Colombo Businss Journal Faculty of Managmnt & Financ Vol. 07, No. 01, Jun, 2016 Univrsity of Colombo Intrnational Journal of Thory & Practic Economtric Analysis of Trad Opnnss and Economic Growth for Dvloping Countris Muhammad Tahira1, Mohammad Sad Lodhib a,b Dpartmnt of Managmnt Scincs, COMSATS Institut of Information Tchnology, Pakistan Abstract This papr has xamind th rlationship btwn trad opnnss and conomic growth in th dvloping countris in ordr to hav a bttr undrstanding of th trad-growth rlationship. Empirical analyss ar carrid out through panl fixd ffcts stimation procdur, and data ar utilizd for two sampls of th dvloping countris for th priod 1990-2009. Th ndognity issu of trad opnnss is handld through instrumntal variabl. Our main finding is that th rlationship btwn trad opnnss and conomic growth is positiv and statistically significant. Th impact of domstic invstmnt, labour forc, ducation, and dmocracy on conomic growth is also positiv and statistically significant. Th rsults also show that uncrtain policis such as frqunt fluctuations in prics ar dtrimntal to long-run conomic growth. It rcommndd that th dvloping countris should libraliz intrnational trad, nsur macroconomic stability, and pay favourabl attntion to othr dtrminants of conomic growth in ordr to grow fastr in th long-run. Kywords: Trad Opnnss, Growth, Fixd Effcts Modls, Endognity, Instrumntal Variabls 1. Introduction Th impact of trad opnnss on conomic growth has attractd much attntion in litratur during th last coupl of dcads. Intrnational trad opnnss is considrd a ky dtrminant of conomic growth in rcnt tims. Intrnational organizations such as World Trad Organization (WTO) and Intrnational Montary Fund (IMF) ar constantly advising th dvloping countris to mov towards mor libral rgim. Th spctacular growth xprinc of th Tigr conomis of Asia (Singapor, South Kora, Taiwan, and Hong Kong) ovr th yars, and th rcnt growth xprinc of som of th dvloping countris such as India and China, aftr moving towards libral rgim, hav forcd policy makrs spcially in th dvloping world to implmnt outward-orintd policis. Such policis ar xpctd to influnc th growth procss of th dvloping countris positivly. Whil thr is a vry rich mpirical litratur on th rlationship btwn trad opnnss and conomic growth, th positivnss and th ngativity of th rlationship ar still dbatabl, owing to 1 Corrsponding Author: tahirm@ciit.nt.pk
mixd mpirical vidnc. Som studis such as Dollar (1992), Sachs and Warnr (1995) and Edwards (1998) hav providd sound vidnc in favour of th positiv rlationship btwn trad opnnss and conomic growth. On th othr hand, rsarchrs such as Rodrik and Rodriguz (2000) and Rodriguz (2007) ar scptical of th positiv trad-growth rlationship. Thir criticism mainly applis to th mthodologis and masurs of trad opnnss usd. This papr aims at contributing to th mpirical vidnc rgarding th trad - growth rlationship in th dvloping countris in various ways. To do this, first, th rlationship btwn trad opnnss and conomic growth for a sampl of 67 dvloping countris, which consists of 14 low-incom, 27 lowr-middl-incom and 26 uppr-middl- incom conomis is tstd. Scond, uppr-middl conomis ar xcludd from th initial sampl to nabl us focus on lowr - middl - incom and low - incom conomis. Th rational bhind doing this is to xamin th rol of trad opnnss for conomic growth in th lowr-middl-incom and low-incom conomis. Th dvloping countris nd policy lssons rgarding intrnational trad in ordr to implmnt and xcut appropriat policis to spd up growth procss. It has bn obsrvd, ovr th yars, that th dvloping countris ar rluctant to opn thir markts to th intrnational trad bcaus of prsistnt confusion cratd by mixd mpirical rsarch. This study provids comprhnsiv policy lssons for th dvloping countris rgarding intrnational trad policy. In this papr, w hav brifly rviwd both thortical and mpirical litratur on th rlationship btwn trad opnnss and conomic growth, to provid a prlud for subsqunt discussions in sction 2. Nxt, w prsnt a summary of statistics on trad opnnss and pr capita GDP. Furthr, spcification of modl, sampl and data, ndognity issu and stimating mthodology ar dalt with. Discussion of th main findings is includd in th pnultimat sction. Th papr nds with conclusions and rcommndations. 