Open Economies Are Much Richer

The contrast between the recent growth performance of East Asia at one extreme and sub-Saharan Africa at the other is striking. But what explains this difference? Is it possible to identify and replicate the conditions that are favourable to East Asian growth elsewhere? And how important are openness to international trade and liberalisation of the World Bank-inspired variety in improving growth performance?

Examining the evidence on these questions in the September issue of the Economic Journal, Professor David Greenaway, Wyn Morgan and Peter Wright find a surprisingly consistent set of results both qualitatively and quantitatively, which suggest that:

  • Liberalisation and openness do impact favourably on the growth of GDP per capita.
  • Openness may be a more important determinant of growth, both in the short and long run than liberalisation per se. Open economies are found to be almost half as rich again as closed economies.
  • The impact of liberalisation may not be straightforward and, as theory suggests, any impact on growth may take a considerable time. Its impact is also likely to be relatively modest, adding approximately 2% to per capita income in the long run.
  • It is vital not to equate liberalisation with openness; and equally vital to remember that openness is a function of many factors, not just liberalisation.

The researchers note that many analysts see openness to international trade as a key factor in East Asian success. This proposition has underpinned an extraordinary wave of unilateral trade reform in developing countries. In the last 20 years, over 90 countries have initiated some kind of reform or another. Some have been voluntary; most, however, have been initiated by Bretton Woods institutions, notably the World Bank under its Structural Adjustment Programme (SAP). Since 1980, a substantial proportion of total Bank lending has come through this window. Typically, any such loans are conditional on policy reform and in general trade policy reform figures prominently.

”Trade Reform, Adjustment and Growth: What Does the Evidence Tell Us?” by Professor David Greenaway, Wyn Morgan and Peter Wright is published in the September 1998 issue of the Economic Journal. The authors are all in the Department of Economics, University of Nottingham, NG7 2RD.

Sue Berry

0115-951-5470 | lezsb@len1.nott.ac.uk