Is Trade Policy Openness Good for Growth?

Very few issues are more contentious today than the effects of trade policy on the rate of economic growth and poverty in developing countries. The paper investigates the relationship between trade barriers and growth using a dynamic panel regression model for data on 48 developing countries over 1980-1999. Trade barriers are captured by measures of tariffs, import and export taxes. Particular attention is paid to simultaneity, country-specific effects and the potential contingency of this relation on income. Our preferred specification for growth includes as an explanatory variable an interaction term between trade barriers and initial income levels. The interaction term is meant to capture the non-linearity in the relationship between trade barriers and economic growth. This specification reveals a significant interaction effect under which the marginal impact of tariffs on growth is rising in initial income. In particular, the relationship between tariffs and growth is negative and significant across all alternative policy measures, but is not uniform across income groups. The richer the country, the smaller are the growth-reducing effects of trade protection and the poorer the country the more likelihood that trade protection will affect growth negatively. This finding is particularly interesting for Sub-Saharan Africa (the world’s poorest continent) where trade restrictions are still pervasive and where poverty is widespread. Author Charles Ackah is research student in the School of Economics. I am grateful to my supervisors, Professor Oliver Morrissey and Dr Simon Appleton for guidance and comments. Contact email: [email protected].