Impact of Trade Liberalization on the Economy: Cross-country Analysis of Selected Asian Economies

Abstract

There exists a controversy on the direction of the causality and relationship among trade liberalization and economic growth. This controversy motivates us to reinvestigate the determinants of the economic growth in the framework of multivariate model. The present study is an attempt to see the impact of trade liberalization on the economic growth of the selected countries of SAARC and ASEAN over the period of 1990 to 2009. To capture the growth effects of trade liberalization an index is calculated on the bases of principal component analysis. With the help of this index, we test the hypothesis that whether the trade liberalization along with other variables is an important determinant of the economic growth. For this purpose we use the fixed and random effect models. We come up with the conclusion that the trade liberalization may improve the economic growth of the developing countries depending on their policy response to the relative factors. Additionally we also find elasticities of capital and labor exhibiting constant return to scale production function in the presence of meager trade parameters.

Keywords: Trade Liberalization Index, Fixed and Random Effect Models, Constant Return to Scale, Hausman Test, Economic Growth