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Relationship between Trade Liberalisation, Economic Growth and Trade Balance : An Econometric Investigation

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  • Parikh, Ashok
  • Stirbu, Corneliu

Abstract

This is a study of 42 developing countries of Asia, Africa and Latin America in which we first examine the impact of trade liberalisation on economic growth, investment share of GDP, openness, trade balance and current accounts (as percentages of GDP). Both panel data and country by country data are used to measure the impact of liberalisation on domestic economic growth measured in PPP terms from the data available in Heston, Summers and Aten (2001) study. Domestic economic growth is often positively related to liberalisation for many countries of our sample. Next we analyse the impact of growth on trade balance and current account to examine whether higher economic growth due to liberalisation leads to adverse effect on balance of trade. Trade balance is normalised by GDP to take into consideration different sizes of countries. We also allow control variables in both sets of regressions such as terms of trade, advanced countries? growth rates, liberalisation and debt related variables. The balance of payments constrained growth model uses foreign exchange constraint that limits growth and using the Harrod multiplier, Thirlwall and Hussain derived a growth equation which is apparently constrained by balance of payments. We use this model in the first part as a behavioural equation and establish that liberalisation promotes growth and such output growth in pre-liberalisation period is lower than that in post- liberalisation period. Panel data of 42 countries, regional panel for three regions (fixed effect and random effect models) and country by country analysis (OLS regression) is conducted. These relationships suggest that liberalisation promotes growth but growth itself has negative effect on trade balance for a large majority of countries. This study uses the latest available data on real GDP, growth rates of individual and advanced countries and examines the relationship between liberalisation and growth, liberalisation and trade balance and also the impact of exchange rate or terms of trade policies on trade balance. One of the models in a cross-section regression study makes use of political and security variables and concludes that the convergence or ?catchingup? hypothesis is supported and extreme political repression tends to constrain growth. One unit change in liberalisation index leads on average to1.62 percentage point change in growth rates on average, ceteris paribus. --

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Bibliographic Info

Paper provided by Hamburg Institute of International Economics (HWWA) in its series HWWA Discussion Papers with number 282.

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Date of creation: 2004
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Handle: RePEc:zbw:hwwadp:26267

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Keywords: liberalisation; trade balance; developing countries; panel data estimation;

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References

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  1. Paul Krugman, 1988. "Differences In Income Elasticities and Trends in Real Exchange Rates," NBER Working Papers 2761, National Bureau of Economic Research, Inc.
  2. Douglas A. Irwin & Marko Tervio, 2000. "Does Trade Raise Income? Evidence from the Twentieth Century," NBER Working Papers 7745, National Bureau of Economic Research, Inc.
  3. Anthony Philip Thirlwall, 1979. "The Balance of Payments Constraint as an Explanation of International Growth Rate Differences," Banca Nazionale del Lavoro Quarterly Review, Banca Nazionale del Lavoro, vol. 32(128), pages 45-53.
  4. 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.
  5. Wood, Adrian, 1997. "Openness and Wage Inequality in Developing Countries: The Latin American Challenge to East Asian Conventional Wisdom," World Bank Economic Review, World Bank Group, vol. 11(1), pages 33-57, January.
  6. Edmar Bacha, 1982. "Growth with limited supplies of foreign exchanges: a reappraisal of the two-gap model," Textos para discussão 26, Department of Economics PUC-Rio (Brazil).
  7. Nasiruddin Ahmed, 2000. "Export response to trade liberalization in Bangladesh: a cointegration analysis," Applied Economics, Taylor & Francis Journals, vol. 32(8), pages 1077-1084.
  8. Michael Bleaney, 1999. "Trade reform, macroeconomic performance and export growth in ten Latin American countries, 1979-95," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 8(1), pages 89-105.
  9. 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.
  10. Bacha, Edmar L., 1990. "A three-gap model of foreign transfers and the GDP growth rate in developing countries," Journal of Development Economics, Elsevier, vol. 32(2), pages 279-296, April.
  11. Thirlwall, Anthony P & Hussain, Mohammed Nureldin, 1982. "The Balance of Payments Constraint, Capital Flows and Growth Rate Differences between Developing Countries," Oxford Economic Papers, Oxford University Press, vol. 34(3), pages 498-510, November.
  12. Dawn Richards Elliott & Rupert Rhodd, 1999. "Explaining growth rate differences in highly indebted countries: an extension to Thirlwall and Hussain," Applied Economics, Taylor & Francis Journals, vol. 31(9), pages 1145-1148.
  13. Edwards, Sebastian, 1993. "Openness, Trade Liberalization, and Growth in Developing Countries," Journal of Economic Literature, American Economic Association, vol. 31(3), pages 1358-93, September.
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Cited by:
  1. Vatcharin Sirimaneetham, 2006. "What drives liberal policies in developing countries?," Bristol Economics Discussion Papers 06/587, Department of Economics, University of Bristol, UK.
  2. Parikh, Ashok, 2004. "Relationship between Trade Liberalisation, Growth and Balance of Payments in Developing Countries : An Econometric Study," HWWA Discussion Papers 286, Hamburg Institute of International Economics (HWWA).

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