Openness and Growth: Cross‐Sectional and Time‐Series Evidence

While various economic models predict that openness to international trade accelerates productivity and promotes economic growth and convergence, the empirical evidence (mostly based on cross‐sectional data) has been mixed and inconclusive. This paper investigates the issue using annual data from the 1950–1992 period for a sample of 56 economies. When the relationship between openness and growth (or convergence) is examined in the cross section, the results are fragile and statistically insignificant. When the complete panel is employed, however, and the time dimension of the data is fully utilized, a positive and statistically significant relationship between openness and growth emerges. In particular, it is shown that an increase in trade (exports plus imports) as a percentage of GDP by 10 percentage points results in a permanent increase in the growth rate by approximately 0.5 percent.