The Openness and Its Impact to Indonesian Economy: A Structural VAR Approach

There have been long running disputes on the relationship between the degree of openness and economic performance. Based on cross-country analyses, a number of studies found that the relationship between openness and economic performance is quite mixed. Some studies discovered a positive relationship, while others found a negative or simply neutral relationship. Unlike previous studies using cross-sectional data, this study uses structural vector auto-regression (SVAR) to explore the impact of trade openness and financial openness on the Indonesian economy. The findings shows that trade openness and financial openness have negative impacts on output. The results of trade openness are quite robust; since a lack of preparation to anticipate trade openness weakens the competitiveness of Indonesian products relative to foreign products and, finally, lower output. The findings of financial openness are also robust because greater financial openness leaves the Indonesian economy more vulnerable to capital reversal, which endangers economic performance.