Openness Can Be Good for Growth : The Role of Policy Complementarities

The authors study how the effect of trade openness on economic growth depends on complementary reforms that help a country take advantage of international competition. This issue is illustrated with a simple Harris-Todaro model where output gains after trade liberalization depend on the degree of la...

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Bibliographic Details
Main Authors:	Chang, Roberto, Kaltani, Linda, Loayza, Norman
Format:	Policy Research Working Paper
Language:	English
Published:	World Bank, Washington, DC 2012
Subjects:	AGGREGATE INCOME AVERAGE PROCESS AVERAGE RATE BLACK MARKET BLACK MARKET PREMIUM CAPITAL INVESTMENT CENTRAL BANK CHANGES IN TRADE COMPARATIVE ADVANTAGE COMPETITIVENESS CONDITIONAL CONVERGENCE COUNTRY CHARACTERISTICS COUNTRY DATA COUNTRY OBSERVATIONS COUNTRY REGRESSIONS COUNTRY-SPECIFIC EFFECTS COUNTRY-SPECIFIC FACTORS COVARIANCE MATRIX CROSS-COUNTRY DATA CROSS-SECTIONAL STUDIES DATA SET DECREASING RATE DEMAND SIDE DEPENDENT VARIABLE DESCRIPTIVE STATISTICS DEVELOPED COUNTRIES DEVELOPING COUNTRIES DOMESTIC CONSUMPTION DOMESTIC CREDIT DOMESTIC MARKETS DOMESTIC PRODUCTION DUE DYNAMIC PANEL ECONOMIC ACTIVITIES ECONOMIC DEVELOPMENT ECONOMIC GROWTH ECONOMIC REFORM ECONOMIC REFORMS ECONOMICS EMPIRICAL ANALYSIS EMPIRICAL EVIDENCE EMPIRICAL GROWTH LITERATURE EMPIRICAL LITERATURE EMPIRICAL SECTION EMPIRICAL STUDIES EMPIRICAL WORK ENDOGENOUS GROWTH ERROR TERM ESTIMATED COEFFICIENTS ESTIMATION RESULTS EXPECTED VALUE EXPECTED WAGE EXPLANATORY VARIABLE EXPLANATORY VARIABLES EXPORTS FACTOR MARKETS FINANCIAL DEPTH FINANCIAL DEVELOPMENT FINANCIAL MARKETS FIRM EXIT FOREIGN COMPETITION FOREIGN DIRECT INVESTMENT FOREIGN FIRMS FOREIGN MARKETS GDP GDP PER CAPITA GROWTH DETERMINANTS GROWTH EFFECT GROWTH MODELS GROWTH PERFORMANCE GROWTH RATES GROWTH REGRESSION GROWTH REGRESSIONS HUMAN CAPITAL IMPACT OF TRADE INCREASING RETURNS INCREASING RETURNS TO SCALE INFLATION RATE INFLATION STABILIZATION INTERNATIONAL MARKETS INTERNATIONAL TRADE JOBS LABOR DEMAND LABOR FORCE LABOR MARKET LABOR MARKET CONDITIONS LABOR MARKET REFORM LABOR MARKET REFORMS LABOR MARKETS LAGGED CHANGES LAGGED DEPENDENT LAGGED LEVELS LAGGED VALUES LATIN AMERICAN LIBERALIZATION AGENDA LINEAR REGRESSION LONG-RUN GROWTH MARGINAL PRODUCT MARGINAL PRODUCTIVITY MARKET DISTORTIONS MEASURE OF TRADE MEASUREMENT ERROR MIDDLE EAST MINIMUM WAGE NEGATIVE COEFFICIENT 0 HYPOTHESIS OPENNESS OUTPUT PER CAPITA PER CAPITA INCOME POLICY RESEARCH POLITICAL STABILITY POOR COUNTRIES POSITIVE GROWTH POSITIVE IMPACT POVERTY REDUCTION PREVIOUS SUBSECTION PRICE STABILITY PRODUCTION SIDE PRODUCTIVE SECTOR PRODUCTIVITY IMPROVEMENTS PROFIT MAXIMIZATION PROPERTY RIGHTS PUBLIC INFRASTRUCTURE RANDOM WALK REAL GDP REAL WAGE REAL WAGES REDUCTION IN TARIFFS REGRESSION RESULTS RELATIVE IMPORTANCE SECONDARY ENROLLMENT SECONDARY ENROLLMENT RATES SERIAL CORRELATION SERIES DATA SPECIALIZATION STRUCTURAL CHARACTERISTICS SUB-SAHARAN AFRICA TARIFF REDUCTION TARIFF REVENUES TECHNOLOGICAL PROGRESS TRADE LIBERALIZATION TRADE OPENING TRADE OPENNESS TRADE POLICY TRADE PROTECTION TRADE REFORM TRADE RESTRICTIONS TRADE VOLUMES UNEMPLOYED UNEMPLOYED WORKERS UNEMPLOYMENT UNPRODUCTIVE SECTORS VOLUME OF TRADE WAGES WORKER WORKERS WORLD PRICES
Online Access:	http://documents.worldbank.org/curated/en/2005/11/6380787/openness-can-good-growth-role-policy-complementarities http://hdl.handle.net/10986/8492

Description
Summary:	The authors study how the effect of trade openness on economic growth depends on complementary reforms that help a country take advantage of international competition. This issue is illustrated with a simple Harris-Todaro model where output gains after trade liberalization depend on the degree of labor market flexibility. In that model, trade protection may ameliorate the problem of underemployment (and underproduction) in sectors affected by labor market distortions. Hence, trade liberalization unambiguously increases per capita income only when labor markets are sufficiently flexible. The authors then present some panel evidence on how the growth effect of openness depends on a variety of structural characteristics. For this purpose, they use a non-linear growth regression specification that interacts a proxy of trade openness with proxies of educational investment, financial depth, inflation stabilization, public infrastructure, governance, labor-market flexibility, ease of firm entry, and ease of firm exit. They find that the growth effects of openness are positive and economically significant if certain complementary reforms are undertaken.

Openness Can Be Good for Growth : The Role of Policy Complementarities

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