TRADE ORIENTATION AND MACROECONOMIC PERFORMANCE IN LDCS - AN EMPIRICAL-STUDY

Nearly all cross-country studies of the impact of trade policies on growth rates in developing countries have employed export growth rates as proxies for trade policies. The problem with this approach is that the connection between export growth and trade policies remains unproven. To overcome this problem I have used more direct measures of trade orientation (TO) recently made available by the World Bank for a sample of 41 developing countries for two successive time periods - to examine the relationship between TO and various macroeconomic variables. My estimation results show a positive and statistically significant relationship between outward orientation and export and output growth rates for both time periods. The positive relationships between TO and savings and investment rates, however, were considerably weaker, especially for the first period. This suggested that the impact of trade policies on growth rates acted more strongly through increases in productivity rather than increases in investment rates. This was corroborated by the results of estimations that regressed output growth on growth rates of labour, investment rates, export growth rates, and TO dummies. Pooling data from the two time periods to avoid problems of multicollinearity, it was found that productivity growth rates are positively associated with outward orientation as well as export growth rates. -Author