Openness, Trade Liberalization and Growth In Developing Countries

Abstract

This paper critically reviews the literature on the relationship between trade orientation and economic growth in the developing countries. This paper is divided into three main parts. Part I deals with large multicountry studies, and analyzes the methodology used in these works, as well as the results obtained. In discussing these issues I emphasize the role of exchange rate policy during the transition from protected to liberalized economies. This analysis tackles the effectiveness of devaluation in Africa. I argue that there is increasingly abundant evidence suggesting that the historical "devaluation pessimism" in Africa is unwarranted. Part H of the paper concentrates on the relationship between trade orientation, liberalization policies and employment. I argue that less distorted trade regimes will, generally, result in the use of more labor intensive techniques. Moreover, recent results suggest that the unemployment transitional costs of liberalization programs are significantly smaller than what was traditionally thought. Part III discusses econometric studies on the relationship between trade orientation, exports expansion and growth. I argue that most of this literature has serious shortcomings, stemming from a lack of theoretical underpinnings and from measurement problems. I argue that new work on trade policy and growth should increasingly concentrate on investigating the microeconomic channel through which trade policy affects growth.

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