Trade openness, income levels, and economic growth: The case of developing countries, 1970--2009

Daniel Sakyi (), Jose Villaverde and Adolfo Maza

The Journal of International Trade & Economic Development, 2015, vol. 24, issue 6, 860-882

Abstract: This paper attempts to investigate the extent to which trade openness has had an impact on the levels of income and rates of growth in a sample of 115 developing countries for the period 1970--2009. Additionally, to assess whether there is an income level threshold for a country to benefit from international trade, the sample is broken down into three mutually exclusive groups of countries: low-income, lower middle-income, and upper middle-income countries. The main novelty of the paper lies on the use, on the one hand, of a new and better trade openness measure and, on the other hand, of non-stationary heterogeneous panel cointegration techniques to cope with the problem of cross-sectional dependence. The results show a positive bi-directional relationship between trade openness and income level in the long run, thus suggesting that trade openness is both a cause and a consequence of the level of income. The results for the short run, that is, the link between openness growth and economic growth, go in the same direction.

Date: 2015
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DOI: 10.1080/09638199.2014.971422

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