2. Litratur Rviw 2.1 Thortical Litratur Intrnational trad opnnss and its rlationship with conomic growth is a wll-rsarchd topic in trad-growth litratur. Thoris of intrnational trad strongly support th hypothsis that incrasd opnnss to intrnational trad can influnc conomic growth positivly. According to th absolut advantag thory of intrnational trad, intrnational trad givs accss to xtndd intrnational markts and improvs productivity through division of labour (Smith, 1776). Small siz of th domstic markt acts as a hurdl to conomic growth particularly in th dvloping countris. Thirlwall (2000) argus that th major dynamic bnfit of intrnational trad is that domstic producrs gt accss to widnd markts. Th comparativ advantag thory blivs that intrnational trad is bnficial and brings production gains and consumption gains to trading partnrs (Ricardo, 1817). In th sam way, Carbaugh (2005) has argud that, in th framwork of nw trad thory, conomis with similar rsourc ndowmnts and ngligibl comparativ advantag may bnfit from th intrnational trad bcaus of massiv conomis of scal. Additionally, thortical litratur has indicatd that trad opnnss has th capacity to acclrat and sustain long-run conomic growth by improving productivity, incrasing comptitiv prssur among th domstic producrs and channls of domstic invstmnt (Dobr, 2008). Grossman and Hlpman (1994) hav argud that opn conomis can accss largr tchnical knowldg bas than 25
closd conomis. Furthr, thy hav argud that in th procss of tchnological dissmination, trad can play a vital rol. In thortical litratur, Fistas (2005) has documntd that libralization of intrnational trad stimulats incom and long-run conomic growth. It is worth noting that thortical litratur on trad opnnss has documntd that trad opnnss improvs conomic growth. According to Lopz (2005) and Lin (2000), this improvmnt in conomic growth occurs through nhancing th allocativ fficincy and channlling of forign dirct invstmnt. In rcnt tims howvr, som controvrsis hav bn raisd among rsarchrs on trad-growth rlationship in th framwork of trad thoris. In a rcnt papr, Bajona, Gibson, Kho, and Ruhl (2010) hav analysd various static and dynamic modls of intrnational trad; thy conclud trad modls only prdict that trad opnnss can improv social wlfar, but not ncssarily conomic growth. Furthr, thortical litratur dos not provid a dcisiv answr to th trad-growth rlationship (Ulasan, 2012). 2.2 Empirical Litratur Extnsiv studis hav bn conductd on th rlationship btwn trad opnnss and conomic growth during th last coupl of dcads. Empirical vidnc rgarding th trad-growth rlationship in th contxt of dvloping countris is mixd. Som rsarchrs such as Dollar (1992), Sachs and Warnr (1995), and Frankl and Romr (1999) ar vry much convincd about th positiv rlationship btwn trad opnnss and conomic growth. Rodrik and Rodriguz (2000), howvr, hav cast doubts on th positiv rlationship btwn trad opnnss and conomic growth by highlighting problms rlatd to applid mthodologis and th way trad opnnss is masurd. For instanc, Rodriguz (2007) has focusd on rcnt mpirical studis (Dollar & Kraay, 2002; Warnr, 2003; Wacziarg & Wlch, 2003) and concludd that standard masurs of trad policy ar not rlatd to conomic growth. On th othr hand, Bhagwati and Srinivasan (2001) hav analysd th criticism Rodrik and Rodriguz (2000) hav mad about th positiv rlationship btwn trad opnnss and conomic growth and commntd that th criticism is unprsuasiv. Warnr (2003) has commntd that th crucial vidnc is ignord and indd thr was a ngativ rlationship btwn trad rstrictions and conomic growth. In a rcnt study, Panagariya (2004), has also paid attntion to th criticism mad by Rodrik and Rodriguz (2000) about th positiv rlationship btwn trad opnnss and conomic growth, and documntd that th vidnc from cross country growth rgrssion is not wak and thrfor, outward-orintd policis could not b rjctd. Mor to th point, Fistas (2005) hav argud that dspit mthodological issus, thr is no vidnc that trad libralization is harmful for conomic growth. Tahir and