Is there any impact of trade liberalisation on growth? Experiences of India and Korea

Is there any impact of trade liberalisation on growth? Experiences of India and Korea

Can trade openness increase economic growth for India and Korea?

Trade liberalisation in developing countries over the last 20 years has often been implemented considering it as a pre-requisite to growth. In this context, this paper uses ARDL approach to co-integration to examine the relationships between growth and trade liberalisation in the context of India and Korea.

The paper starts by discussing the debate over the growth-enhancing effect of trade liberalization. After that, the paper examines:

  • the graphical and ordinary trend analysis of the behaviour of the trade openness indices and growth rates of the India and Korea
  • the question whether the trends exhibited by the series are deterministic
  • the question of whether there is any meaningful relationship between increased openness and growth

The author makes the following observations based on his analysis:

  • both India and Korea opened up and consequently shares of trade (export, import and sum of the two) in their GDPs rose significantly
  • the process of opening up accelerated in India and decelerated in Korea after 1973
  • real growth rates of both India and Korea fluctuated and there is some evidence of a rise in Indian real growth rates
  • the rates of growth of GDP and per capita GDP swelled in Korea at a rapid rate up to the beginning of the 1970s and fell subsequently
  • the series do not have deterministic trends so that temporary shocks can have permanent effects

Using three indicators of liberalisation, this paper finds no meaningful relationship between the growth rate of real GDP or per capita real GDP and trade openness. This finding is very interesting in view of the fact that Korea was trade-oriented since the early 1960s and showed a very high and rapidly rising share of trade in their total production in the subsequent years while India followed the ISI strategy in the 1960s with a very low and declining share of trade in their total output and changed this strategy in recent years. Still, none of the countries experienced a positive long-term relationship between trade share and growth.

The author suggests further investigation in order to know whether the process of rapid growth causes declining importance of trade or a rising importance of trade leads to a deceleration in economic growth.