Working Paper: NBER ID: w11787
Authors: Roberto Chang; Linda Kaltani; Norman Loayza
Abstract: This paper studies how the effect of trade openness on economic growth depends on complementary reforms that help a country take advantage of international competition. This issue is illustrated with a simple Harris-Todaro model where output gains after trade liberalization depend on the degree of labor market flexibility. In that model, trade protection may ameliorate the problem of underemployment (and underproduction) in sectors affected by labor market distortions; hence trade liberalization unambiguously increases per capita income only when labor markets are sufficiently flexible. We then present some panel evidence on how the growth effect of openness depends on a variety of structural characteristics. For this purpose, we use a non-linear growth regression specification that interacts a proxy of trade openness with proxies of educational investment, financial depth, inflation stabilization, public infrastructure, governance, labor-market flexibility, ease of firm entry, and ease of firm exit. We find that the growth effects of openness are positive and economically significant if certain complementary reforms are undertaken.
Keywords: trade openness; economic growth; labor market flexibility; policy complementarities
JEL Codes: E61; F13; F43; O40
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Labor market flexibility (J48) | Effectiveness of trade liberalization in enhancing growth (F68) |
| Trade openness (F43) | Economic growth (O49) |
| Trade openness + Labor market flexibility (F16) | Economic growth (O49) |
| Trade openness + Educational investment (F43) | Economic growth (O49) |
| Trade openness + Public infrastructure (H54) | Economic growth (O49) |
| Trade openness + Governance (F43) | Economic growth (O49) |