Norulazidah (2013), Tahir and Khan (2014) and Tahir (2013) rportd a positiv rlationship btwn trad opnnss and conomic growth for both dvlopd and dvloping countris. Again, Tahir and Norulazidah (2014) rviwd both th thortical and mpirical litratur on trad opnnss and conomic growth and concludd that indd thr is a positiv rlationship btwn trad opnnss and conomic growth. With rfrnc to th dvloping countris, Sachs and Warnr (1995) found that opn dvloping conomis grw fastr than th closd dvloping conomis ovr th yars. It follows, that intgration to th world conomy is in th intrst of th dvloping countris from growth prspctiv. Dollar (1992) proposd two indics for masuring trad libralization and found that thr is a positiv rlationship btwn trad libralization and conomic prformanc. Th study conductd by Yanikkaya (2003) has qustiond th convntional wisdom rgarding th rlationship 26
btwn trad rstrictions and conomic growth in th contxt of th dvloping countris. Ackah (2008) has argud that trad libralization influncs conomic growth positivly in rlativly richr conomis. On th contrary, Dowrick and Golly (2004) commntd that most of th bnfits of trad libralization hav occurrd in th dvlopd countris post 1980s. Dava (2012) has argud that th dbat on th rlationship btwn trad opnnss and conomic growth has not yt bn sttld. In th sam way, Ulasan (2012) commntd that th dbat on tradgrowth rlationship is controvrsial and th availabl litratur has not providd convincing and robust vidnc. Furthr, it is argud that thory dos not provid a dcisiv answr about th rlationship btwn trad opnnss and conomic growth. Also, Stnsns (2006) has rightly assrtd that a robust rlationship btwn trad opnnss and conomic growth has not bn stablishd yt, and th rlationship btwn trad opnnss and growth should b dtrmind mpirically bcaus of ambiguitis in th thortical modls. Thr ar diffrnt factors xplaining why rsarchrs hav not bn abl to provid an xplicit answr to th qustion of whthr trad opnnss rally mattrs for achiving a highr conomic growth. Firstly, th quality of data may b poor spcially in th contxt of low-incom dvloping countris. Scondly, sampl htrognity is also a potntial factor bhind mixd mpirical vidnc. Th prsnc of both th dvlopd and dvloping countris in th sam sampl might b mislading, and hnc gnralization basd on such analysis might b doubtful. This might imply that such an xrcis might not uncovr th tru rlationship. Thirdly, a clar cut mchanism by which trad opnnss influncs conomic growth is ambiguous. Thrfor, th only option rsarchrs do hav is to dal with th trad growth rlationship mpirically. 3. Som Obsrvations on Trad Opnnss and Economic Growth Intrnational trad has incrasd spcially among th dvloping countris ovr th last fw dcads. According to Tabl 1, prcntag incras of 28 prcnt in avrag trad opnnss can b sn for th dvloping countris during 1990 to 2009. Arguably, this incras in trad opnnss has also contributd significantly to conomic growth. Similarly, th avrag pr capita GDP in purchasing powr parity has also incrasd for th dvloping countris from 3406.31 in 1990 to 5116.81 in 2009, showing an incras of almost of 50.21 prcnt. In addition, a scattr diagram in Figur 1 dpicts th growth of ral pr capita GDP during 1990 to 2009 of th ntir sampl. In Figur 1, th actual opnnss is plottd on horizontal axis whil th growth of pr capita GDP is masurd on vrtical axis. Th scattr diagram shows a positiv rlationship btwn pr capita GDP growth and trad opnnss. Simpl corrlation btwn th growth of pr capita GDP and th dgr of trad opnnss is 0.21. Th obsrvd positiv rlationship is not vry strong and it could b du to sampl siz and its rprsntativnss. Thr ar diffrnt groups of dvloping countris and hnc thir dgr of trad opnnss may b significantly diffrnt. 27
