Openness Can be Good for Growth: The Role of Policy Complementarities / Roberto Chang, Linda Kaltani, Norman Loayza.

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Chang, Roberto

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TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w11787.Publication details: Cambridge, Mass. National Bureau of Economic Research 2005.Description: 1 online resource: illustrations (black and white)Subject(s):

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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.

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Previous	nber w11784 Two Theories of Money Reconciled: The Colonial Puzzle Revisited with New Evidence /	nber w11785 Evaluation of Currency Regimes: The Unique Role of Sudden Stops /	nber w11786 Pay Inequality, Pay Secrecy, and Effort: Theory and Evidence /	nber w11787 Openness Can be Good for Growth: The Role of Policy Complementarities /	nber w11788 Robustness of the Estimates of the Hybrid New Keynesian Phillips Curve /	nber w11789 Paternalism and Psychology /	nber w1179 Public Sector Labor Markets /	Next

November 2005.

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.