1 Running head: TRADE OPENNESS Does Trade Openness matter for Economic growth in Eastern European Countries? Name University 2 TRADE OPENNESS Introduction The dissertation is set to figure out whether an element of trade openness is significant or rather harmful to the economic growth in the Eastern European Countries. This is a fundamental topic that has given rise to lots of questions than answers (Frankel & Romer, 1999). There has been extensive research on the effects attached to the openness of trade on different macroeconomic, environmental and institutional variables in existence today. The hypothesis of the study is that trade openness has an impact on the economic growth of the Eastern European Countries. The extreme analysis of the existing relationship between macroeconomic performance and more so globalization is a representation of a primary interest of growing empirical literature. The dominating aspect of globalization is the trending of the world towards a vast trade openness. Such a trend is always illustrated in entirely developing or more so Industrial economies. The recent globalization wave began in mid-1980’s having a rising flow of trade linkages. Diverse intensive debates have emerged between academics and more so policy makers regarding the impact of trade integration on economic growth (Barro, 2001). The general economic theory has it that financial globalization has an important benefit which is in a better position to induce efficient resource allocation, diversify risks, strengthening of macroeconomic risks and most importantly enhancing the development of different countries. Following the arguments of the Neo-classical framework, there is a suggestion that the global finances in trade should enhance the flow of capital beginning from rich to poor countries regarding the fact that the expected capital return is said to be comparatively higher (Rose & Wincoop, 2001). It is argued that such capital returns increase investments through the import of 3 TRADE OPENNESS relevant managerial skills alongside other organizational expertise forms. It fosters the enhancement of the home based trade markets and more so imposing macroeconomic policy discipline. The policy makers emerging from the developed countries have integrated domestic economies into global markets to reap benefits of trade. Third world countries should therefore continue in the same way as the developed countries do (Rodriguez & Rodrik, 2000). Globalization can lead to intensification of external exposure which is measured by the economic growth sensitivity to trade openness regarding the National Economy. In the integration process, third world countries may be victims of vulnerability as subject to production specialization, to the non-diversified income sources, weak institutions and more so unstable macro-economic policies. Problem Statement Premature domestic opening towards international markets in absence of supporting conditions can have an effect on the country. It is quite unfortunate that the existing literature does not elucidate systematic empirical analysis on the relationship existing between trade openness and economic growth (Bhagwati, & Srinivasan, 2002). The origin of the debate related to the effect of globalization is a mixed set of results observed from the literature. One possible explanation is the difficulty of quantifying trade liberalization grade and the complications on measuring the consistency of liberalization among diverse countries. Other divergence sources are well presented by the studies inclusive of different Nations and econometric techniques. The Eastern European Countries integrated their economies into the world markets of all products and services in the financial market world as from 1980 (Rose, 4 TRADE OPENNESS 2004). The enhancement of the European Union nations to integrate further their economies into the world markets globally. It is not only the countries in my sample that end of the integration process as the Eastern European nations. Regarding the measures of trade and more so openness, the analysis of trade openness is on the basis of two different classes of indicating openness. They are a reflection of initial trade volumes, intercountry capital flows and restriction barriers. The next group of indicators concerns the de facto openness measures (Rodrik, 1998). It is also a reflection of the capital flows and more so stock of domestic economy and vice versa. The former indicator sets reveal the desired official policy of authorities out of the home country with regard to trade and financial integration as related factors. This model of measures is a reflection of exogenous policies. There is also an indication drawn from the latter class of indicators that the initial level of trade integration of the domestic economy is directly influenced by the specific features of the country inclusive of production specialization, size, geographical conditions among others (Rodrik,, Subramanian, & Trebbi, 2004). Regarding these sets of measures, the indicators have got a higher degree of correlation that exists between them. It is the fact as to why they are endogenous to the commencing moments of economic growth. The de facto measures illustrate the initial size financial and trade integration level of financial and more so trade integration of the domestic countries in the entire global world market of products and services. Empirical studies which utilize de facto measures of trade and more so financial integration give an extremely robust results and outcomes. The Eastern European countries which are inclusive of Belarus, Bulgaria, Hungary and Moldova are some of 5 TRADE OPENNESS the communist states as far as history is concerned. There have been reforms taken in terms of institutional, political and economic reforms during the last three decades. There are trade liberalization policies that have been initiated in almost the entire Eastern European Countries. The overarching queries have been given an attack by the countries in question providing a suitable attack strategy (Rodrik,, Subramanian, & Trebbi, 2004). Trade liberalization contributes towards the growth of a new dataset which entails the Eastern European Countries conflicting findings have been realized from the studies conducted on the topic