Productivity Growth Is Faster In Open Economies

Countries with a more open trade system enjoy faster productivity growth than countries with a closed economy. That is the definitive conclusion of Professor Sebastian Edwards in the latest issue of the Economic Journal. Using a new data set and nine alternative measures of trade policy to analyse the relationship between trade policy and economic performance in a score of countries, his results indicate, very strongly, the advantages of free trade over protection for economic performance. These are important results for the current debate on the role of globalisation.

Edwards notes that old controversies die slowly. For over a century, social analysts have debated the connection between trade policy and economic performance. While according to liberal economists, freer trade results in faster growth, some analysts have argued that protectionism may&##160;help economic performance. This controversy continues today, even as the world is experiencing an unprecedented period of trade liberalisation and in spite of numerous empirical studies that claim to have found a positive effect of openness on growth.

Two issues have been at the core of this controversy. First, until recently, theoretical models have been unable to link trade policy to faster growth. Second, empirical research has been affected by data problems, in particular the difficulty of encompassing the complexity of trade policy into a single indicator of trade orientation: international trade can be affected by tariffs, quotas, licences, prohibition and exchange controls among others.

Edwards’ analysis makes a special effort to address the ”robustness” of the findings, using new comparative data and nine alternative indices of trade policy. The results, that more open countries have indeed experienced faster productivity growth, are forceful and persuasive.

”Openness, Productivity and Growth: What Do We Really Know?” by Sebastian Edwards is published in the March 1998 issue of the Economic Journal. Edwards is Professor of Economics at the University of California, Los Angeles.

Sebastian Edwards

001-310-206-6797 | sebastian.edwards@anderson.ucla.edu