The Linkage between Economic Growth and Openness: Does Financial Development Matter?

Purpose: Even though, the impact of trade openness on economic growth overwhelmingly has been analyzed by researchers; the real effect still remains inconclusive and controversial in the literature. The main objective of this study is therefore to find out whether the financial development has any role in determining the impact of trade openness on economic growth Method: The study has employed dynamic panel data of 41 developing countries for the period 1995-2014. Findings: this study could not find any effect of trade openness or financial development on economic growth. Rather, the study has found that interaction term representing the joint effect of financial development and openness has a negative effect on economic growth. Furthermore, the study has empirically proved that human capital and investments have positive effects on economic growth while inflation rate and global financial crisis worsen the economic growth. Discussion: The study has attributed this result to the willingness of investors to transfer their financial capital outflows as trade barriers lowers and financial system gets deeper.

PDF

___

Abramovitz, M. (1986). Catching up, forging ahead, and falling behind. Journal of Economic History, 46: 385- 406

Ades, A.F., and Glaeser, E. (1999). Evidence on growth, increasing returns and the extent of the market. Quarterly Journal of Economics, 114: 1025-1046.

Aghion, P., Howitt, P., and Mayor-Foulkes, D. (2005). The effect of financial development on convergence: Theory and evidence. Quarterly Journal of Economics, 120: 173-222.

Arellano, M. & Bond., S. (1991). Some tests of specification for panel data: Monte Carlo evidence and an application to employment equations. The Review of Economic Studies, 58(2), 277–297.

Arellano, M. & Bover, O. (1995). Another look at the instrumental variable estimation error components model. Journal of Econometrics, 68(1), 29–51.

Awokuse, T.O. (2008). Trade openness and economic growth: is growth export-led or import led?, Applied Economics, 40(2): 161-173.

Baldwin, R., Braconier, H., and Forslid, R. (2005). Multinationals, endogenous growth, and technological spill overs. Theory and evidence. Journal of Money, Credit and Banking, 33: 16-41.

Blundell, R., and Bond, S. (1998). Initial conditions and moment restrictions in dynamic panel data models. Journal of Econometrics, 87 (1), 115-143

Dowrick, S., and Golley, J. (2004). Trade openness and growth: Who benefits? Oxford Review of Economic Policy, 20: 38-56.

Hansen, L.P (1982). Large sample properties of Generalized Method of Moment Estimators. Econometrica, 50(4), 1029-1054

Harrison, A. (1996). Openness and growth: A time series, cross country analysis for developing countries. Journal of Development Economics, 48: 419-447.

Howitt, P0. (2000). Endogenous growth and cross-country income differences. American Economic Review, 90: 111-130

Huang, L.-C., and Chang, S.-H. (2014). Revisit the nexus of trade openness and GDP growth: Does the financial system matter? The Journal of International Trade & Economic Development, 23 (7): 1038-1058.

Kaltani, L. (2007). Complementary reforms and the link between growth openness and growth in Albania. Post-Communist Economies, 19 (2): 225-253.

Keho, Y. (2017). The impact of trade openness on economic growth: The case of Cote d’Ivoire. Cogent Economics & Finance, 5: 1-14.

Kim, D., and Lin, S. (2009). Trade and growth at different stages of economic development. Journal of Development Studies, 45: 1211-1224.

Kim, D.-H., Lin, S.-C., and Suen, Y.-B. (2012). The simultaneous evolution of economic growth, financial development, and trade openness. The Journal of International Trade & Economic Development, 21 (4): 513-537.

Lucas, R.E. (1988). On the mechanic of economic development. Journal of Monetary Economics, 22: 3-42.

Ramanayake, S.S., and Lee, K. (2015). Does openness lead to sustained economic growth? Export growth versus other variables as determinants of economic growth. Journal of Asia Pacific Economy, 2 (3): 345- 368.

Rao, B.B. and Rao, M. (2009). Openness and growth in Fiji: Some time series evidence. Applied Economics, 41 (13): 1653-1662.

Redding, S. (1999). Dynamic comparative advantage and the welfare effects of trade. Oxford Economic Papers. 51:15-39.

Romer, P.M. (1989). Growth based on increasing returns due to the specialization. American Economic Review, 77: 56-62.

Rootman, D. (2009). How to do xtabond 2: An introduction to difference and system GMM in stata. The stata Journal 9(1), 86-136

Sakyi, D., Villaverde, J. and Maza, A. (2015). Trade openness, income levels, and economic growth: The case of developing countries, 1970-2009. The Journal of International Trade & Economic Development, 26 (4): 860-882.

Sarkar, P. (2008). Trade openness and growth: is there any link? Journal of Economic Issues, 42: 763-785.

Stiglitz, J.E. (2004). Globalization and growth in emerging markets. Journal of Policy Modeling. 26: 465-484.

Ulaşan, B. (2015). Trade openness and economic growth: Panel evidence. Applied Economics Letters, 22 (2): 163-167.

Yenikkaya, H. (2003). Trade openness and economic growth: A cross-countries empirical investigation. Journal of Development Economics, 72: 57-89.

Young, A. (1991). Learning by doing and the dynamic effects of international trade. Quarterly Journal of Economics, 106: 369-405.