Trade reform, adjustment and growth: What does the evidence tell us?

We began this paper by explaining why liberalisation might impact favourably upon growth but also pointed to reasons why, at least in the short-run, it might not. Following a review of alternative measures of liberaliation we discussed the various strands of the literature which feed into the empirical analysis of trade policy and economic growth. As we saw, this is a genuinely controversial literature. We then proceeded to test a dynamic model of growth in the context of several samples and, more importantly, using several measures of liberalisation. We report a surprisingly consistent set of results both qualitively and quantitatively. These suggest that liberalisation and openness do impact favourably on the growth of GDP per capita. In the cae of the former, the impact may not necessarily be straightforward and as theory suggests, the respnse is in all probability lagged. Moreover, it is also relatively modest. That is not so surprising since liberalisations vary in their depth and intenstiy and rarely it ever amount to an immediate shift to free trade. The liberalisations which are picked up are often first steps rather the final steps. Through time of course economies become more open, partly as a consequence of incremental trade reforms but also of course as a consequence of other factors: reductions in transportation and communication costs, technological change and so on. The pay-off to this increased openness is likely to be far greater and that is what our results confirm. Perhaps therefore the most important lesson of our results is that in evaluating the impact of trade policy and changes in trade policy on growth it is vital to equate liberalisation with openness and equally vital to remember that openness is a function of many factors not just liberalisation.