Figur 1: Th Rlationship btwn Pr Capita GDP and Trad Opnnss ) 9 0 0-2 0 9 9 (1 P D G ta i p a C r P l a R f o t a R h t w o r G.6.4.2.0 -.2 -.4 0 40 80 120 160 200 240 Actual Trad Opnnss (1990-2009) Sourc: Hston, Summrs & Atn, 2011 [Pnn World Tabls, Vrsion: 7] As mntiond in Tabl 1, thr ar significant variations in th dgr of trad opnnss of upprmiddl incom, lowr-middl incom and low incom countris. Owing to ths apparnt diffrncs in trad opnnss, w could not s a strong rlationship btwn trad opnnss and conomic growth as shown in Figur 1. Th sub division of th sampl (as shown in Tabl 1) shows that th opnnss dgr is incrasd from 64.39 to 77.74 for uppr middl conomis, from 65.98 to 84.67 for lowr-middl-incom conomis, and from 41.67 to 61.85 for low-incom conomis from th priod 1990 to 2009. Tabl 1, also rports changs in pr capita GDP for diffrnt sts of th dvloping countris. Tabl 1: Th Rlationship btwn Trad Opnnss and Pr Capita GDP (1990-2009) Countris Trad opnnss (1990) Pr capita GDP (1990) Trad opnnss (2009) Pr capita GDP (2009) Prcntag chang in opnnss Prcntag chang in pr capita GDP Whol sampl (67) 60.28 3406.31 77.21 5116.81 28.08 % 50.21 % 64.39 6014.33 77.74 9342.31 20.73 % 55.33 % 65.98 2257.14 84.67 3177.75 28.32 % 40.78 % 41.68 779.06 61.85 1009.07 48.40 % 29.52 % Uppr-middlincom (26) Lowr- middl incom (27) Low incom (14) Sourc: Hston, Summrs & Atn, 2011 [Pnn World Tabls, Vrsion: 7] Tabl 1, shows that among th dvloping countris, low-incom conomis ar still far bhind in trms of opnnss compard to uppr-middl and lowr-middl-incom conomis. Th dgr of trad opnnss is 84.67 for lowr-middl-incom countris, 77.74 prcnt for uppr-middl-incom 28
countris, and only 61.85 for th low-incom countris in 2009. Th possibl rason for th abov obsrvation might b that th low-incom countris ar far bhind in trms of pr capita GDP. Furthr, Tabl 1 shows changs in pr capita GDP for diffrnt sts of countris includd in th sampl. Thr is a clos rlationship btwn th changs in opnnss and changs in pr capita GDP. Th countris with low opnnss dgr ar also having low lvl of pr capita GDP. Th upprmiddl-incom and lowr-middl-incom countris ar much mor opn than low-incom countris, and hnc thir pr capita is also high compard to low-incom countris. Th low-incom countris hav achivd an incras of 29.52 prcnt in GDP pr capita during th priod from 1990-2009. Data shows that th dgr of trad opnnss has incrasd by 48.40 prcnt for th low-incom countris, but furthr incras is rquird as th opnnss in 2009 is 61.85, which is still far bhind as compard to uppr-middl-incom and lowr-middl-incom countris. 4. Modl, Mthodology, Sampl, and Data Sourcs 4.1 Th Modl Trad thoris and growth thoris support th hypothsis that trad opnnss nhancs conomic growth. This hypothsis is tstd with th hlp of standard panl conomtric tchniqus in ordr to control for th unobsrvd factors. Howvr, conomic growth is indd a complx procss and hnc cannot b xplaind by a singl dtrminant of conomic growth such as trad opnnss or invstmnt. Economic growth can b influncd by various dtrminants. Both domstic invstmnt and labour forc dtrmin th productiv capacity of an conomy, and ar considrd to b th ky dtrminants of growth. Human capital or simply ducation also influncs conomic growth by improving th productiv fficincy. Furthr, macroconomic nvironmnt also mattrs for th smooth functioning of an conomy. Frqunt fluctuations in macroconomic variabls advrsly affct conomic activitis. Similarly, uncrtainty in policis shattrs confidnc of invstors, and hnc growth rat dclins. In addition, sound institutional systm is also qually important for achiving highr conomic growth lik all othr dtrminants. Sound institutions affctivly coordinat among diffrnt sctors of th conomy and furthr provid a platform to all stakholdrs to play thir part in th national dvlopmnt procss. Howvr, institutions ar indd difficult to masur. Thrfor, w captur th ovrall impact of institutional factors through dmocratic systm with th assumption that only dmocratic govrnmnt can nhanc th quality of institutions. In othr words, th prsnc of dmocratic govrnmnt is an indication of good institutions. Th following modl is spcifid for analysis: ℎ = (1) Th subscript ( ) rprsnts cross sctional dimnsion of th data and ( ) stands for th tim dimnsion of th data. Th trm ( ℎ ) stands for th dpndnt variabl and masurs growth of ral pr capita GDP in purchasing powr parity. ( ) dnots domstic capital formation and is usd as a proxy for invstmnt. Trad opnnss is dnotd by ( ) and is calculatd by dividing th sum of xports plus imports on GDP ( / ). All quantitis ar in ral trms. Th trm ( ) stands for th growth of labour forc, which is calculatd as th growth rat of population aging btwn 15 to 64 yars. For ducation ( ), gross nrolmnt ratio at scondary lvl is usd rgardlss of ag group, and ( ) rfrs to inflation volatility which is 29
