Globalisation and Aggregate Productivity Growth

The relationship between trade openness and growth is a contentious issue. Advocates of free trade and outward oriented trade policies have advanced both theoretical and empirical evidence demonstrating that greater openness results in better long-run economic performance, measured either in terms of higher per capita gross domestic product (GDP) or total factor productivity (TFP) growth. However, there are some researchers who remain sceptical in the face of this evidence. There are a number of issues which lie at the heart of the controversy. The first relates to the suitability of the indices commonly used in empirical trade and growth studies to proxy a country’s trade regime (Edwards, 1993; Rodrik, 1995; Rodriguez and Rodrik, 2000). For example, Rodrik (1995) argues that in most studies of openness and growth, ‘the trade regime indicator is typically measured very badly’ and ‘openness in the sense of lack of trade restrictions is often confused with macroeconomic aspects of the policy regime’ (p. 2941). Additionally, Pritchett (1996) finds that the commonly used trade policy measures are uncorrelated among themselves. The second, is the lack of good quality trade policy information with broad country and time coverage, particularly for developing countries, to construct satisfactory measures of trade policy (Edwards, 1998; Harrison and Hanson, 1999; Baldwin, 2003).