Trade liberalisation and growth: a threshold exploration

Openness and trade liberalisation variables are consistently estimated to have significant positive coefficients in panel growth regressions. Many arguments have been advanced as to why and how more open or liberalised economies might grow faster, but the specific channels this process uses have begun to be investigated only recently. We continue these efforts by including a variable identifying the date of trade liberalisation in a system of equations that captures the determinants of growth in per capita income. Four ‘channels’ are considered: capital formation, the share of government, the economy's openness to trade and its price distortions. We include the liberalisation variable in the equation explaining each channel, and allow for thresholds on its coefficient depending on the ‘years since liberalisation’. These estimated coefficients can also differ by region. In this way, we can identify the channels through which trade liberalisation affects growth and uncover the timing of the adjustments involved.