The Focus of the Article
Economic analysts compare and contrast the economic growth of one nation with another one with the objective of deriving plausible explanation of their contrasting growth performance and apply the robust findings as recommendations to the developing countries. The contrasting variable that the analysts have identified is the “openness to the international trade” (Greenaway, Morgan & Wright 1547).
There is positive correlation between the open trade and the economic growth as empirically demonstrated in the developed countries. This finding has triggered trade reforms in the developing countries with the World Bank initiating and supporting the trade reforms through its Structural Adjustment Programme.
The political will is necessary for proper implementation of the policies in trade reforms given the rationale that “…there appears to be long term association between performance and openness and if an economy is presently relatively closed, then liberalization is a necessary bridge to becoming more open” (Greenaway, Morgan & Wright 1547). Hence, one of the integral factors to openness is the liberalization of the trade.
Different economic analysts have used different strategies and models to elucidate the impact of trade liberalization to the growth of the economy. The biggest challenge is the identification of the empirical model that will give robust evidence because liberalization is very controversial in the view of economic and trade reforms.
The economic analysts can use one or multiple approaches in the identification of the trade liberalization. Policy accounts is the basic measure of identifying liberation in terms of the policies but it has a setback of poor implementation of policies thus require the back up from other measures. A relative price change is another measure that has a unit of trade regime bias, which can substitute trade liberalization with time.
The output-based measure is very broad and can integrate more unnecessary indicators. Many economic analysts have failed to present the tangible dynamics of the liberalization because “…there are no straight forward indicators of liberalization. For these reason a number of analysts have used multiple criteria to identify liberation episodes, some formulaically some judgmentally” (Greenaway, Morgan & Wright 1550).The use of multiple criteria approach gives a clear view of the liberalization intricacy.
The Evidence
The empirical evidences have proved that the economic growth depends on the liberalization, exports, and trade orientation. In the case of liberalization, the assessment and evaluation has been approached in two ways, amidst challenges such as pre-existing policies, other policy shifts, and the nature of the economy. Cross-country is the first approach that has been used by the inter alia World Bank and has two aspects of assessment: ‘with-without’ and ‘before-after.’
Assessment using ‘with-without’ entails taking of case and control studies of a sample of countries and doing comparative studies to ascertain whether there is significance difference in economic growth thus attributing to the trade reforms. ‘Before-after’ assessment is similar to the ‘with-without’ except that it has a range of time in terms of years before and after assessment. Time series is the second approach that uses economic parameters such as structural adjustment loans, investment, and exports in the analysis of liberation.
These studies have confirmed that, “liberalization is a panacea; its result into a more rapid growth of exports, more rapid growth of real GDP …without serious transitional costs in unemployment, and …without significant effects on the government’s fiscal position” (Greenaway, Morgan & Wright 1552). The ambiguity of the correlation between trade reforms and economic growth challenge the above conclusion that the liberation is a panacea of economic growth.
The inconsistency and ambiguity of the results proving correlation of trade reforms and economic growth can be attributed to the over ambitious program design, low supply elasticity, and poor implementation of the programme and the use of varied measures and models.
To find the consistent and robust results, varied measures of liberalization, large sample of countries and a standard core growth model was used. The results obtained show that “the growth enhancing effects of liberalization are unlikely to be instantaneous: a clear evidence of a J curve effect which is consistent across samples and measures of liberalization” (Greenaway, Morgan & Wright 1558). For the economic growth to be exponentially significant, it requires a long-term period of years.
The Implications
The studies of trade reforms and economic growth have empirically proved that liberalization and openness have long-term significant impact on the growth of the economy. The identification of factors that constitutes liberalization and assessment of liberalization impact on the economic growth has been so controversial and ambiguous. The ambiguity and controversy was due to the inconsistent results from different economic analysts that made it difficult to give conclusive results.
The inconsistency of the results was attributed to the differing measures and models of evaluating and assessing liberalization. This study obtained robust and consistent results because it utilized variable liberalization measures and standard core growth model. The study have conclusively shown that the trade policies and reforms necessary for economic growth are intricately linked to the openness, liberalization and other confounding factors such as communication, technology and transportation.
Works Cited
Greenaway, David, Wyn Morgan and Peter, Wright. “Trade Reform, Adjustment and
Growth: What Does the Evidence Tell Us?” The Economic Journal 108 (1998): 1547-1561