Economic growth – is openness to international trade beneficial?: an empirical analysis of economic growth and trade policy

Abstract

This thesis attempts to answer the following research question: “To which degree, if any, does policy open to international trade lead to increased economic growth within a country?” The applied measure of openness to international trade is an index that increases as a country has less restrictions on trade, while annual growth in GDP per capita is the preferred measure of economic growth. There is a potential problem of endogeneity in the openness index, so four instrumental variables are suggested. These are the share of votes equal to the U.S. in the United Nations General Assembly, number of years as member of GATT/WTO, share of children that are immune to DPT and a country’s distance to equator. A panel data set for up to 91 countries for the time period 1970-2011 is analysed, with countries from all income-groups represented. First, openness is considered exogenous, and directly applied with both an ordinary least squares-estimator and a fixed effect-estimator. Second, the potential endogeneity bias is accounted for by use of instrumental variable regressions. The main results of this thesis are that there exists a negative relationship between openness to international trade and economic growth. The result is robust to alterations of model specification, and high-income countries have the largest reported negative effects of a ceteris paribus increase in openness. The instrumental variables remain strong throughout the robustness tests, and especially share of votes equal to the U.S. in the United Nations General Assembly, number of years as member of GATT/WTO are reported as valid.