TRADE POLICY AND ECONOMIC GROWTH: A SKEPTIC'S GUIDE TO THE CROSS-NATIONAL EVIDENCE

TRADE POLICY AND ECONOMIC GROWTH: A SKEPTIC'S GUIDE TO THE CROSS-NATIONAL EVIDENCE

April 1999 | Francisco Rodríguez, Dani Rodrik
The paper by Rodríguez and Rodrik critically examines the empirical literature on trade policy and economic growth, highlighting methodological flaws that undermine the reliability of findings. They argue that while many studies claim a positive relationship between trade openness and growth, the evidence is often weak or misleading. Key issues include the use of flawed indicators of trade barriers, such as average tariff rates and coverage ratios for non-tariff barriers, which may not accurately reflect trade restrictions or correlate with other factors affecting economic performance. Additionally, the empirical strategies used to link trade policy to growth are often insufficient, leading to results that may not hold under different specifications or data. The authors review several influential studies, including those by Dollar (1992), Sachs and Warner (1995), Ben-David (1993), and Edwards (1998). They find that these studies often fail to account for important variables and may be influenced by omitted variables or measurement errors. For example, Dollar's use of real exchange rate distortion and variability indices is criticized for being sensitive to exchange rate policies and geographic factors, which may not reflect true trade restrictions. Similarly, Sachs and Warner's openness index, which combines multiple criteria to classify countries as open or closed, is found to be correlated with other factors like macroeconomic problems and geographic location, leading to an upward bias in the estimated effects of trade restrictions. The authors conclude that the relationship between trade policy and economic growth remains uncertain. They emphasize that trade policies may have different effects depending on country-specific and external factors, and that the empirical evidence does not consistently support the notion that trade openness unambiguously promotes growth. The paper also cautions against interpreting empirical results on trade policy and growth as necessarily implying welfare improvements, as growth and welfare are distinct concepts. Overall, the authors argue that the empirical literature on trade policy and growth is largely uninformative and that more rigorous research is needed to understand the true effects of trade policies on economic growth.The paper by Rodríguez and Rodrik critically examines the empirical literature on trade policy and economic growth, highlighting methodological flaws that undermine the reliability of findings. They argue that while many studies claim a positive relationship between trade openness and growth, the evidence is often weak or misleading. Key issues include the use of flawed indicators of trade barriers, such as average tariff rates and coverage ratios for non-tariff barriers, which may not accurately reflect trade restrictions or correlate with other factors affecting economic performance. Additionally, the empirical strategies used to link trade policy to growth are often insufficient, leading to results that may not hold under different specifications or data. The authors review several influential studies, including those by Dollar (1992), Sachs and Warner (1995), Ben-David (1993), and Edwards (1998). They find that these studies often fail to account for important variables and may be influenced by omitted variables or measurement errors. For example, Dollar's use of real exchange rate distortion and variability indices is criticized for being sensitive to exchange rate policies and geographic factors, which may not reflect true trade restrictions. Similarly, Sachs and Warner's openness index, which combines multiple criteria to classify countries as open or closed, is found to be correlated with other factors like macroeconomic problems and geographic location, leading to an upward bias in the estimated effects of trade restrictions. The authors conclude that the relationship between trade policy and economic growth remains uncertain. They emphasize that trade policies may have different effects depending on country-specific and external factors, and that the empirical evidence does not consistently support the notion that trade openness unambiguously promotes growth. The paper also cautions against interpreting empirical results on trade policy and growth as necessarily implying welfare improvements, as growth and welfare are distinct concepts. Overall, the authors argue that the empirical literature on trade policy and growth is largely uninformative and that more rigorous research is needed to understand the true effects of trade policies on economic growth.
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