permanent liberalizations. The results show that economic growth increases by
about 1.5 per cent (from 1.5 to 3.0 per cent) after reforms and the impact is
immediate and persistent. The investment rate takes off during the 10 years
after liberalization and remains high thereafter. After separating out other
reforms (such as domestic deregulation and privatization) they find that it was
trade liberalization that explained the bulk of the positive impact on growth
and investment.
The literature discussed above relates to trade policy and economic growth.
The evidence linking productivity growth to trade liberalization is probably
even more confusing. It is often argued that long-term productivity gains will
result from trade liberalization working through the competitive pressures of
the world economy. The literature examining this link shows no clear empiri-
cal results. Some studies show a negative and weak correlation between import
substitution and productivity growth; in others TFP is high in protected
sectors; in others there is continued and accelerating TFP pre- and post-protec-
tion; and in still others high levels of import penetration are associated with
low rates of productivity growth. The common finding that more efficient
firms doengage in exporting could be because exporting compels improve-
ments in efficiency, but it could also be because more efficient firms are better
able to compete in overseas markets (Deraniyagala and Fine, 1999).
Trade liberalization and case-study evidence
A case for case studies in studying economic growth was made in Chapter 2.
In-depth case studies of single or several countries can allow scholars to get a
general feel for whether trade liberalization is associated with more rapid
economic growth.
Contemporary case studies
Detailed case-study data is available for the change in growth, investment
rates and openness ratios between pre- and post-liberalization periods for 24
countries. This uses the Sachs and Warner (1995) index for openness further
developed by Wacziarg and Welch (2008). The measure defines ‘trade liber-
alization’ as being that moment when a country was defined as being contin-
uously ‘open’ according to the five criteria listed by Sachs and Warner. The
data reveal increased economic growth in 13 of the 24 countries, negative in
six and no discernible growth impact in 5. Among countries with a positive
growth difference, the magnitude of the growth increase ranged from a 0.83
percentage points increase in per capita income growth in Poland to 3.62
percentage points in Mauritius. There are large variations in before-and-after
comparisons of investment. Post-liberalization increases in investment rates
were striking in South Korea, Taiwan, Indonesia, Jordan and Guinea-Bissau,
while about half of the 24 countries exhibited zero or negative changes in
investment rates. Examination of the case studies suggests that the packag-
ing and timing of reforms are important factors in explaining difference in
International Trade, Openness and Integration 279