Does Trade Openness Matter for Economic Growth in the CEE Countries?

Open access

Abstract

This paper sets out to answer the question: Is trade openness important for economic growth in the Central and Eastern European (CEE) countries? The policyoriented measures of trade openness used in earlier studies have been argued to be subjective, while the simple outcome-oriented measures only capture one aspect of trade openness, namely: countries’ share of trade. Hence, following Squalli and Wilson (2011), the paper constructs a new outcome-oriented measure of trade openness which captures a country’s share of trade, and its interaction and interconnectedness with the rest of the world. Using fixed-effects regressions for 17 CEE countries over the period 1994 - 2014, the paper finds trade openness to be important for growth within the CEE countries. In particular, the results show that increases in trade openness is associated with increases in real GDP per capita growth within these countries. The results appear significantly the same after we dropped Croatia and Estonia - two historically closed economies.

Acemoglu, D., Johnson, S., Robinson, J. and Thaicharoen, Y. (2003). Institutional causes, macroeconomic symptoms: Volatility, crises and growth. Journal of Monetary Economics, 5 (1), 49-123. DOI: 10.1016/S0304-3932(02)00208-8

Aizenman, J. and Noy, I. (2006). FDI and Trade-Two-Way Linkages? The Quarterly Review of Economics and Finance, 46(4), 317-37. DOI: 10.1016/j.qref.2006.02.004

Alcalá, F. and Ciccone, A. (2004). Trade and Productivity. Quarterly Journal of Economics, 119(2), 613-46. DOI: 10.1162/0033553041382139

Anderson, J. E. and Neary, J. P. (1992). Trade reform with quotas, partial rent retention, and tariffs. Econometrica, 60(1), 57-76. DOI: 10.2307/2951676

Arellano, M. and Bond, S. (1991). Some tests of specification for panel data: Monte Carlo evidence and an application to employment equations. Review of Economic Studies, 58(2), 277-297. DOI: 10.2307/2297968

Arellano, M. and Bover, O. (1995). Another look at the instrumental variable estimation of error-components models. Journal of Econometrics, 68(1), 29-51. DOI: 10.1016/0304-4076(94)01642-D

Awokuse, T. O. (2007). Causality between exports, imports, and economic growth: Evidence from transition economies. Economics Letters, 94(3), 389-395. DOI: 10.1016/j.econlet.2006.08.025

Bai, J. and S. Ng. (2010). Instrumental variables estimation in a data rich environment. Econometric Theory. 26(6), 1577-1606. DOI: 10.1017/S0266466609990727

Bhagwati, J. and Srinivasan, T. N. (2002). Trade and poverty in the poor countries. American Economic Review Papers and Proceedings, 92(2), 180-193.

Billmeier, A. and Nannicini, T. (2009). Trade openness and growth: pursuing empirical glasnost. IMF Economic Review, 56(3), 447-475.

Blundell, R. and Bond, S. (1998). Initial conditions and moment restrictions in dynamic panel data models. Journal of Econometrics, 87(1), 115-143. DOI: 10.1016/S0304-4076(98)00009-8

Cavallo, E.A. and Frankel, J.A. (2008). Does openness to trade make countries more vulnerable to sudden stops, or less? Using gravity to establish causality. Journal of International Money and Finance, 27(8), 1430-1452. DOI: 10.1016/j.jimonfin.2007.10.004

Chang, R., Kaltani, L. and Loayza, N. V. (2009). Openness can be good for growth: The role of policy complementarities. Journal of Development Economics, 90(1), 33-49. DOI: 10.1016/j.jdeveco.2008.06.011

Chintrakarn, P. and Millimet, D. L. (2006). The Environmental Consequences of Trade: Evidence from Subnational Trade Flows. Journal of Environmental Economics and Management, 52(3), 430-53. DOI: 10.1016/j.jeem.2006.03.001

Combes, J.-L., and Saadi-Sedik, T. (2006). How does trade openness influence budget deficits in developing countries? The Journal of Development Studies, 42(8), 1401-1416. DOI: 10.1080/00220380600930762

Dollar, D. (1992). Outward-Oriented Developing Economies Really Do Grow More Rapidly: Evidence from 95 LDCs 1976-1985. Economic Development and Cultural Change, 40(3), 523-44.

Dollar, D. and Kraay, A. (2003). Institutions, trade, and growth. Journal of Monetary Economics, 50(1), 133-162. DOI: 10.1016/S0304-3932(02)00206-4

Dollar, D. and Kraay, A. (2004). Trade, Growth, and Poverty. Economic Journal, 114(493), F22-F49. DOI: 10.1111/j.0013-0133.2004.00186.x

Edwards, S. (1992). Trade Orientation, Distortions and Growth in Developing Countries. Journal of Development Economics, 39(1), 31-57. DOI: 10.1016/0304-3878(92)90056- F

Edwards, S. (1993). Openness, Trade Liberalization, and Growth in Developing Countries. Journal of Economic Literature, 31(3), 1358-93.