masurd as th standard dviation of inflation, whil stands for dmocracy, which masurs institutional aspct and it has bn approximatd by an indx which rangs from 10 (Dmocratic) to -10 (Autocratic). 4.2 Sampl and Data Sourcs Kping in mind th objctiv of th papr, a list of countris basd on pr capita GDP has bn collctd from th World Bank. Th World Bank has catgorizd countris in to diffrnt groups basd on pr capita GDP. Basd on data availability, only 67 dvloping countris ar chosn for th sampl, which consists of 14 lowr-incoms, 27 lowr-middl-incom and 26 uppr-middl-incom countris (s appndix for th list of countris). Th uppr middl- incom countris ar thos whr pr capita GDP is ranging btwn 3976 to 12275 dollars. Th countris whr pr capita GDP is gratr than 1006 dollars and lss than 3975 dollars, ar namd as lowr-middl-incom countris. Th third group of countris among th dvloping countris ar namd as low-incom countris, whr pr capita GDP is only 1005 dollars or lss. Data ranging from 1990 to 2009, ar convrtd to 5 yar avrags in ordr to avoid th short run fluctuations that could affct th rlationship btwn th indpndnt variabls and th dpndnt variabl (Harrison, 1995). Data on GDP pr capita, trad opnnss and population ar takn from Pnn World Tabls (Hston t al., 2011). Data on gross fixd capital formation as a ratio of GDP, inflation rat and labour forc ar obtaind from World Bank dvlopmnt indicators (World Bank, 1990-2009). Educational and dmocracy data ar obtaind from CANA databas (Castllacci & Natra, 2011). 4.3 Th Endognity Problm Th convntional masur of trad opnnss (xports plus imports as a ratio of GDP) which is also usd in this papr is ndognous in th growth quation (1). It is bcaus of th fact that forign trad pattrn of a country can also b affctd by its siz rgardlss of its trad policy. Rsarchs hav also highlightd th ndognity issus associatd with th masur of trad opnnss (Frankl & Romr; 1999, Wintrs; 2004). W assum that siz of a country can influnc its forign trad pattrn. Howvr, th point w want to mak hr is that th rlationship btwn siz of a country and its forign trad also dpnds on th productiv capacity of domstic conomy. To put it diffrntly, a country with vn a high population may trad mor if it is incapabl to produc nough to mt th dmands of its domstic consumrs and producrs. It may trad lss, if it producs sufficint to fulfil th domstic dmands of its consumrs and producrs. This implis that th productiv capacity of an conomy plays a significant rol in dtrmining its pattrn of forign trad. It is, thrfor, important to adjust th crud trad opnnss of ach country for its siz in ordr to liminat th impact of siz of th country on its dgr of trad opnnss. To do this, 20 yars data on trad opnnss is rgrssd on 20 yars data on a total population of includd countris in th sampl. Th fittd valus ar collctd and convrtd to 5 yars avrags. Ths avrags ar in turn usd as an instrumnt for trad opnnss in th growth rgrssion. Th simpl corrlation cofficint btwn th actual trad opnnss and th fittd valus is (0.93), which shows th strngth of th instrumnt. Th actual trad opnnss is plottd against th instrumntd trad opnnss in Figur 2 as bllow: 30
Figur 2: Th Rlationship btwn th Actual Trad Opnnss and Instrumntd Trad Opnnss 5.5 5.0 s s n n p O d ra T d t n m u rt s n I 4.5 4.0 3.5 3.0 2.5 0 40 80 120 160 200 240 Actual Trad Opnnss In Figur 2, th actual trad opnnss and instrumntd trad opnnss ar plottd on horizontal axis and vrtical axis rspctivly. Th Figur displays a strong positiv rlationship btwn th actual trad opnnss and instrumntd trad opnnss. Both quantitis ar moving in th sam dirction. Most of th data points ar ovrlapping, showing th validity of th instrumnt. Tabl 2: Main Growth Rgrssion Rsults Variabls Constant Whol Sampl (67) Uppr-middlincomLowr-middl incomlow incom countris Fixd Effcts Fixd Effcts -0.91-1.07 0.07* (IV) 10 Statistical critria Sub Sampl (41) Low-incomLowr-middlincom countris Fixd Effcts Fixd Effcts -1.10-1.49 0.13*** 0.10*** 0.22*** 0.12*** 0.12*** 0.07** 0.08** 0.71*** 0.67*** 0.89*** 0.86*** 0.09*** 0.09*** 0.10*** 0.12*** -0.04*** 0.003*** -0.04*** 0.003*** -0.05*** 0.003-0.05*** 0.004 R2 = 0.68; Adj- R2= 0.50; SER = 0.09; F = 3.76 R2 = 0.69; Adj- R2= 0.51; SER = 0.09; F = 3.79 R2 = 0.69; Adj- R2= 0.50; SER = 0.09; F = 3.56 R2 = 0.70; Adj- R2= 0.50; SER = 0.09; F = 3.61 31
