IDEAS home Printed from https://ideas.repec.org/p/zbw/hwwadp/26267.html
   My bibliography  Save this paper

Relationship between Trade Liberalisation, Economic Growth and Trade Balance: An Econometric Investigation

Author

Listed:
  • Parikh, Ashok
  • Stirbu, Corneliu

Abstract

This is a study of 42 developing countries of Asia, Africa and Latin America in which we first examine the impact of trade liberalisation on economic growth, investment share of GDP, openness, trade balance and current accounts (as percentages of GDP). Both panel data and country by country data are used to measure the impact of liberalisation on domestic economic growth measured in PPP terms from the data available in Heston, Summers and Aten (2001) study. Domestic economic growth is often positively related to liberalisation for many countries of our sample. Next we analyse the impact of growth on trade balance and current account to examine whether higher economic growth due to liberalisation leads to adverse effect on balance of trade. Trade balance is normalised by GDP to take into consideration different sizes of countries. We also allow control variables in both sets of regressions such as terms of trade, advanced countries' growth rates, liberalisation and debt related variables. The balance of payments constrained growth model uses foreign exchange constraint that limits growth and using the Harrod multiplier, Thirlwall and Hussain derived a growth equation which is apparently constrained by balance of payments. We use this model in the first part as a behavioural equation and establish that liberalisation promotes growth and such output growth in pre-liberalisation period is lower than that in post- liberalisation period. Panel data of 42 countries, regional panel for three regions (fixed effect and random effect models) and country by country analysis (OLS regression) is conducted. These relationships suggest that liberalisation promotes growth but growth itself has negative effect on trade balance for a large majority of countries. This study uses the latest available data on real GDP, growth rates of individual and advanced countries and examines the relationship between liberalisation and growth, liberalisation and trade balance and also the impact of exchange rate or terms of trade policies on trade balance. One of the models in a cross-section regression study makes use of political and security variables and concludes that the convergence or ?catchingup? hypothesis is supported and extreme political repression tends to constrain growth. One unit change in liberalisation index leads on average to1.62 percentage point change in growth rates on average, ceteris paribus.

Suggested Citation

  • Parikh, Ashok & Stirbu, Corneliu, 2004. "Relationship between Trade Liberalisation, Economic Growth and Trade Balance: An Econometric Investigation," HWWA Discussion Papers 282, Hamburg Institute of International Economics (HWWA).
    • Handle: RePEc:zbw:hwwadp:26267
    as

