Outward-Orientation and Economic Growth: Additional Cross-Country Evidence

To shed further light on the role of outward-orientation in economic growth, Dollar’s (1992) framework is extended by (a) applying the methodology to the more recent period 1985-90, and (b) comparing a conventional measure of outward-orientation with Dollar’s indices of real-exchange-rate distortion and variability. The following main points are noted. First, for the entire developing-country sample, the broad parametric structure is somewhat similar for 1976-85 and 1985-90. Second, however, the parameter for real-exchange-rate variability seems considerably weaker for 1985-90. Third, the investment-parameters are much weaker in 1985-90 for the bottom haif and the bottom quartile subgroups. Fourth, the outward-orientation ranks of some countries show a marked departure in 1985-90 from those in 1976-85. Fifth, there is a dramatic difference between the two periods in regard to the significance of the exchange-rate-distortion index for the poorest group. Sixth, the conventional measure of outward-orientation shows high significance even in the presence of the exchange-rate distortion and variability indices. Seventh, the growth regressions show a considerably better fit when the conventional measure replaces the more refined indices of exchange-rate distortion and variability. The major message of the study is thus threefold: considerable caution is appropriate in generalizing to the poorest LDCs the merit of outward-orientation for economic growth; traditional measures of outward-orientation probably contain information that the indices of exchange-rate distortion and variability do not; and the significance of the exchange-rate variability index for economic growth appears uncertain.