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Trade Liberalisation is Good for You if You are Rich

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  • Charles Ackah,
  • Oliver Morrissey

Abstract

This paper investigates the relationship between trade policy and growth using a dynamic panel regression model with GMM estimates for data on 44 developing countries over 1980-1999. Trade policy is captured by measures of tariffs, import and export taxes. Typically, the average effects of changes in such policy variables have been investigated. However, from a policy perspective, the differential effects on high-or low-income countries may be of more interest. Our preferred specification for growth thus includes as an explanatory variable an interaction term between trade barriers and initial income levels to capture the non-linearity in the relationship. This specification reveals a significant interaction effect under which the marginal impactof tariffs on growth is declining in initial income. In particular, for low-income countries tariffs appear to be associated with higher growth, whereas only for middle-income and richer countries is there a negative impact of tariffs on growth. The impact of a marginal change in protection on growth changes from positive to negative as income increases beyond a threshold level of GDP per capita (below which, in rough terms, a country would be classed as low-income). Put differently, trade liberalisation seems to offer the possibility of achieving faster growth only in relatively richer countries.

Suggested Citation

  • Charles Ackah, & Oliver Morrissey, 2007. "Trade Liberalisation is Good for You if You are Rich," Discussion Papers 07/01, University of Nottingham, CREDIT.
  • Handle: RePEc:not:notcre:07/01
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    Cited by:

    1. Vincent Leyaro, 2015. "Threshold and interaction effects in the trade, growth, and inequality relationship," WIDER Working Paper Series wp-2015-009, World Institute for Development Economic Research (UNU-WIDER).

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