Does openness lead to sustained economic growth? Export growth versus other variables as determinants of economic growth

Abstract

This research revisits the issue of economic growth determinants in developing countries with a focus on international integration variables. Four alternative variables are tested, namely, export growth, trade openness, export diversification, and foreign direct investment (FDI), in a single framework. This study finds that export growth is the most robust, in addition to export specialization, and that traditional variables of trade openness and FDI are not robust. This result is based on the econometric estimations that use not only cross-section and fixed-effect panel estimations but also system generalized method of moments estimations. The findings warn against the traditional emphasis on simple trade openness and FDI as policy prescriptions for developing countries. In other words, simply opening an economy for international integration does not guarantee sustained economic growth unless these actions lead to export growth, which requires capability building in indigenous firms and investments in innovations. This observation is consistent with the experiences of successful economies in Asia, such as Korea, Taiwan, and China.

Keywords:

• export growth
• trade openness
• export diversification
• foreign direct investment
• economic growth
• developing and developed countries

JEL Classifications:

• F43
• F10
• F13
• F21
• O10

Acknowledgements

Different versions of this paper were presented in several places, including the 2014 Globelics Conferences held in Ethiopia. The authors acknowledge the support from the Korean government through the National Research Foundation of Korea (NRF-2013S1A3A2053312).

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. They have investigated the causes for this phenomenon and suggested that political leadership and investment sustainability are the suspected factors.

2. Sachs and Warner (1995), used a different variable of openness, that is, a dummy variable between 0 and 1, and the sample consisted of 135 countries. In this research, we consider ‘trade openness’ as the total trade share of GDP and ‘openness’ as the openness dummy variable.

3. He used data from 1870 to 1970. Even during war periods, the correlation between trade openness and growth was negative.

4. Carkovic and Levine (2002) used GMM panel estimator using World Bank and IMF datasets over the period from 1960 to 1995.

5. Their analysis used 90 countries and the data from 1980 to 1990. POLS, fixed effect (FE), and least squares dummy variable (LSDV) methods were used for the estimation.

6. They used GMM estimation for 69 LDCs and OECD countries, and the selected data period was from 1975 to 1993.

7. Fosu (1990) uses cross-sectional OLS estimations that were used for 64 developing countries over the period from 1960 to 1980.

Additional information

Funding

National Research Foundation of Korea [grant number NRF-2013S1A3A2053312].

Notes on contributors

Sanika Sulochani Ramanayake

Sanika Sulochani Ramanayake is a postdoctoral researcher in Inha University and Seoul National University since 2013. She obtained PhD degree from Seoul National University and received Brain Korea scholarship for her PhD studies. Her research interests include economic growth in developing countries, with emphasis on the concept of the middle-income trap and the adding-up problem. Her recent publication has appeared in Millennial Asia Journal (October 2014).

Keun Lee

Keun Lee is a professor of economics at the Seoul National University, and the director of the Center for Economic Catch-up. He has been awarded the 2014 Schumpeter Prize for his monograph on Schumpeterian Analysis of Economic Catch-up: Knowledge, Path-Creation and the Middle Income Trap (2013 Cambridge University Press) by the International Schumpeter Society. He is also the president-elect of this Society. He is a member of the Committee for Development Policy of UN, a co-editor of Research Policy, and a member of the governing board of Globelics. He obtained PhD degree from the University of California, Berkeley, and worked before at the World Bank, University of Aberdeen, and the East West Center.