Not: Th dpndnt variabl is th growth of ral pr capita GDP. (***), (**) and (*) stands for 1%, 5% and 10% lvl of significanc. In th last sction, an instrumnt for trad opnnss is constructd in ordr to addrss th likly ndognity of trad opnnss. Bfor stimating th modls, F-tst is conductd to s whthr, indd, panl data tchniqus ar ncssary or not. Also, th Hausman tst is prformd to choos btwn th fixd ffcts and random ffcts modl. Th F-tst displayd th prsnc of fixd ffcts, whil th Hausman spcification tst (1978) prfrrd th fixd ffcts modl ovr random ffcts modl. Thrfor, poold last squar stimation and random ffcts stimation ar not appropriat. Th htroscdasticity problm is corrctd by stimating modls with Whit (1980) robust stimator. Two rgrssion modls, on with actual trad opnnss, and on with instrumntd trad opnnss ar stimatd for th ntir sampl of 67 dvloping countris as wll as for th subsampl of 41 dvloping countris. Rgrssion rsults ar displayd in Tabl 2. 5. Rsults and Discussion Th rsults basd on fixd ffcts stimation sms to b consistnt with conomic thory and also with past mpirical rsarch. Th actual trad opnnss is significantly diffrnt from zro at 10 prcnt lvl for th whol sampl of 67 dvloping countris and at 1 prcnt lvl for 41 lowincom and lowr-middl-incom dvloping countris. Also, th instrumntd trad opnnss is statistically significant at 1 prcnt lvl for both sampls. This might suggst that opn trad policis ar rlvant for acclrating conomic growth in th dvloping countris. It is, thrfor, in th intrst of th dvloping countris to spd up th procss of trad libralization in ordr to grow fastr and match with th conomic growth of richr countris. Th rsults suggst that th dvloping countris in gnral should not worry about th wak argumnts favouring protctionism. It has bn obsrvd ovr th yars that th dvloping countris, particularly, th lss dvloping countris ar rluctant to opn up thir markts in to th global conomy. Howvr, survival without intgrating into th global ntwork is almost impossibl in today s complx world. Thrfor, th dvloping countris ar suggstd to spcializ according to th thory of comparativ advantag in ordr to achiv both production gains and consumption gains. Th production and consumption gains ovr th yars would contribut to th growth procss of th dvloping countris rmarkably. Th domstic invstmnt and labour forc, which ar considrd as drivrs of conomic growth in both thortical and mpirical litratur, hav rportd positiv cofficints and ar statistically significant at standard lvls. Th dvloping countris, thrfor, ar suggstd to pay favourabl attntion to th basic dtrminants of conomic growth such as invstmnt and labour forc in ordr to improv thir growth rats. Th surplus and idl labour forc, spcially in th lss-dvloping countris could b tackld through ncouraging additional invstmnt in th domstic conomy. Human capital, which is approximatd by gross nrolmnt rats at scondary lvl, bars a positiv sign in th stimatd rgrssion modls and it is also statistically significant. Th rsults suggst that th dvloping countris nd to invst in human capital. For instanc, ducating mor popl will boost th growth procss, spcially in th dvloping countris. It is an undniabl fact that ducatd labour forc can play its part in th procss of production mor fficintly compard to th ordinary labour forc. 32
