Running head: TRADE OPENNESS
Does Trade Openness matter for Economic growth in Eastern European Countries?
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
relevant managerial skills alongside other organizational expertise forms. It fosters the
enhancement of the home based trade markets and more so imposing macroeconomic policy
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
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,
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
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
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
H:2- Trade openness affects the macro-economic variables on the growth of the economy in any
of the Eastern European Countries
trade openness on the growth of any economy in the Eastern European Countries
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
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
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.
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