THE RELATIONSHIP BETWEEN TRADE OPENNESS AND ECONOMIC GROWTH. A CASE STUDY OF NIGERIA AND GHANA

THE RELATIONSHIP BETWEEN TRADE OPENNESS AND ECONOMIC GROWTH.

 A CASE STUDY OF NIGERIA AND GHANA

Despite the recent wave of liberalizations, the debate about the linkages and causality between trade openness, growth, and income circulation is still ongoing (Rodriguez and Rodrik, 2001). More external countries likely to have higher economic growth in the long run, according to empirical evidence (e.g., among others, Sachs and Warner, 1995; Edwards, 1998; Frankel and Romer, 1999; Dollar and Kraay, 2004; Lee et al., 2004). Freund and Bolaky (2008) and Chang et al. (2009), using larger databases and cross-section or panel-data estimations, show that trade openness has a beneficial effect on income and that this effect is persistent. Complementary policies strengthen the beneficial relationship. However, according to other authors (e.g., Rodriguez and Rodrik, 2001), most of this work has at least two fundamental flaws that call their conclusions into question: the way trade openness is measured and the estimating methodologies used.

A review of the available research on trade and growth reveals that trade openness is not well defined. Many authors interpret trade openness to mean trade policy orientation, and their goal is to determine the impact of trade policy or trade liberalization on economic growth. Other scholars, on the other hand, see trade openness as a complex concept that encompasses not just a country’s trade policy orientation but also a set of other domestic policies (such as macroeconomic or institutional policies) that all contribute to the country’s externality. The authors’ goal is to determine or quantify the impact of global policy orientation on economic growth. In another situation, a more global perspective of trade openness may be preferred, encompassing not only the policy component but also other non-policy elements that clearly influence trade and a country’s outward orientation. Geographical and infrastructure factors, for example, have an impact on commerce and a country’s outward orientation, regardless of its policy orientation.

Various types of trade openness metrics have been presented and utilized in empirical studies of the link between openness and growth. They are, for the most part, compatible with the three possible definitions of openness discussed above. Many authors have kept measurements based on trade restrictions/distortions, such as average tariff rates, average coverage of quantitative barriers, and frequency of non-tariff barriers or collected tariff ratios, in line with the trade policy orientation definition (see, e.g., Pritchett, 1996; Harrison, 1996; Edwards, 1998, Yanikkaya, 2003). These markers are, without a doubt, quite important The overall restrictions/distortions produced by trade policies are only measured in part. Furthermore, the data needed to calculate such indicators is sometimes only accessible for a small number of nations and years. Various “qualitative” indices for classifying countries according to their trade and global policy regime have been presented in terms of the global policy orientation concept (see, e.g., the 1987 World Development Report outward orientation index or the openness indices proposed by both Sachs and Warner, 1995, and Wacziarg and Welch, 2003). Unfortunately, such measures only provide a very rough categorisation of countries (from rather closed to rather open). Furthermore, many of the data needed to create these indices is only available for a few nations and at a single point in time.

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