Edwards, S. (1998). Openness, Productivity and Growth: What Do We Really Know? Economic Journal, 108(447), 383-98. DOI: 10.1111/1468-0297.00293

Estevadeordal, A. and Taylor, A. M. (2008). Is the Washington Consensus Dead? Growth, Openness, and the Great Liberalization, 1970s-2000s, NBER Working Paper No. 14264, National Bureau of Economic Research, Cambridge, MA.

Falvey, R., Foster, N. and Greenaway D. (2004). Imports, Exports, Knowledge Spillovers and Growth. Economics Letters, 85(2), 209-13. DOI: 10.1016/j.econlet.2004.04.007

Fatás, A., and Mihov, I. (2003). The case for restricting fiscal policy discretion. Quarterly Journal of Economics, 118(4), 1419-1447. DOI: 10.1162/003355303322552838

Frankel, J. A. (2009). Environmental Effects of International Trade. Faculty Research Working Paper Series No. RWP09-006 (Cambridge, MA: Harvard University).

Frankel, J. A. and D. Romer (1999). Does Trade Cause Growth? American Economic Review, 89(2), 379-99. DOI: 10.1257/aer.89.3.379

Frankel, J. A. and Rose, A. (2005). Is Trade Good or Bad for the Environment? Sorting out the Causality. The Review of Economics and Statistics, 87(1), 85-91.

Gavin, M. and Hausmann, R. (1996). Sources of macroeconomic volatility in developing economies. Mimeo, Inter-American Development Bank, Washington (DC) (1996).

Giavazzi, F. and Tabellini, G. (2005). Economic and political liberalizations. Journal of Monetary Economics, 52(7), 1297-1330. DOI: 10.1016/j.jmoneco.2005.05.002

Greenaway, D., Morgan, W., and Wright, P. (2002). Trade liberalisation and growth in developing countries. Journal of Development Economics, 67(1), 229-244. DOI: 10.1016/S0304-3878(01)00185-7

Harrison, A. (1996). Openness and growth: A time-series, cross-country analysis for developing countries. Journal of Development Economics, 48(2), 419-447. DOI: 10.1016/0304-3878(95)00042-9

Helpman, E. and P. Krugman (1985). Market Structure and Foreign Trade (Cambridge, MA: MIT Press).

Kapetanios, G., M. Marcellino. (2010). Factor-GMM estimation with large sets of possibly weak instruments. Computational Statistics and Data Analysis, 54(11), 2655-2675. DOI: 10.1016/j.csda.2010.04.008

Koren, M. and Tenreyro, S. (2007). Volatility and development. Quarterly Journal of Economics, 122 (1), 243-287. DOI: 10.1162/qjec.122.1.243

Krueger, A. O. (1978), Liberalization Attempts and Consequences (Cambridge: Ballinger).

Leamer, E. E. (1988). Measures of Openness," NBER Chapters, in: Trade Policy Issues and Empirical Analysis, 145-204. National Bureau of Economic Research.

Lee, H. Y., Ricci, L. A. and Rigobon, R. (2004). Once Again, Is Openness Good for Growth? Journal of Development Economics, 75(2), 451-472. DOI: 10.1016/j.jdeveco.2004.06.006

León-González, R., and Montolio, D. (2015). Endogeneity and panel data in growth regressions: A Bayesian model averaging approach. Journal of Macroeconomics, 46(C), 23-39. DOI: 10.1016/j.jmacro.2015.07.003

León-González, R. and Vinayagathasan, T. (2015). Robust determinants of growth in Asian developing economies: A Bayesian panel data model averaging approach. Journal of Asian Economics, 36(C), 34-46. DOI: 10.1016/j.asieco.2014.12.001

Levine, R., and Renelt, D. (1992). A Sensitivity Analysis of Cross-Country Growth Regressions. American Economic Review, 82(4), 942-963.

Li, K., Morck, R., Yang, F., and Yeung, B. (2004). Firm-Specific Variation and Openness in Emerging Markets. The Review of Economics and Statistics, 86(3), 658-69. DOI: 10.1162/0034653041811789

Malik, A., and Temple, J.R.W. (2009). The geography of output volatility. Journal of Development Economics, 90 (2), 163-178. DOI: 10.1016/j.jdeveco.2008.10.003

Markusen, J. R., T. F. Rutherford and L. Hunter (1995). Trade Liberalisation in a Multinational dominated Industry. Journal of International Economics, 38(1), 95-117. DOI: 10.1016/0022-1996(94)01339-T

Mehrhoff, J. (2009). A solution to the problem of too many instruments in dynamic panel data GMM. Discussion Paper Series 1. No 31/2009.

Miller, S. M. and Upadhyay, M. P. (2000). The effects of openness, trade orientation, and human capital on total factor productivity. Journal of Development Economics, 63(2), 399-423. DOI: 10.1016/S0304-3878(00)00112-7

Montalbano, P. (2011). Trade Openness and Developing Countries’ Vulnerability: Concepts, Misconceptions, and Directions for Research. World Development, 39(9), 1489-1502. DOI: 10.1016/j.worlddev.2011.02.009

Nannicini, T. and Billmeier, A. (2011). Economies in transition: How important is trade openness for growth? Oxford Bulletin of Economics and Statistics, 73(3), 287-314. DOI: 10.1111/j.1468-0084.2010.00626.x

Neumayer, E. and Soysa, I. (2005). Trade Openness, Foreign Direct Investment and Child Labor. World Development, 33(1), 43-63. DOI: 10.1016/j.worlddev.2004.06.014

Pearson, K. (1896). Mathematical contributions to the theory of evolution-III. Regression, heredity, and panmixia. Philosophical Transactions of the Royal Society of London, Series A, 187, 253-318.

