Things are different when you open up: Economic openness, domestic economy, and income

Beja, Edsel Jr. (2009): Things are different when you open up: Economic openness, domestic economy, and income. Unpublished.

Abstract

“Does economic openness increase income?” is retested using quantity measures of trade, finance, and domestic economic size, and the short answer is: “It de-pends”. The results show that Africa and the Americas lose from both trade and financial openness, while Asia gains from trade openness but loses from financial openness. The industrialized region benefits from both trade and financial open-ness. In all regions, the domestic base compensates for any adverse effects of economic openness. The overall experience of economies with openness can be enhanced with healthier external and domestic engagements. The case study on the Philippines finds that the country gains from trade and financial openness but not from the domestic base. In this case, economic progress is difficult because the gains from external engagement are wiped out by the losses from domestic economy disengagement.

• Item Type: MPRA Paper
• Language: English
• Keywords: Economic openness, trade, finance, domestic economy, income
• Subjects: F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F40 - General; F - International Economics > F0 - General > F00 - General; F - International Economics > F2 - International Factor Movements and International Business > F20 - General; F - International Economics > F1 - Trade > F10 - General; O - Economic Development, Technological Change, and Growth > O1 - Economic Development > O10 - General; B - History of Economic Thought, Methodology, and Heterodox Approaches > B5 - Current Heterodox Approaches > B50 - General

References

Acemoglu, D., Johnson, S., & Robinson, J. (2001). “The Colonial Origins of Comparative Development: An Empirical Investigation,” American Economic Review, 91(5): 1369-1401

Akamatsu, K. (1961), “A theory of Unbalanced Growth in the World Economy”, Review of World Economics, 86(1): 3-25 Amsden, A. (1989). Asia’s Next Giant, New York, NY: Oxford University Press

Beck, T., Levine, R., & Loayza, N. (2000). “Finance and the Sources of Growth,” Journal of Financial Economics, 58(1-2): 261-300

Chang, H. (1996). The Political Economy of Industrial Policy. London, UK: Macmillan Press

Chang, H.-J. (2002). Kicking Away the Ladder, London, UK: Anthem Press

Chang, R., Kaltani, L., & Loayza, N. (2005). “Openness can be Good for Growth: The Role of Policy Complementarities,” Working Paper No. 11787, National Bureau of Economic Research

Chenery, H., Robinson, S., & Syrquin, M. (1986). Industrialization and Growth: A Comparative Study, Oxford, UK: Oxford University Press

Dollar, D. (1992). “Outward-Oriented Developing Economies Really Do Grow More Rapidly: Evidence from 95 LDCs, 1976-1985,” Economic Development and Cultural Change, 40(3): 523-544

Dollar, D. & Kraay, A. (2003). “Institutions, Trade, and Growth,” Journal of Monetary Economics, 50(1): 133-162

Edison, H., Klein, M., Ricci, L., & Sloek, T. (2002). “Capital Account Liberalization and Eco-nomic Performance: Survey and Synthesis,” Working Paper No. 9100, National Bureau of Economic Research

Edwards, S. (1993). “Openness, Trade Liberalization and Growth in Developing Countries, Journal of Economic Literature, 31(3): 1358-1393

Edwards, S. (1998). “Openness, Productivity, and Growth: What Do We Really Know?,” Economic Journal, 108(447): 383-398

Edwards, S. (2001). “Capital Mobility and Economic Performance: Are Emerging Economies Different?” Working Paper No. 8076, National Bureau of Economic Research

Evans, P. (1995). Embedded Autonomy: States and Industrial Transformation. Princeton, NJ: Princeton University Press

Feldstein, M. & Horioka, C. (1980). “Domestic Saving and International Capital Flows,” Economic Journal, 90(358): 314-329

Frankel, J. & Romer, D. (1999). “Does Trade Cause Growth?,” American Economic Review, 89(3): 379-399

French, K. & Poterba, J. (1991). “Investor Diversification and International Equities Markets, American Economic Review, 81(2): 222-226

Gerschenkron, A. (1962). Economic Backwardness in Historical Perspective, Cambridge, MA: Belknap Press

Gold, T. (1986). State and Society in the Taiwan Miracle, Armonk, NY: M.E. Sharpe

Griffin, K. & Enos, J. (1970). “Foreign Assistance: Objectives and Consequences,” Economic Development and Cultural Change, 18(3): 313-327

Haggard, S. (1990). Pathways from the Periphery: The Politics of Growth in the Newly Industrializing Countries, Ithaca, NY: Cornell University Press

Harrison, A. (1996). “Openness and Growth: A Time-Series, Cross-Country Analysis for Developing Countries,” Journal of Development Economics, 48(2): 419-447

Henry, P. (2007). “Capital Account Liberalization: Theory, Evidence, and Speculation, Journal of Economic Literature, 45(4): 887-935

