The Impact of Trade Liberalisation on Exports, Imports and the Balance of payments of Developing Countries

Abstract

This paper uses panel data and times series/cross section analysis to estimate the effect of trade liberalisation on export growth, import growth, the balance of trade and the balance of payments for a sample of 22 developing countries that have adopted trade liberalisation policies since the mid-1970s. We find that liberalisation stimulated export growth but raised import growth by more, leading to a worsening of the balance of trade and payments. To the extent that this has constrained the growth of output and living standards, the findings have important implications for the sequencing and degree of liberalisation.One of the major purposes of trade liberalisation is to promote economic growth by capturing the static and dynamic gains from trade through a more efficient allocation of resources; greater competition; an increase in the flow of knowledge and investment and, ultimately, a faster rate of capital accumulation and technical progress. Barriers to trade and anti-export bias will reduce export growth below potential. Import controls are likely to reduce efficiency, although, at the same time, they protect the balance of payments. The presumption is that trade liberalisation will raise the growth of exports and imports but the implications for the trade balance and the balance of payments are uncertain because this depends on the relative impact of liberalisation on export and import growth and on what happens to the prices of traded goods. Trade liberalisation may promote growth from the supply side but, if the balance of payments worsens, growth may be adversely affected from the demand side because the payments deficits resulting from liberalisation are unsustainable and not easily rectified by relative price (real exchange rate) changes (Khan and Zahler, 1985).The purpose of this paper is to examine this issue in a systematic way taking 22 developing countries from different continents that have undergone extensive trade liberalisation since the mid-1970s. We are interested in answering four major questions. First, what has been the effect of trade liberalisation on export and import growth in the aggregate for all countries in the sample and, are there differences between the major regions of Africa, Latin America, East Asia, and South Asia? Second, has the impact of liberalisation been greater on export growth or import growth? Third, how has liberalisation affected the price and income elasticities of demand for exports and imports? Last, what has been the effect of liberalisation on the trade balance and the current account of the balance of payments of countries: has there been improvement or deterioration? Theoretically, the effect of liberalisation on the trade balance or balance of payments is ambiguous whatever framework of balance of payments adjustment theory is used, so the issue becomes an empirical one (see later). The results have policy implications relating to the 'sequencing' of export and import liberalisation. If foreign

Foreign trade, human capital and economic growth: An empirical approach for the European Union countries

“…However it essentially remains a supply-orientated approach and most importantly, it does not take into account the fact that growth can be constrained by external demand. 2 Recent studies by Santos-Paulino and Thirlwall (2004), Pacheco-López and Thirlwall (2006), Vera (2006), Porcile et al (2007), among others, make clear how balance-ofpayments problems can constrain growth in developing countries as a result of trade liberalization. Some examples for particular EU countries are those from Léon-Ledesma (1999) for Spain, Kvedaras (2006) for the Central and Eastern European countries (CEE), Garcimartín et al(2008) for Ireland and Antunes and Soukiazis (2009) …”

Trade Openness and Disaggregated Import Demand in East African Countries

“…The models predict that movement towards openness can temporarily increase imports due to short run gains from re-allocation of resources within the economy. The implication is that trade openness has a positive relationship with imports [7].…”

“…The theory is based on the assumptions that traded goods are perfectly substitutable and can be traded across countries. The theory further assumes that international capital movements will passively adjust to restore the trade balance and it identifies two mechanisms in which trade openness might affect imports [7]. The first one is the domestic source path, this is associated with innovation while the second one is through absorption of foreign technology from leading trading partners.…”

“…Some empirical studies that have used the Autoregressive Distributed Lag (ARDL) bounds test approach to examine import demand functions include; Among the studies conducted on import demand functions for East African countries include studies by [7] [9] [11] among others. A study by [7] investigates the factors that determine bilateral trade between Kenya and Uganda.…”

“…An example of studies examining this theoretical literature are presented below; Firstly, [7] analyzing the impact of a reduction of tariff and non-tariff barriers on imports for a panel of selected developing countries shows that income and relatives prices positively influence import growth and that import tariff reduce import growth. It further shows that income and price elasticities are higher as a result of removing barriers to free trade.…”