Pernia, E. M. and Quising, P. F. (2003). Trade Openness and Regional Development in a Developing Country. The Annals of Regional Science, 37(3), 391-406. DOI: 10.1007/s00168-003-0160-y

Pritchett, L. (1996). Measuring Outward Orientation in the LDCs: Can It Be Done? Journal of Development Economics, 49(2), 309-55. DOI: 10.1016/0304-3878(95)00064-X

Pritchett, L. (2000). Understanding patterns of economic growth: searching for hills among plateaus, mountains, and plains. World Bank Economic Review, 14(2), 221-250. DOI: 10.1093/wber/14.2.221

Razin, A., Sadka, E., and Coury, T. (2003). Trade openness, investment instability and terms-of-trade volatility. Journal of International Economics, 61(2), 285-306. DOI: 10.1016/S0022-1996(03)00014-X

Rodriguez, F., and Rodrik, D. (2001). Trade policy and economic growth: a skeptic's guide to the cross-national evidence. In NBER Macroeconomics Annual 2000, 15, (pp. 261-338). MIT Press.

Rodrik, D. (1999). Where did all the growth go? External shocks, social conflict, and growth collapses. Journal of Economic Growth, 4(4), 385-412. DOI: 10.1023/A:1009863208706

Romer, D. H. and Frankel, J. A. (1999). Does Trade Cause Growth? American Economic Review, 89(3), 379-399. DOI: 10.1257/aer.89.3.379

Roodman, D. (2009a). A Note on the Theme of Too Many Instruments. Oxford Bulletin of Economics and Statistics, 71(1), 135-158. DOI: 10.1111/j.1468-0084.2008.00542.x

Roodman, D. (2009b). How to do xtabond2: An introduction to difference and system GMM in Stata. Stata Journal, 9(1), 86-136.

Sachs, J. D., and Warner, A. (1995). Economic Reform and the Process of Global Integration. Brookings Papers on Economic Activity, 1995(1), 1-118. DOI: 10.2307/2534573

Schneider, P. H. (2005). International trade, economic growth and intellectual property rights: A panel data study of developed and developing countries. Journal of Development Economics, 78(2), 529-547. DOI: 10.1016/j.jdeveco.2004.09.001

Slaughter, M. J. (2001). Trade liberalization and per capita income convergence: a difference- in-differences analysis. Journal of International Economics, 55(1), 203-228. DOI: 10.1016/S0022-1996(00)00087-8

Squalli, J. and Wilson, K. (2011). A New Measure of Trade Openness. The World Economy, 34(10), 1745-1770. DOI: 10.1111/j.1467-9701.2011.01404.x

Staiger, D. and Stock, J. H. (1997). Instrumental variables regressions with weak instruments. Econometrica, 65(3), 557-586. DOI: 10.2307/2171753

Treisman, D. (2000). The Causes of Corruption: A Cross-National Study. Journal of Public Economics, 76(3), 399-457. DOI: 10.1016/S0047-2727(99)00092-4

Vamvakidis, A. (2002). How robust is the growth openness connection? Historical evidence. Journal of Economic Growth, 7(1), 177-194. DOI: 10.1023/A:1013418610712

Wacziarg, R. and Welch, K. H. (2003). Trade Liberalization and Growth: New Evidence, NBER Working Paper 10152, National Bureau of Economic Research, Cambridge, MA.

Wacziarg, R. and Welch, K. H. (2008). Trade liberalization and growth: new evidence. World Bank Economic Review, 22(2), 187-231. DOI: 10.1093/wber/lhn007

Windmeijer, F. (2005). A finite sample correction for the variance of linear efficient two-step GMM estimator. Journal of Econometrics, 126(1), 25-51. DOI: 10.1016/j.jeconom.2004.02.005

World Bank (2008). Unleashing Prosperity: Productivity Growth in Eastern Europe and the Former Soviet Union. World Bank Documents, Washington (2008), p. 42 available at: http://siteresources.worldbank.org/ECAEXT/Resources/publications/UnleashingProsperity.pdf

Yanikkaya, H. (2003). Trade openness and economic growth: a cross-country empirical investigation. Journal of Development Economics, 72(1), 57-89. DOI: 10.1016/S0304-3878(03)00068-3

Review of Economic Perspectives

Národohospodárský obzor; The Journal of Masaryk University

Journal Information


CiteScore 2017: 0.42

SCImago Journal Rank (SJR) 2017: 0.153
Source Normalized Impact per Paper (SNIP) 2017: 0.351

Metrics

All Time Past Year Past 30 Days
Abstract Views 0 0 0
Full Text Views 198 198 21
PDF Downloads 87 87 22