In the present era of globalisation, import-substituting development strategy has given way to import liberalisation and export promotion. The increased openness is hailed in IMF/World Bank circles arguing that outward-oriented trade policies have been more successful in promoting growth than inward-oriented trade policies.
In this context, the present study examines the long-term relationship between openness and growth. The author starts by overviewing the debate over the growth-enhancing effect of trade liberalization and then moves on to discussing the relationship between trade liberalisation and growth.
The author uses the index of trade openness which is the percentage share of total trade in ‘real’ GDP as a measure of openness over the period, 1950-2000 for a sample of 84 countries.
The findings go as follows:
the cross-section study shows that a less-developed country with a higher trade share tends to experience a higher real growth
the time series study of individual country experiences shows that in the majority of cases there exist no positive long-term relationship between opening up and growth casting doubt on the hypothesis that opening up of an economy promotes growth
in some cases there is a negative relationship
In the end, the author calls for further investigayion for individual country cases to see if an outward oriented strategy can be a drag on economic growth under the inexorable Prebisch-Singer law of secular decline in the terms of trade.