Trade and Human Capital as Determinants of Growth

Do openness to trade and higher levels of human capital growth promote faster growth? To answer that question we use a panel of countries to investigate the role of human capital and two measures of openness in determining both the level of income and its growth rate. We argue that focusing on the levels of income by estimating a production function will give misleading estimates if there are unobserved differences in the underlying growth of technical efficiency across countries that are correlated with the explanatory variables. Using a growth rate equation, where we allow for country fixed effects and for possible endogeneity of explanatory variables, we show that both measures of openness, one the Sachs-Warner measure which reflects policy, and one from the PENN World Tables, the share of trade in GDP, give similar results. We argue that openness has a highly significant and large effect on the underlying rate of growth of productivity, while human capital does not. JEL classification: F43, O11.