The effect of trade openness on economic growth: Some empirical evidence from emerging market economies

• Published date: 01 August 2020
• DOI: http://doi.org/10.1002/pa.2081
• Author: Chandrashekar Raghutla
• Date: 01 August 2020

ACADEMIC PAPER

The effect of trade openness on economic growth:

Some empirical evidence from emerging market economies

Chandrashekar Raghutla

Department of Economics, GITAM School of

Humanities and Social Sciences, GITAM

University, Hyderabad, Telangana, India

Correspondence

Chandrashekar Raghutla, Assistant Professor,

Department of Economics, GITAM School of

Humanities and Social Sciences, GITAM

University, Hyderabad, Rudraram, Patancheru

(Mandal), Sangareddy 502329, Telangana,

India.

Email: chandrashekareco@gmail.com

This study investigates the impact of trade openness on economic growth in a panel

of five emerging market economies, covering the data period from 1993 to 2016.

Based on the panel estimation methods, the empirical results confirm the long-run

relationship among trade openness, economic growth, financial development, infla-

tion, labour force, and technology, whereas the findings of long-run elasticities show

that trade openness has a positive considerable impact on economic growth. Further-

more, the heterogeneous panel non-causality tests indicate the presence of a bidirec-

tional causality between economic growth and inflation and a unidirectional causality

that runs from economic growth to trade openness and economic growth to financial

development in the short run. Finally, the findings suggested that trade openness

plays a substantial role in promoting economic growth while also promoting eco-

nomic development in these five emerging market economies.

JEL CLASSIFICATION

F1; O47

1|INTRODUCTION

A dynamic and significant subject in both international trade and eco-

nomic development has been the potential impact on economic

growth. Based on this, numerous studies have examined the linkages

between trade openness and economic growth in the trade–growth

literature. Nevertheless, the focus of both developed and emerging

economies have shifted towards increasing the trade openness across

the world. The trade openness has several advantages, that is, it can

increase more opportunities for easy export and import while creating

an employment opportunity. It can also significantly increase eco-

nomic growth. The neoclassical economists highlighted that the trade

growth is the main drive for economic growth, and they also argued

that there is a strong significant association between trade and eco-

nomic growth. Given this significance, both developed and developing

countries have started to focus on increasing their output. For exam-

ple, output improves the level of productivity; it can meet the demand

for goods and services, and this can increase with trade openness.

Given this background, the emerging market economies would then

become the world principal “engine of new demand growth and

spending power”in the world (Wilson & Purushothaman, 2003).

Goldman (2003) predicted that the emerging market economies will

be the greater economy in the world by 2050, and it might be higher

than the combined economies of the G6 countries, namely, United

States, Italy, Japan, Germany, United Kingdom, and France.

The emerging market economies like Brazil, Russia, India, China,

and South Africa (BRICS) are the most significant countries in the

world in terms of foreign trade, production of output, and economic

development. However, the emerging market economies have signifi-

cantly reached their country developmental targets, and as a result,

emerging market nations have achieved a positive economic growth

rate. Therefore, to maintain the significant growth rates, those econo-

mies mainly focus on increasing the share of output in total share of

world output. Furthermore, it has two advantages: First, introducing

new technological innovation will increase productivity, through

increasing demand for outputs, which are main drivers of economic

development in the long run. Second, according to the classical as well

as neoclassical economists, the international trade makes a significant

contribution to the development of economic growth, and it is also

“engine of the growth.”Moreover, the trade openness also encour-

ages more production; therefore, we widely accepted that an open

economy has more impact on faster economic growth compared with

a closed economy. Formerly, the emerging market economies have

started focusing more on international trade and making more

Received: 14 December 2019 Accepted: 11 January 2020

DOI: 10.1002/pa.2081

J Public Affairs. 2020;20:e2081. wileyonlinelibrary.com/journal/pa © 2020 John Wiley & Sons, Ltd 1of8

https://doi.org/10.1002/pa.2081