International Trade, Distortions, and Long-Run Economic Growth

The links between trade and growth are examined in a neoclassical model of an open economy in which domestic production requires both domestic and imported inputs. The model shows that trade distortions induced by policies such as tariffs and exchange controls generate cross-country divergences in growth rates and in per capita income over a long period. The empirical results confirm that tariff rates and black market premia, interacting with the estimated share of free trade imports, have significant negative effects on the growth rate of per capita income across countries.