Trade Openness and Economic Growth

Trade liberalization has been central to the discussion of development policy in recent decades. In the 1990s, the Washington Consensus, a set of 10 major development policy recommendations from Washington-based institutions such as the International Monetary Fund (IMF) and the World Bank (WB), regarded trade openness as essential to the achieve higher economic growth. Trade policy, according to the Washington Consensus, should focus on lowering tariffs on imports, especially cheap intermediate inputs that give countries competitive edges in export industries. Although acknowledging the negative effects this type of policy could have on competing domestic industries, the Consensus believed that protection would create “costly distortions that end up penalizing exports and impoverishing the domestic economy” while generating a “massive potential” of corruption (Williamson 1990). This pro-trade-liberalization view garnered early support from academia, as evidenced through a host of cross-country econometric studies by Sachs and Warner (1995), Harrison (1996) and Edwards (1998), among others. All these papers suggest that trade liberalization has a positive impact on economic growth