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Vivek Arora is the IMF resident representative in South Africa and Lesotho; Athanasios Vamvakidis is the IMF resident representative in Croatia. The authors are grateful to Tamim Bayoumi, Michael Clemens, Gian-Maria Milesi Ferretti, Robert Flood, Olivier Jeanne, Se-Jik Kim, Thomas Krueger, Paolo Mauro, Guy Meredith, James Morsink, Jonathan Ostry, Doris Ross, Antonio Spilimbergo, and three anonymous referees for helpful comments. The authors are solely responsible for the contents of the paper.
For example, Arora and Vamvakidis (2004) 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.
Spilimbergo (2000) provides a discussion of such models and argues that, in principle, a rich country could be worse off by trading with a poor country whose demand pattern is biased toward sectors that have weak learning-by-doing effects.
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 often change their trading partners. However, it is more meaningful to use current weights rather than weights 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 (1995) find that tariff rates have a significant negative impact on growth, although the impact of nontariff barriers is not statistically significant.
Specifically, Sachs and Warner (1995) use a composite measure of openness, while Rodriguez and Rodrik (1999) disaggregate the measure and find that only the component relating to the black market premium is significant in a growth regression. They claim that this premium has to do with macroeconomic stability rather than trade protection. However, Warner argues that the black market premium may, in fact, reflect trade distortions and that most powerful tests of the growth-openness connection come from aggregating various measures of protection.
The average share over a five-year period is used, as 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 stability is somewhat surprising, given the increase in international integration during this period.
The per capita GDP is only $283 higher in 1995 constant values for industrial countries.
The United States has been the most important trading partner during the past four decades. It was among the 10 most important trading partners for 90 countries in the late 1990s, up from 84 countries in the early 1960s.
Caselli, Esquivel, and Lefort (1996) have argued that the initial per capita GDP is endogenous. However, excluding it from the regressions in the present analysis did not change the conclusions.
Although it has its drawbacks, the trade share is one of the most broadly used and robust measures of openness in the literature (see Levine and Renelt, 1992). A strong advantage of the trade share is that it varies over time.
Although it would be interesting to test whether the composition of bilateral trade matters for growth, in the present specification this would require data on bilateral trade by sector for more than 100 countries over a 40-year period; to our knowledge, such data do not exist.
Specifically, with every 10 percent increase in the trade share, a 1 percent increase in trading partners' growth is correlated with a 0.1 percent increase in domestic growth.
All robustness results cited in this paper are available from the authors on request.
The estimated equation in this case is:
per capita GDP growth = c − c1(y) − c2 (y/y*) + c3 (other growth determinants), where y and y* represent home and trading partners' per capita GDP levels, respectively. The equation can be rewritten as: per capita GDP growth = c − y[c1 + c2(1/y*)] + c3other growth determinants).
The equation indicates that as a country reaches a higher level of per capita GDP, the negative impact on its growth resulting from convergence forces (the term [c1 + c2 (1/y*)]) is smaller the higher is the level of its trading partners' per capita GDP (y*). The implication is that countries with relatively more developed trading partners should grow faster.
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 also significant.
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 similar if regional growth trends are instead captured by the average growth rate in the continent to which each country belongs.
Using world growth instead of distance-weighted growth as an independent variable results in coefficients of a similar magnitude.
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 from the authors on request.)
Sachs and Warner (1995) define an economy as “open” if all five of these conditions hold: (1) the average tariff rate is less than 40 percent; (2) the average nontariff 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 responded to their criticism with evidence in support of this approach.