under study thus leaving the question being investigated in this dissertation. In addition, the studies that have been already conducted on the topic have incorporated the policy oriented approaches and measures regarding trade openness known to be naturally subjective or maybe they incorporated the outcome oriented approaches of trade openness which tend to be shallow as they only capture a portion of a countries trade (Bhagwati, & Srinivasan, 2002). This paper gives an attempt of using a newly enhanced model of trade openness which is as objective as possible. The approach covers all aspects of trade openness inclusive of a country’s trade share and the interconnectivity globally. It builds and gives further details of the novel which was written two Authors Squalli & Wilson who constructed this particular measure with regard to trade openness. From the illustration above, there is an indication that efforts have been taken in order to curb the issue of Trade Openness and Economic growth in Eastern European Countries, but the findings have not been satisfactory. It is therefore the reason as to why this particular study is necessary in trying to investigate the primary objective which is finding out whether Trade Openness matters for Economic growth in Eastern European Countries. 6 TRADE OPENNESS Justification of the study The main purpose of the study is to determine whether Trade Openness matters for Economic growth in Eastern European countries. Most Eastern European Countries have been in position to implement trade liberalization measures for some time, therefore it is reasonable to take note of stock of performance after liberalization for the proposal of remedial actions when obliged. If in any case trade openness matters for an opportune economic growth, then the trade liberalization strategy should be speeded up for the objective to be achieved. Objectives of the study the general aim of the study was finding out whether openness in trade has an impact on economic growth. The specific objectives which guided the study in question were: a) To find out the effect of trade openness on the growth of any economy in the Eastern European Countries b) To assess the impact of the macro-economic variables on the growth of the economy in any of the Eastern European Countries Hypothesis of the study The study was guided by the following research hypothesis: H:1 - trade openness has an impact on the growth of any economy in the Eastern European Countries H:2- Trade openness affects the macro-economic variables on the growth of the economy in any of the Eastern European Countries 7 TRADE OPENNESS trade openness on the growth of any economy in the Eastern European Countries 8 TRADE OPENNESS Literature Review There is a growing literature empirically trying to shed some light on the impact of trade openness on the growth of any given economy. Majority of the empirical studies are unable to give proper findings in supporting the growth trade globalization. On the same note, some researchers have tried to find out a threshold related to economic development level. It is from the country meeting the threshold that it can therefore reap some attached benefits of trade and more so financial globalization. Financial globalization has been seen as the major obstacles of the global financial market stability. There has been need for employing the capital flows mechanisms and argue for the introduction of international trade barriers. Financial integration has been viewed by other Authors as a means of assisting third world countries develop while enhancing the stability of the industrialized countries (Rose & Wincoop, 2001). Even though the empirical studies develop positive impacts on the growth of economies of different countries, there are many unanswered questions that need instant attention and how the higher progress degree should be liberalized in the trade and more so financial aspect. It is quite notable that trade openness is attached to financial openness and that is the main reason as to why the financial openness aspect is incorporated in this investigation. Financial Openness and Growth The effect of financial integration on the growth of the economy has become a major interest for many researchers from way back 199o up to date. The Eastern European countries have undergone very many crises which have illustrated that there is an aspect of weak fiscal institutions and liberalized capital accounts which can be followed by a crisis of balance of 9 TRADE OPENNESS payment (Frankel & Romer, 1999). However, there is limited evidence from the conducted studies on the responsibility of financial integration for the global financial crisis. Financial globalization benefits not only via the traditional model but also through the Collateral benefits set. Studies which relate to the effect of financial globalization on economic growth of trade utilizes diverse models, samples of data and the span models. Countries from the Eastern European countries have been found to encompass positive impacts on capital account liberalization than the rest of the globe. The other researchers have not been in a better position to provide evidence of neither the positive nor negative 10 TRADE OPENNESS References Frankel, J. A., & Romer, D. H. (1999). Does trade cause growth? American economic review, 89(3), 379-399. Barro, R. J. (2001). Human capital and growth. American economic review, 91(2), 12-17. Rose, A. K., & Van Wincoop, E. (2001). National money as a barrier to international trade: The real case for currency union. American Economic Review, 91(2), 386-390. Rodriguez, F., & Rodrik, D. (2000). Trade policy and economic growth: a skeptic's guide to the cross-national evidence. NBER macroeconomics annual, 15, 261-325. Bhagwati, J., & Srinivasan, T. N. (2002). Trade and poverty in the poor countries. American Economic Review, 92(2), 180-183. Rose, A. K. (2004). Do we really know that the WTO increases trade?. American Economic Review, 94(1), 98-114. Rodrik, D. (1998). Why do more open economies have bigger governments?. Journal of political economy, 106(5), 997-1032. Rodrik, D., Subramanian, A., & Trebbi, F. (2004). Institutions rule: the primacy of institutions over geography and integration in economic development. Journal of economic growth, 9(2), 131-165.