    Download full text from publisher

    File URL: https://www.econstor.eu/bitstream/10419/19254/1/282.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Melo, Oscar & Vogt, Michael G., 1984. "Determinants of the demand for imports of Venezuela," Journal of Development Economics, Elsevier, vol. 14(3), pages 351-358, April.
    2. Anthony P. Thirlwall, 2011. "The Balance of Payments Constraint as an Explanation of International Growth Rate Differences," PSL Quarterly Review, Economia civile, vol. 64(259), pages 429-438.
    3. Nasiruddin Ahmed, 2000. "Export response to trade liberalization in Bangladesh: a cointegration analysis," Applied Economics, Taylor & Francis Journals, vol. 32(8), pages 1077-1084.
    4. Wood, Adrian, 1997. "Openness and Wage Inequality in Developing Countries: The Latin American Challenge to East Asian Conventional Wisdom," The World Bank Economic Review, World Bank, vol. 11(1), pages 33-57, January.
    5. David Greenaway & David Sapsford, 1994. "What does liberalisation do for exports and growth?," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 130(1), pages 152-174, March.
    6. Chenery, Hollis B., 1984. "Economic Structure and Performance," Elsevier Monographs, Elsevier, edition 1, number 9780126800609 edited by Syrquin, Moshe & Taylor, Lance & Westphal, Larry E..
    7. Carmen M. Reinhart & Peter Wickham, 1994. "Commodity Prices: Cyclical Weakness or Secular Decline?," IMF Staff Papers, Palgrave Macmillan, vol. 41(2), pages 175-213, June.
    8. Thirlwall, Anthony P & Hussain, Mohammed Nureldin, 1982. "The Balance of Payments Constraint, Capital Flows and Growth Rate Differences between Developing Countries," Oxford Economic Papers, Oxford University Press, vol. 34(3), pages 498-510, November.
    9. Bacha, Edmar L., 1990. "A three-gap model of foreign transfers and the GDP growth rate in developing countries," Journal of Development Economics, Elsevier, vol. 32(2), pages 279-296, April.
    10. Dawn Richards Elliott & Rupert Rhodd, 1999. "Explaining growth rate differences in highly indebted countries: an extension to Thirlwall and Hussain," Applied Economics, Taylor & Francis Journals, vol. 31(9), pages 1145-1148.
    11. Irwin, Douglas A. & Tervio, Marko, 2002. "Does trade raise income?: Evidence from the twentieth century," Journal of International Economics, Elsevier, vol. 58(1), pages 1-18, October.
    12. Edward K. Y. Chen, 1979. "Export Performance and Economic Growth," Palgrave Macmillan Books, in: Hyper-growth in Asian Economies, chapter 6, pages 109-126, Palgrave Macmillan.
    13. Amelia Santos-Paulino & A. P. Thirlwall, 2004. "The impact of trade liberalisation on exports, imports and the balance of payments of developing countries," Economic Journal, Royal Economic Society, vol. 114(493), pages 50-72, February.
    14. Krugman, Paul, 1989. "Differences in income elasticities and trends in real exchange rates," European Economic Review, Elsevier, vol. 33(5), pages 1031-1046, May.
    15. Michael Bleaney, 1999. "Trade reform, macroeconomic performance and export growth in ten Latin American countries, 1979-95," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 8(1), pages 89-105.
    16. Edwards, Sebastian, 1993. "Openness, Trade Liberalization, and Growth in Developing Countries," Journal of Economic Literature, American Economic Association, vol. 31(3), pages 1358-1393, September.
    17. Edmar Bacha, 1982. "Growth with limited supplies of foreign exchanges: a reappraisal of the two-gap model," Textos para discussão 26, Department of Economics PUC-Rio (Brazil).
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Bosede Victoria Kudaisi, 2022. "Trade, Financial Liberalisation And Current Account Balance In Nigeria," Oradea Journal of Business and Economics, University of Oradea, Faculty of Economics, vol. 7(special), pages 36-50, June.
    2. L. G. Burange & Rucha R. Ranadive & Neha N. Karnik, 2019. "Trade Openness and Economic Growth Nexus: A Case Study of BRICS," Foreign Trade Review, , vol. 54(1), pages 1-15, February.
    3. Narayan Sethi & Purna Chandra Padhan & Devi Prasad Dash, 2024. "When Is Aid Credible in the Emerging Asian economies? An Empirical Re-assessment from the Perspective of Economic Growth," Journal of the Knowledge Economy, Springer;Portland International Center for Management of Engineering and Technology (PICMET), vol. 15(2), pages 7331-7357, June.
    4. Hakimi, Abdelaziz & Hamdi, Helmi, 2016. "Trade liberalization, FDI inflows, environmental quality and economic growth: A comparative analysis between Tunisia and Morocco," Renewable and Sustainable Energy Reviews, Elsevier, vol. 58(C), pages 1445-1456.
    5. Dimitar Hadjinikolov & Paskal Zhelev, 2018. "Expected Impact of EU-Vietnam Free Trade Agreement on Bulgaria’s Exports," Economic Alternatives, University of National and World Economy, Sofia, Bulgaria, issue 4, pages 467-479, December.
    6. Maria Khan, 2021. "Effect of Natural Resources on Economic Growth in Pakistan: A Time Series Analysis," Asian Journal of Economic Modelling, Asian Economic and Social Society, vol. 9(1), pages 29-47, March.
    7. Vatcharin Sirimaneetham, 2006. "What drives liberal policies in developing countries?," Bristol Economics Discussion Papers 06/587, School of Economics, University of Bristol, UK.
    8. Salah Abosedra & Chor Foon Tang, 2019. "Are exports a reliable source of economic growth in MENA countries? New evidence from the rolling Granger causality method," Empirical Economics, Springer, vol. 56(3), pages 831-841, March.
    9. Olabisi Olabode Eric, 2015. "Trade Liberalization and Economic Growth in Nigeria: Do Concern Matters?," International Journal of Economics and Empirical Research (IJEER), The Economics and Social Development Organization (TESDO), vol. 3(6), pages 306-311, June.