Inflation volatility is also highly significant at 1 prcnt lvl and carris a ngativ cofficint, confirming that frqunt fluctuations in prics ar dtrimntal to conomic growth. Likwis, th issu of uncrtainty in policis is harmful to conomic growth. Th policis, spcially in dvloping countris, ar unstabl and unprdictabl. This suggsts that macroconomic policis should b proprly managd and xcutd in ordr to liminat its harmful ffcts on conomic growth. Furthr, it is found that th impact of dmocracy, which is bing usd as a proxy for institutional factor, is not only positiv, but also, statistically significant. This implis that th dvloping countris should rjct infficint forms of govrnmnts such as dictatorship and mov towards dmocratic rgims. Th impact of dmocracy on conomic growth howvr, is positiv; although it is also statistically insignificant for low-incom and lowr-middl-incom countris. Th poor natur of dmocratic govrnmnts and its involvmnt in corrupt practics could xplain th insignificant impact of dmocracy on conomic growth in th contxt of low-incom and lowr-middl-incom conomis. Adjustd R-squard for th whol sampl of 67 dvloping countris is 0.50, 0.51 for th modls with actual trad opnnss and instrumntd trad opnnss rspctivly, indicating that 50 prcnt variation in th growth of pr capita GDP is xplaind by th fittd modls. For th sub-sampl sampl of 41 lowr-middl and low-incom countris, th fittd modls can xplain 50 prcnt variation in growth procss. F-statistic is also statistically significant in all cass at 1 prcnt lvl, indicating that th stimatd modls fit th data wll. 6. Concluding Rmarks and Policy Rcommndations This papr has xamind th impact of trad opnnss on conomic growth for th dvloping countris. First, mpirical analyss ar carrid out for th whol sampl of 67 dvloping countris, consisting of uppr-middl-incom, lowr-middl-incom, and low-incom dvloping countris. Scond, th trad-growth rlationship is also tstd for low-incom and lowr-middl-incom dvloping countris togthr. Howvr, du to small sampl siz, rgrssions modls ar not stimatd sparatly for lowr middl incom and low incom dvloping countris. Not running sparat rgrssions for diffrnt groups of countris is a limitation of th papr, spcially givn that th bhaviour of th data dos not appar to b similar (i.., in lowr-middl incom countris, thr is a larg chang in growth corrsponding to a small chang in opnnss, whras in low incom countris thr is only a small chang in growth corrsponding to a larg chang in opnnss; s Tabl 1). Panl conomtric tools ar applid using data from 1990-2009 for th mpirical analysis. Th rsults show that opnnss to intrnational trad mattrs for achiving highr conomic growth in th dvloping countris. Furthrmor, it is found that th positiv rlationship btwn trad opnnss and conomic growth is applicabl to th lowr-middl-incom and low-incom dvloping countris. Howvr, givn th abov statd limitation, th lattr is not a clar finding. In addition, a positiv rlationship is obsrvd btwn domstic invstmnt, labour forc, ducation, dmocracy, and conomic growth. A ngativ rlationship is found btwn inflation volatility and conomic growth for both sampls. Th dvloping countris in gnral ar suggstd to spd up th procss of trad libralization in ordr to grow fastr in th long run. Also th lowr middl incom countris and low incom countris should also tak appropriat stps in ordr to nsur gratr participation in global trad. Howvr, it should also b notd that th suggstd rcommndations ar not vry conclusiv du to 33
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Appndics Appndix 1: List of th Total Sampl (67 Dvloping Countris) Albania Algria Angola Bolivia Botswana Brazil Bulgaria Camroon Chil China Colombia Cot d`ivoir Dominican Rpublic Egypt El Salvador Fiji Gabon Ghana Guatmala Guyana Honduras India Indonsia Iran Lbanon Lsotho Malaysia Mauritania Mauritius Mxico Mongolia Morocco Namibia Nicaragua Pakistan Panama Paraguay Pru Philippins Romania Russia Sngal South Africa Sri Lanka Sudan Swaziland Thailand Tunisia Turky Uruguay Uzbkistan Vnzula Zambia Bangladsh Bnin Chad Ethiopia Guina Knya Madagascar Malawi Mozambiqu Npal Rwanda Sirra Lon Tanzania Uganda Appndix 2: Lowr-Middl-Incom and Low-Incom Dvloping Countris (41 Countris) Angola Bolivia Camroon Cot d`ivoir Egypt El Salvador Fiji Ghana Guatmala Guyana Honduras India Indonsia Lsotho Mauritania Mongolia Morocco Nicaragua Pakistan Paraguay Philippins Sngal Sri Lanka Sudan Swaziland Uzbkistan Zambia Bangladsh Bnin Chad Ethiopia Guina Knya 36 Madagascar Malawi Mozambiqu Npal Rwanda Sirra Lon Tanzania Uganda