How does trade openness influence budget deficits in developing countries?

Jean-Louis Combes and Tahsin Saadi-Sedik
Authors registered in the RePEc Author Service: Tahsin Saadi Sedik ()

Journal of Development Studies, 2006, vol. 42, issue 8, 1401-1416

Abstract: This paper analyses the effects of trade openness on budget balances by distinguishing the effects of natural openness from those of trade policy. Revealed indicators of natural openness and trade policy are computed. Using GMM-system estimator, the econometric analysis focuses on 66 developing countries over 1974-98. The results show that trade openness increases a country's exposure to external shocks. This enforces the negative impact on budget balances of terms of trade instability. Additionally, trade openness influences budget balances through several other channels: corruption, income inequalities, etc. Then natural openness and trade policy have opposite effects: the former deteriorates budget balances whereas the latter enhances them.

Date: 2006
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Working Paper: How Does Trade Openness Influence Budget Deficits in Developing Countries? (2006)
Working Paper: How Does Trade Openness Influence Budget Deficits in Developing Countries? (2006)
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DOI: 10.1080/00220380600930762

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