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The Impact of Trade Liberalization on the Trade Balance in Developing Countries

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  • Yi Wu
  • Li Zeng
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    Abstract

    Using two recently constructed measures of trade liberalization dates, this research studies the impact of trade liberalization on imports, exports, and overall trade balance for a large sample of developing countries. We find strong and consistent evidence that trade liberalization leads to higher imports and exports. However, in contrast Santos-Paulino and Thirwall (2004) who find a robustly negative impact of trade liberalization on the overall trade balance, we only find mixed evidence of such a negative impact. In particular, we find little evidence of a statistically significant negative impact using our first measure of liberalization dates which extends Li (2004). Using a second measure of liberalization dates compiled by Wacziarg and Welch (2003), we find some evidence that liberalization worsens the trade balance, but the evidence is not robust across different estimation specifications, and the estimated impact is smaller than that reported by Santos-Paulino and Thirwall (2004).

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 08/14.

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    Length: 19
    Date of creation: 01 Jan 2008
    Date of revision:
    Handle: RePEc:imf:imfwpa:08/14

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    Keywords: Developing countries;

    This paper has been announced in the following NEP Reports:

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    1. Michael Keen & Thomas Baunsgaard, 2005. "Tax Revenue and (or?) Trade Liberalization," IMF Working Papers 05/112, International Monetary Fund.
    2. Blundell, Richard & Bond, Stephen, 1998. "Initial conditions and moment restrictions in dynamic panel data models," Journal of Econometrics, Elsevier, vol. 87(1), pages 115-143, August.
    3. Xiangming Li, 2004. "Trade Liberalization and Real Exchange Rate Movement," IMF Staff Papers, Palgrave Macmillan, vol. 51(3), pages 553-584, November.
    4. Jeffrey Sachs & Andrew Warner, 1995. "Economic Reform and the Progress of Global Integration," Harvard Institute of Economic Research Working Papers 1733, Harvard - Institute of Economic Research.
    5. Bertola, Giuseppe & Faini, Riccardo, 1990. "Import demand and non-tariff barriers: The impact of trade liberalization : An application to Morocco," Journal of Development Economics, Elsevier, vol. 34(1-2), pages 269-286, November.
    6. David Roodman, 2006. "How to Do xtabond2: An Introduction to "Difference" and "System" GMM in Stata," Working Papers 103, Center for Global Development.
    7. Bowsher, Clive G., 2002. "On testing overidentifying restrictions in dynamic panel data models," Economics Letters, Elsevier, vol. 77(2), pages 211-220, October.
    8. Amelia U. Santos-Paulino, 2001. "The Effects of Trade Liberalisation on Imports in Selected Developing Countries," Studies in Economics 0110, Department of Economics, University of Kent.
    9. Amelia Santos-Paulino & A. P. Thirlwall, 2004. "The impact of trade liberalisation on exports, imports and the balance of payments of developing countries," Economic Journal, Royal Economic Society, vol. 114(493), pages F50-F72, 02.
    10. Ostry, Jonathan D. & Rose, Andrew K., 1992. "An empirical evaluation of the macroeconomic effects of tarrifs," Journal of International Money and Finance, Elsevier, vol. 11(1), pages 63-79, February.
    11. Melo, Oscar & Vogt, Michael G., 1984. "Determinants of the demand for imports of Venezuela," Journal of Development Economics, Elsevier, vol. 14(3), pages 351-358, April.
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