Openness and Economic Growth: A Cross-Country Analysis
This thesis analyzes the relationship between openness and economic growth. Although long standing and well accepted economic theory clearly shows the gains from open trade between nations, developing countries have followed the protectionist policies of Import Substituting Industrialization (ISI) for a large portion of the twentieth century. The application of ISI by developing nations is characterized by multiple and overlapping protective measures which give rise to high effective rates of protection. These high effective rates of protection create a bias against exports, prevent emerging industries in developing countries from achieving economies of scale and give rise to economic dualism. For these reasons and others, the 1980s saw a shift away from ISI to the policies of export-oriented industrialization (EOI). EOI strives to make neutral the incentives between domestic and foreign production of a good. Trade liberalization in the form of EOI has been shown to enhance the economic performance of numerous developing countries. Numerous efforts made to explain the strong, positive relationship between openness and economic growth rely upon empirical analysis based upon neoclassical production functions. A review of this work shows that this empirical analysis is often based on small data sets which cover a limited time span. In addition, this work does not utilize demographic variables as sources of growth. Most important of all, these works tend to concentrate on measures of exports assuming away any condition of import shortage. This thesis alleviates these shortcomings by developing an economic growth model which assumes that marginal factor productivities differ between the export and domestic sectors of an economy, utilizes demographic variables as sources of growth and accounts for import shortage conditions through the inclusion of an imports growth variable. Finally, empirical analysis based on a large cross country data set confirms the assumptions made by the model.