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International Monetary Fund. The authors are grateful to Tamim Bayoumi, Gian Maria Milesi-Ferretti, Olivier Jeanne, Se-Jik Kim, Thomas Krueger, Paolo Mauro, Guy Meredith, James Morsink, Jonathan Ostry, Doris Ross, and Antonio Spilimbergo for helpful comments. The authors are solely responsible for the contents of the paper.
For example, Arora and Vamvakidis (2002) find a positive relationship between long-run growth in the United States and in the rest of the world, which they attribute to the importance of the United States as a global trading partner; and Ahmed and Loungani (1999) find that the short-run impact of foreign output shocks on domestic output in emerging market economies is roughly one for one.
The estimates are based on trade flow data from the IMF’s Direction of Trade Statistics (IMF, 2002). It turns out that trade weights are highly correlated over time for both developing and industrial countries, which suggests that countries do not change their trading partners often. However, it is still more meaningful to use current weights rather than weights that are based on trade flows during a dated, and possibly arbitrary, base period.
For a discussion of the early empirical and theoretical trade and growth literature, see Bhagwati and Srinivasan (1985). For more recent literature reviews, see Greenaway, Morgan, and Wright (1998), Bhagwati and Srinivasan (2002), and Baldwin (2003).
Barro and Sala-i-Martin find that tariff rates have a significant negative impact on growth, although the impact of non-tariff barriers is not statistically significant.
Specifically, Sachs and Warner use a composite measure of openness, while Rodriguez and Rodrik disaggregate the measure and find that only the component relating to the blackmarket premium is significant in a growth regression. They claim that this premium has to do with macroeconomic stability rather than with trade protection. However, Warner argues that the black-market premium may in fact reflect trade distortions, and argues more generally that most powerful tests of the growth-openness connection come from aggregating different measures of protection.
The average share over a five-year period is used, since annual shares tend to be volatile.
The correlation for the whole period, that is between trade weights in the first half of the 1960s and the second half of the 1990s, is 0.70. It is somewhat higher for industrial than for developing countries (0.88 and 0.66, respectively).
This is somewhat surprising given the increase in international integration during this period.
It is only US$283 higher in 1995 constant values for industrial countries.
The United States has been the most important trading partner during the last four decades. It was among the ten most important trading partners for 90 countries in the late 1990s, an increase from 84 in the early 1960s.
Caselli, Esquivel, and Lefort (1996) have argued that the initial GDP per capita is endogenous. However, excluding it from the regressions in the present analysis did not change the conclusions.
Although it has its share of drawbacks, the trade share is one of the most broadly used measures of openness in the literature and among the most robust (see Levine and Renelt, 1992). One of its strong advantages is that it varies over time.
Specifically, with every 10 percent increase in the trade share, the impact of a 1 percent increase in trading partners’ growth on home growth increases by 0.1 percentage points.
All of the robustness results referred to in the paper are available from the authors upon request.
Small countries might be expected to be more open than large countries, and therefore to be affected more by their trading partners. In addition, since the interaction term of openness with trading partners’ growth is significant, it is surprising that the interaction term of openness with size is not significant.
See Navaretti and Tarr (2000) for a review of the literature on growth and R&D.
While the analysis relies on export weights, in practice export weights and import weights are often highly correlated because of factors such as regional trade agreements and geography.
The distance between two countries is measured by the distance between their capitals, as reported by the Centre D’Etudes Prospectives et D’Informations Internationales (CEPII). The results are very similar if regional growth trends are instead captured by the average growth rate in the continent to which each country belongs.
In addition, the results are not driven by growth only in particular regions. For example, the results do not change if east Asia is excluded from the sample. (Details are available upon request from the authors.)
Sachs and Warner (1995) define an economy as “open” if all of the following five conditions hold: (1) the average tariff rate is less than 40 percent, (2) the average non-tariff barriers are less than 40 percent, (3) the black-market premium is equivalent to less than 20 percent of the official exchange rate, (4) the government is not communist, and (5) there is no state monopoly on major exports. As noted in the literature review section, Rodriguez and Rodrik (1999) have criticized this approach. However, Warner (2002) has answered their criticism with evidence in support of this approach.