Economic openness and income growth in developing countries: a regional comparative analysis

ABSTRACT

This article examines and compares the openness–growth relationship between the high-performing Asian economies (HPAEs) and the rest of the developing world (Sub-Saharan Africa-SSA, South East Asia-SEA and Latin America and Caribbean-LAC). We applied the SYS-GMM estimator to a dynamic standard endogenous growth model which relates economic openness to real per capita income growth. A few key findings emerged from this study. First, economic openness led to increase in real per capita GDP growth in HPAEs and SSA, but not in LAC and SEA. Second, openness to trade accelerated income convergence among countries in SSA, SEA, and HPAEs, however, whereas foreign direct investment inflows accelerated income convergence only in SSA, it rather de-accelerated income convergence in HPAEs. Thirdly, the HPAEs recorded higher positive effect of openness on real per capita GDP growth than any of the other developing regions because they created sufficient stock of human capital that enhanced their absorptive capacity of imported advanced technology. They also created a more stable macroeconomic environment which consolidated the income growth gains from openness. The results of this study highlight the importance of the implementation of policies that are complementary to economic openness in promoting economic growth in the developing world.

KEYWORDS:

• Economic openness
• growth
• developing countries
• growth model
• foreign direct investment
• GMM estimator
• FDI

JEL CLASSIFICATION:

• F11
• F13
• F14

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ Except for Hong Kong which was already pursuing open trade and investment policies (Baldwin 2004).

² Authors’ calculation using data from the World Development Indicator (WDI), World Bank.

³ WAEMU is a regional organization of eight West African countries (Benin, Burkina Faso, Cote d’Ivoire, Guinea Bissau, Mali, Niger, Senegal, and Togo) with the objective of promoting regional economic integration and creating a common market.

⁴ ${\beta }_1$ measures the rate of convergence.

⁵ See Islam (1995) and Weeks and Yao (2003).

⁶ Reflects unobserved fixed effects such as geographical, political factors or quality of institutions, and legal systems which vary across countries. We did not explicitly investigate the effects of institutional and legal variables.

⁷ In the empirical analysis, we follow the growth literature by proxying labour growth rate with population growth rate.

⁸ See Caselli, Esquivel, and Lefort (1996), Dollar and Kraay (2004) and Chang, Kaltani, and Loayza (2009).

⁹ See Appendix Table A1 and Table A2 for a list of the sample countries, and data description and sources respectively.

¹⁰ The long-run results are calculated for the main variables of interest.

¹¹ The p-values of both tests for all estimated models in this article lead to same conclusions, hence, we will not be repeating their discussions.

¹² See Chang and Mendy (2012) and Chen (1999).

¹³ The value is obtained by dividing the coefficient by 100.

¹⁴ Taiwan is excluded in this study due to unavailability of data.

¹⁵ We do not repeat the calculation of the long-run coefficients here except for HPAEs.