Hirschman, A. (1958). The Strategy of Economic Development, New Haven, CT: Yale University Press

Johnson, C (1982). The MITI and the Japanese Miracle, Stanford, CA: Stanford University Press

Kaldor, N. (1967). Strategic Factors in Economic Development, Ithaca, NY: Cornell University Press

Kaminsky, G. & Reinhart, C. (1999). “The Twin Crises: The Causes of Banking and Balance-of-Payments Problems,” American Economic Review, 89(3): 473-500

King, R. & Levine, R. (1993). “Finance and Growth: Schumpeter might be Right,” Quarterly Journal of Economics, 108(3): 717-737

Kose, A., Otrok, C., & Prasad, E. (2008). “Global Business Cycles: Convergence or Decoupling,” Working Paper No. 13292, National Bureau of Economic Research

Kose, A., Prasad, E., & Terrones, M. (2003). “Volatility and Comovement in a Globalized World Economy: An Empirical Exploration,” Working Paper No. 246, International Monetary Fund

Kose, A., Prasad, E., Rogoff, K., & Wei, S. (2007). “Financial Globalization: A Reappraisal,” Working Paper No. 189, International Monetary Fund

Lall, S. (1996). Learning from the Asian Tigers: Studies in Technology and Industrial Policy, London, UK: Macmillan

Lane, P. & Milesi-Ferretti, G.M. (2007). “The External Wealth of Nations Mark II: Revised and Extended Estimates of Foreign Assets and Liabilities, 1970-2004”, Journal of International Economics, 73(2): 223-250

Levine, R. & Renelt, D. (1992). “A Sensitivity Analysis of Cross-Country Growth Regressions,” American Economic Review, 82(4): 942-963

List, F. (1966). The National System of Political Economy, New York, NY: Knopt Press

Markusen, J. (1983). “Factor Movements and Commodity Trade as Complements,” Journal of International Economics, 14(3-4):341-356

McCallum, J., 1995, “National Borders Matter: Canada-U.S. Regional Trade Patterns,” American Economic Review, 85(3): 615-23.

Mundell, R. (1957). “International Trade and Factor Mobility,” American Economic Review, 47(3): 321-335

Myrdal, G. (1957). Economic Theory and Under-developed Regions, London, UK: Duckworth

Obstfeld, M. (2008). “International Finance and Growth in Developing Countries: What have we Learned?,” Working Paper No. 34, Commission on Growth and Development

Prasad, E., Rogoff, K. Wei, S., & Kose, A.(2003). “Effects of Financial Globalization on Devel-oping Countries: Some Empirical Evidence,” Occasional Paper No. 220, International Monetary Fund

Prasad, E., Rajan, R., & Subramanian, A. (2007). “Foreign Capital and Economic Growth,” Brooking Papers on Economic Activity, 2007(1): 153-209

Pritchett, L. (1996). “Measuring Outward Orientation in LDCs: Can it be Done?,” Journal of Development Economics, 49(2): 307-355

Quinn, D. (1997). “The Correlates of Changes in International Financial Regulation,” American Political Science Review, 91(3): 531-551

Reinert, E. (2007). How Rich Countries Got Rich … And Why Poor Countries Stay Poor. New York, NY: Public Affairs

Rigobon, R. & Rodrik, D. (2005). “Rule of Law, Democracy, Openness, and Income: Estimating the Interrelationships,” Working Paper No. 10750, National Bureau of Economic Research

Rodriguez, F. (2007). “Openness and Growth: What Have We Learned?” in Ocampo, J.A., Jomo K.S., & Vos, R. (editors), Growth Divergences, London: Zed Books: 172-203

Rodriguez, F. & Rodrik, D. (1999). “Trade Policy and Economic Growth: A Skeptic’s Guide to the Cross-National Evidence,” Working Paper No. 7081, National Bureau of Economic Research

Rodrik, D. (1998). “Who Needs Capital Account Convertibility?,” Essays in International Finance, No. 207: 55-65

Rodrik, D., Subramanian, A., & Trebbi, F.(2004). “Institutions Rule: The Primacy of Institutions over Geography and Integration in Economic Development,” Working Paper No. 189, In-ternational Monetary Fund

Rosenstein-Rodan, P. (1961). “Notes on the theory of the ‘big push’” in Ellis, H. & Wallich, H. (eds.) Economic Development for Latin America, New York: St. Martin’s

Tinbergen, J. (1962). “An Analysis of World Trade Flows” in Tinbergen, J. (ed.), Shaping the World Economy, New York, NY: New Century Fund

Wacziarg, R. & Welch, K. (2003). “Trade Liberalization and Growth: New Evidence,” Working Paper No. 10152, National Bureau of Economic Research

Wade, R. (1990). Governing the Market, Princeton, NJ: Princeton University Press

Weiss, L. & Hobson, J. (1995). States and Economic Development: A Comparative Historical Analysis, Cambridge, UK: Cambridge University Press