    10. Parikh, Ashok, 2004. "Relationship between Trade Liberalisation, Growth and Balance of Payments in Developing Countries: An Econometric Study," HWWA Discussion Papers 286, Hamburg Institute of International Economics (HWWA).
    11. Stephen Taiwo Onifade & Abdul Qahar Khatir & Ahmet Ay & Murat Canitez, 2022. "Reviewing the Trade Openness, Domestic Investment, and Economic Growth Nexus: Contemporary Policy Implications for the MENA Region," Revista Finanzas y Politica Economica, Universidad Católica de Colombia, vol. 14(2), pages 489-512, June.
    12. Parikh, Ashok, 2004. "Relationship between Trade Liberalisation, Growth and Balance of Payments in Developing Countries: An Econometric Study," Discussion Paper Series 26212, Hamburg Institute of International Economics.
    13. Adams, Samuel & Klobodu, Edem Kwame Mensah, 2016. "Remittances, regime durability and economic growth in Sub-Saharan Africa (SSA)," Economic Analysis and Policy, Elsevier, vol. 50(C), pages 1-8.
    14. Bekele, Yetsedaw Emagne, 2017. "Exploring the Relationship between Trade Liberalization and Ethiopian Economic Growth," MPRA Paper 83584, University Library of Munich, Germany.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Parikh, Ashok & Stirbu, Corneliu, 2004. "Relationship Between Trade Liberalisation, Economic Growth and Trade Balance: An Econometric Investigation," Discussion Paper Series 26267, Hamburg Institute of International Economics.
    2. Lanre Kassim, 2013. "The Impact of Trade Liberalisation on Export Growth and Import Growth in Sub-Saharan Africa," Studies in Economics 1310, School of Economics, University of Kent.
    3. Ashok Parikh, 2002. "Impact of Liberalization, Economic Growth and Trade Policies on Current Accounts of Developing Countries: An Econometric Study," WIDER Working Paper Series DP2002-63, World Institute for Development Economic Research (UNU-WIDER).
    4. Silvia Nenci, 2009. "Tariff liberatization and the growth of word trade: A comparative historiocal analysis to evaluate the multilateral trading system," Departmental Working Papers of Economics - University 'Roma Tre' 0110, Department of Economics - University Roma Tre.
    5. Kounetas, Kostas & Napolitano, Oreste, 2015. "Too much EMU? An investigation of technology gaps," MPRA Paper 67600, University Library of Munich, Germany.
    6. Muhammad Zakaria, 2014. "Effects of Trade Liberalization on Exports, Imports and Trade Balance in Pakistan: A Time Series Analysis," Prague Economic Papers, Prague University of Economics and Business, vol. 2014(1), pages 121-139.
    7. Amelia U. Santos‐Paulino, 2005. "Trade Liberalisation and Economic Performance: Theory and Evidence for Developing Countries," The World Economy, Wiley Blackwell, vol. 28(6), pages 783-821, June.
    8. Nenci Silvia & Pietrobelli Carlo, 2008. "Does Tariff Liberalization Promote Trade? Latin American Countries in the Long-Run (1900-2000)," Global Economy Journal, De Gruyter, vol. 8(4), pages 1-30, December.
    9. Elena Horská & Luboš Smutka & Mansoor Maitah, 2012. "The impacts of the global economic crisis on selected segments of the world trade in commodities," Acta Universitatis Agriculturae et Silviculturae Mendelianae Brunensis, Mendel University Press, vol. 60(7), pages 101-110.
    10. Carlo Pietrobelli & Silvia Nenci, 2007. "Does tariff liberalization promote trade? Latin America in the long run (1900-2000)," Working Papers 0704, CREI Università degli Studi Roma Tre, revised 2007.
    11. Anthony Philip Thirlwall, 2012. "Balance of Payments Constrained Growth Models: History and Overview," Palgrave Macmillan Books, in: Elias Soukiazis & Pedro A. Cerqueira (ed.), Models of Balance of Payments Constrained Growth, chapter 1, pages 11-49, Palgrave Macmillan.
    12. Bajo-Rubio, Oscar, 2012. "The balance-of-payments constraint on economic growth in a long-term perspective: Spain, 1850–2000," Explorations in Economic History, Elsevier, vol. 49(1), pages 105-117.
    13. Oscar Bajo-Rubio, 2014. "Balance-constrained growth rates: generalizing Thirlwall's law," Applied Economics Letters, Taylor & Francis Journals, vol. 21(9), pages 593-596, June.
    14. Amitava Krishna Dutt, 2002. "Thirlwall’s Law and Uneven Development," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 24(3), pages 367-390, March.
    15. Ekaterina Y. ARAPOVA, 2017. "Ex-Post Analysis Of The Influence Of Tariff Liberalisation On Asean Exports," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 17(2), pages 135-154.
    16. Mr. Yi Wu & Mr. Li Zeng, 2008. "The Impact of Trade Liberalization on the Trade Balance in Developing Countries," IMF Working Papers 2008/014, International Monetary Fund.
    17. A. P. Thirlwall, 2013. "Economic Growth in an Open Developing Economy," Books, Edward Elgar Publishing, number 15208.
    18. A.P. Thirlwall, 2018. "Una vita nell’economia," Moneta e Credito, Economia civile, vol. 71(283), pages 179-210.
    19. Alex Luiz Ferreira, 2007. "On the Transmission Mechanism of Monetary Constraints to the Real Side of the Economy," International Review of Applied Economics, Taylor & Francis Journals, vol. 21(1), pages 43-54.
    20. Jesus Felipe & J. S. L. McCombie & Kaukab Naqvi, 2010. "Is Pakistan's Growth Rate Balance-of-Payments Constrained? Policies and Implications for Development and Growth," Oxford Development Studies, Taylor & Francis Journals, vol. 38(4), pages 477-496.

    More about this item

    Keywords

    liberalisation; trade balance; developing countries; panel data estimation;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • O24 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Trade Policy; Factor Movement; Foreign Exchange Policy
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:zbw:hwwadp:26267. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ZBW - Leibniz Information Centre for Economics (email available below). General contact details of provider: https://edirc.repec.org/data/hwwaade.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.