North-South trade, openness and growth

It has long been thought that openness to international trade can be beneficial to a country in terms of growth, and that trade liberalisation can assist in enhancing countries growth rates. For a long time such arguments were based on static theories, in which trade raises the level of income, but not the long-run growth rate. Recently, models have emerged that show how countries can increase their long-run growth rates through trade. Trade can affect growth through a number of channels. For developing countries however, the primary benefit that trade provides is likely to be access to the technology of more advanced countries. This study examines various aspects of the relationship between openness to trade and economic growth in developing countries. The study concentrates on North-South trade, since it is expected that imports from the North enhance growth by allowing access to more advanced knowledge and technology. It is shown that trade with the North can benefit countries in the South in terms of higher growth, through the importation of Northern goods. Evidence is also found to suggest that trade has a role in transferring to the South the benefits of Research and Development (R&D) conducted in the North, although these results tend not to be robust. The second part of the study examines the impact of trade liberalisation on openness and growth. It is found that trade liberalisation has tended to lower openness to imports from the North, at least in the short-run. The results suggest the possibility of a J-curve effect whereby openness initially falls, but then recovers somewhat. In the long-run we may expect openness to rise following liberalisation, but this cannot be shown in our dataset. The relationship between liberalisation and growth is also found to follow a J-curve, with liberalisation initially leading to a reduction in growth, but in the long-run increasing growth in per capita income