Openness can be good for Growth: The Role of Policy Complementarities

By Roberto Chang, Linda Kaltani, Norman V. Loayza. 2005

772 citations recorded by the source corpus.

This paper studies how the effect of trade openness on economic growth depends on complementary reforms that help a country take advantage of international competition. This issue is illustrated with a simple Harris-Todaro type of model where output gains after trade liberalization depend on the degree of labor market flexibility. In that model, trade protection may ameliorate the problem of underemployment (and underproduction) in sectors affected by labor market distortions; hence trade liberalization unambiguously increases per capita income only when labor markets are sufficiently flexible. We then present some panel evidence on how the growth effect of openness depends on a variety of structural characteristics. For this purpose, we use a non-linear growth regression specification that interacts a proxy of trade openness with proxies of educational investment, financial depth, inflation stabilization, public infrastructure, governance, labor-market flexibility, ease of firm entry, and ease of firm exit. We find that the growth effects of openness are positive and economically significant if certain complementary reforms are undertaken.

Subfields: Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/efaca82d97db40208008fb60bd183bf2fe2d2bad

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Citations in the corpus

Heterogeneous effects of economic integration agreements (2018, background): “son (1996), Frankel and Romer (1999), Awokuse (2007), Badinger (2008), and Chang et al. (2009). For an overview of how historical factors involving inter-”
Trade and economic growth in developing countries: Evidence from sub-Saharan Africa (2017, methodology): “Following Chang et al. (2009), we introduce interacting terms to allow the economic growth-trade openness relationship to vary with several country characteristics (i.e., governance, education, and financial development).”
Trade Openness Reduces Growth Volatility when Countries are well Diversified (2010, positive): “This set of preliminary estimates replicate, in a limited fashion, some of the main results that have been established in the growth volatility literature (Chang et al. 2009; Jansen 2004; Malik & Temple 2009).”
The trade-growth nexus in the developing countries: a quantile regression approach (2010, background): “Chang et al. (2009) investigate the trade-growth nexus by including interaction terms of openness and proxies of various growth determinants such as educational investment, financial depth, and public infrastructure.”
The Structural Determinants of External Vulnerability (2006, positive): “…the ease of firm entry was calculated from data in World Bank (2003) and O’Driscoll, Feulner, and O’Grady (2003) and is a weighted average of four indicators –registration procedures, cost of registration, days to registration, and burden entry regulations—as in Chang, Kaltani, and Loayza (2005).”
Trade Liberalization and Poverty: What Have We Learned in a Decade? (2014, background): “The same limitation applies to all the rigidities that Chang et al. (2009) explore.”
Revisiting the Determinants of Productivity Growth: What's New? (2009, background): “Such policies include sound macroeconomic policies, market supporting institutions, good infrastructures, appropriate business regulations, well functioning credit markets, and flexible labor markets (Chang, Kaltani, and Loayza, 2005).”
Government Spending, Corruption and Economic Growth (2016, methodology): “…covariates are allowed to have some contemporaneous feedbacks on the error term, and following Dollar and Kraay (2004), Loayza et al. (2005) and Chang et al. (2009), the generalised method of moments (GMM) procedure that addresses endogeneity and controls for unobserved country specific…”