Measuring the Dynamic Gains from Trade

By Romain Wacziarg
2000| Working Paper No. 1654

This .paper investigates the linkages between trade policy and economic growth in a panel of 57 countries, between 1970 and 1989. We develop a new measure of trade policy openness, based on the policy component of trade shares. This is used in a simultaneous equations system aimed at identifying the effect of trade policy on several determinants of growth. The results of this paper suggest a positive impact of trade policy openness on economic growth, with the accelerated accumulation of physical capital accounting for more than one half of the total effect; smaller effects operate through enhanced technological transmissions and improvements in the quality of macroeconomic policy. This decomposition is robust with respect to alternative specifications and time periods. We also successfully test whether the model exhaustively captures the effects of trade policy on growth.