⁦⁦Trade openness on economic growth across countries

Abstract

This study examines the impact of trade openness on real GDP per capita for a panel of 20 countries from 1990 to 2020. The analysis addresses three main questions: What is the overall effect of trade openness on income growth?, Does this effect differ between developed and developing countries? and Does it vary with the quality of institutions? The dependent variable is real GDP per capita, expressed in natural logarithms. Trade openness is measured by trade as a share of GDP, while institutional quality is captured by the rule of law index. The models also include controls for investment, human capital (proxied by secondary school enrollment), labour force participation, population growth, inflation, and sectoral composition (agriculture, industry, and services). Fixed-effects regressions are employed to account for unobserved heterogeneity across countries. The results show that trade openness is positively and significantly associated with income growth in developed countries and in countries with strong institutions. In developing and weak-institution countries, the effect is weaker, often unstable, and sometimes negative depending on the specification.

Overall, the findings suggest that the growth benefits of openness are conditional on the level of development and institutional quality.