Econometric Analysis of Trade Openness and Economic Growth for Developing Countries

Muhammad Tahir and Mohammad Saeed Lodhi

Abstract

This paper has examined the relationship between trade openness and economic growth in the developing countries in order to have a better understanding of the trade-growth relationship. Empirical analyses are carried out through panel fixed effects estimation procedure, and data are utilized for two samples of the developing countries for the period 1990-2009. The endogeneity issue of trade openness is handled through instrumental variable. Our main finding is that the relationship between trade openness and economic growth is positive and statistically significant. The impact of domestic investment, labour force, education, and democracy on economic growth is also positive and statistically significant. The results also show that uncertain policies such as frequent fluctuations in prices are detrimental to long-run economic growth. It recommended that the developing countries should liberalize international trade, ensure macroeconomic stability, and pay favourable attention to other determinants of economic growth in order to grow faster in the long-run.

Keywords:  Trade Openness, Growth, Fixed Effects Models, Endogeneity, Instrumental Variables