fall of the Berlin wall in 1990 as a natural experiment. We analyze whether the slow-down in convergence in per capita income between East and West Germany since the mid-1990s and the lower international openness of East Germany are linked. We address the endogeneity of openness by adapting the methodology proposed by Frankel and Romer (1999) in a panel framework. We instrument openness with time-invariant exogenous geographic variables and time-varying exogenous policy variables. We also distinguish different channels of integration. Our paper has three main findings. First, geographic variables have a significant impact on regional openness. Second, controlling for geography, East German states are less integrated into international markets along all dimensions of integration considered. Third, the degree of openness for trade has a positive impact on regional income per capita.

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File URL: http://www.iaw.edu/RePEc/iaw/pdf/iaw_dp_31.pdf
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Bibliographic Info

Paper provided by Institut für Angewandte Wirtschaftsforschung (IAW) in its series IAW Discussion Papers with number 31.

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Length: 38 pages
Date of creation: May 2007
Date of revision:
Handle: RePEc:iaw:iawdip:31

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Keywords: openness; growth; German re-unification;

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References

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  1. Douglas Staiger & James H. Stock, 1997. "Instrumental Variables Regression with Weak Instruments," Econometrica, Econometric Society, vol. 65(3), pages 557-586, May.
  2. Stephen Redding & Daniel M. Sturm, 2005. "The Costs of Remoteness: Evidence from German Division and Reunification," CEP Discussion Papers dp0688, Centre for Economic Performance, LSE.
  3. Harald Uhlig, 2007. "Regional Labor Markets, Network Externalities and Migration: The Case of German Reunification," Kiel Working Papers 1311, Kiel Institute for the World Economy.
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  8. Dollar, David & Kraay, Aart, 2003. "Institutions, trade, and growth : revisiting the evidence," Policy Research Working Paper Series 3004, The World Bank.
  9. Baldwin, Richard & Taglioni, Daria, 2006. "Gravity for Dummies and Dummies for Gravity Equations," CEPR Discussion Papers 5850, C.E.P.R. Discussion Papers.
  10. Subramanian, Arvind & Wei, Shang-Jin, 2007. "The WTO promotes trade, strongly but unevenly," Journal of International Economics, Elsevier, vol. 72(1), pages 151-175, May.
  11. Yeaple, Stephen & Helpman, Elhanan & Melitz, Marc, 2004. "Export versus FDI with Heterogeneous Firms," Scholarly Articles 3229098, Harvard University Department of Economics.
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  13. Francisco Rodríguez, 2006. "Openness and Growth: What Have We Learned?," Wesleyan Economics Working Papers 2006-011, Wesleyan University, Department of Economics.
  14. Ha Yan Lee & Luca Antonio Ricci & Roberto Rigobon, 2004. "Once Again, is Openness Good for Growth?," NBER Working Papers 10749, National Bureau of Economic Research, Inc.
  15. Lutz Schneider, 2005. "Ost-West-Binnenwanderung: Gravierender Verlust an Humankapital," Wirtschaft im Wandel, Halle Institute for Economic Research, vol. 11(10), pages 308-314.
  16. Holger Görg & David Greenaway, 2004. "Much Ado about Nothing? Do Domestic Firms Really Benefit from Foreign Direct Investment?," World Bank Research Observer, World Bank Group, vol. 19(2), pages 171-197.
  17. Burda, Michael C. & Fuchs-Schündeln, Nikola & Buch, Claudia M. & Sinn, Hans-Werner, 2006. "Factor reallocation in eastern Germany after reunification," Munich Reprints in Economics 19974, University of Munich, Department of Economics.
  18. Robert E. Baldwin, 2004. "Openness and Growth: What’s the Empirical Relationship?," NBER Chapters, in: Challenges to Globalization: Analyzing the Economics, pages 499-526 National Bureau of Economic Research, Inc.
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Citations

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Cited by:
  1. Felbermayr, Gabriel & Hiller, Sanne & Sala, Davide, 2010. "Does immigration boost per capita income?," Munich Reprints in Economics 20582, University of Munich, Department of Economics.
  2. Julia Spies, 2009. "Network and Border Effects: Where Do Foreign Multinationals Locate in Germany?," IAW Discussion Papers 47, Institut für Angewandte Wirtschaftsforschung (IAW).
  3. Stanislav Cernosa, 2011. "Openness to Trade, Migration and Foreign Direct Investments of the EU," WIFO Working Papers 401, WIFO.
  4. Wolf, Nikolaus, 2009. "Was Germany Ever United? Evidence from Intra- and International Trade, 1885–1933," The Journal of Economic History, Cambridge University Press, vol. 69(03), pages 846-881, September.
  5. Felbermayr, Gabriel & Gröschl, Jasmin, 2013. "Natural disasters and the effect of trade on income: A new panel IV approach," European Economic Review, Elsevier, vol. 58(C), pages 18-30.
  6. Werner Smolny, 2012. "Cyclical Adjustment, Capital-labor Substitution and Total Factor Productivity Convergence – East Germany After Unification," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), Justus-Liebig University Giessen, Department of Statistics and Economics, vol. 232(4), pages 445-459, July.
  7. Heineck, Guido & Süssmuth, Bernd, 2012. "A different look at Lenin's legacy: Social capital and risk taking in the two Germanies," Working Papers 118, University of Leipzig, Faculty of Economics and Management Science.
  8. Gabriel Felbermayr & Jasmin Gröschl, 2011. "Within US Trade and the Long Shadow of the American Secession," Ifo Working Paper Series Ifo Working Paper No. 117, Ifo Institute for Economic Research at the University of Munich.
  9. Simplice A, Asongu, 2010. "Financial development, trade openness and financial openness: do income levels matter for developing countries?," MPRA Paper 27441, University Library of Munich, Germany.
  10. Marta Gotz, 2010. "Problems of Economic Development in Reunified Germany. Retrospective Approach," Contemporary Economics, University of Finance and Management in Warsaw, vol. 4(2), June.
  11. Wendy Carlin, 2011. "Good Institutions are not Enough: Ongoing Challenges of Eastern German Development," CESifo DICE Report, Ifo Institute for Economic Research at the University of Munich, vol. 9(1), pages 28-34, 05.

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