Journal of Economic Growth, 7, 5780, 2002

# 2002 Kluwer Academic Publishers. Manufactured in The Netherlands.

How Robust is the Growth-Openness Connection?
Historical Evidence
ATHANASIOS VAMVAKIDIS
International Monetary Fund, 700 19th Street, N.W., Washington DC 20431, 202-6235405
Previous literature has established a positive correlation between openness to international trade and GDP per
capita growth for developed and developing economies in recent decades. However, looking at historical
evidence from 1870 to the present, this paper nds no support for a positive growth-openness connection before
1970. In fact, the correlation is negative for the period 19201940. Cross-country growth regressions estimated
for the period 19201990 suggest that the positive correlation between openness and growth is only a recent
phenomenon. The paper provides useful conclusions regarding the robustness not only of the openness variables
but also of other growth determinants.
Keywords: economic integration, economic growth of open economies
JEL classication: F15, F43
1. Introduction
The literature on the gains from trade is one of the earliest and broadest in economics.
Welfare gains from trade have long been part of the economic canon, but in recent decades
the putative benets of trade have been expanded to include its role as an accelerator of
economic growth. Trade liberalization is now often advanced as a prime source of
convergence and as a key element, among other market policies and reforms, of any
development strategy. Moreover, the correlation between openness and growth has
been estimated to be positive in the empirical growth literature, although some recent
studies have been more skeptical and found that the statistical signicance of this
correlation depends on the specication of the empirical model and the proxy variable for
openness.
The previous empirical literature on the growth-openness connection has focused solely
on evidence from the decades after 1970; hence, its usefulness in assessing the long-term
relation between trade and growth is limited. The difculty of nding data for earlier time
periods has been one of the main reasons that growth regressions have been estimated only
for recent decades.
The present paper seeks to ll this gap by estimating the impact of trade protection on
growth using historical data from 1870 to 1990. A historical data set is put together for the
determinants of growth as described in the existing literature. Growth regressions are
estimated for the period 19201990 using cross-country estimation methods, and
correlations between openness and growth for earlier decades. Estimating growth
regressions for a long historical period provides useful conclusions regarding the
robustness not only of the openness variables but also of the other independent variables in
growth empirical models. For example, the existence of conditional convergence and the
positive impact of investment and education on growth are conrmed below. Even though
growth regressions have been criticized in the recent literature (see, for example, Temple,
2000), they remain a useful tool. Replicating them for earlier periods than in the existing
literature is another way to test the robustness of their results.
The evidence suggests that the positive correlation between free trade and growth after
1970 is an exception. For the sub-periods between 1870 and 1970, there is no correlation
between openness and growth, with the exception of the interwar period in which the
correlation is negative. For the period 19701990, the estimates conrm the existing
literature, nding a positive correlation between openness and growth, whose signicance,
however, is sensitive to the proxy variable for openness. This suggests that future research
should focus on constructing better measures of openness.
Given its importance in current theory and policy, it is easy to overlook the fact that
free trade is a historical aberration. In fact, protectionism was the rule rather than the
exception for most of this century, especially in developing countries. This implies either
that policy-makers were slow to realize the growth potential of free trade, or that trade
and growth have not always been positively correlated. The evidence that the impact of
trade openness on growth is not positive in periods before 1970 may suggest that being
open to trade when protection in the world economy is high does not result in growth
benets.
The structure of the paper is as follows: Section 2 reviews the previous theoretical and
empirical literature on trade and growth; Section 3 contains estimates of the growth-
openness connection based on cross-country regressions for the period 19201990;
Section 4 presents growth-openness correlations for the period 18701910; and Section 5
sets out the basic conclusions and policy implications.
2. The Previous Literature on Openness and Growth
2.1. Empirical Studies
The growth-openness connection is still an open question in the empirical literature.
Although some studies have found a positive impact of openness on growth, others have
doubted the robustness of this impact. The rst group of studies includes Dollar (1992),
Edwards (1998), Barro and Sala-i-Martin (1995),
1
Sachs and Warner (1995), Greenaway
et al. (1998),
2
and Vamvakidis (1998), to mention a few, and used cross-country
regressions and found that trade distortions caused by government intervention lead to
slow growth rates.
3
A recent project on openness and growth by the Bank of England
conrmed these results (see Proudman and Redding, 1998). Ben-David (1993) and Sachs
58 ATHANASIOS VAMVAKIDIS
and Warner (1995) have further shown that only open economies experience unconditional
convergence. Frankel and Romer (1999) conrm that trade has a large and robust impact
on growth by using geographic characteristics to obtain instrumental variables estimates.
Vamvakidis (1999) found that openness has a positive and statistically signicant
correlation with growth and investment when a xed effects model is estimated using
panel data.
4
Harrison (1996) drew similar conclusions, nding that the estimates of a
variety of openness measures are more signicant in xed effects regressions than in
cross-country regressions. Lee (1996) used industry level data for Korea, and found that
trade protection reduced growth rates of labor productivity and total factor productivity
during the period 19631983.
However, another group of studies has recently argued that the estimated impact of
trade on growth is sensitive to the variables measuring openness and the other independent
variables included in the growth regression. Harrison (1996) found that not all openness
measures are signicant in cross-country growth regressions, although most of them have
positive estimates. Rodriguez and Rodrik (1999) demonstrated that the positive correlation
between openness and growth found in Dollar (1992), Sachs and Warner (1995), Ben-
David (1993) and Edwards (1998) is not robust, either because of shortcomings in the
openness measures used, or because these studies did not control for other important
growth determinants. Levine and Renelt (1992) found that the positive impact of openness
on growth is only indirect, through higher investment, and that the direct impact is not
robust to extreme-bounds analysis. Clerides et al. (1998) have presented sectoral level
evidence from Colombia, Mexico and Morocco, showing that the positive association
between exporting and efciency found in previous literature is explained by the self-
selection of the more efcient rms into the export market, which suggests that there are
no signicant learning by exporting effects. Finally, Sala-i-Martin (1997) found that the
Sachs and Warner openness measure is the only signicant openness measure for growth
when he constructed condence levels for the entire distribution of coefcients for
different growth determinants.
These results do not necessarily imply that openness has no impact on growth, since the
available variables may not be good proxies for openness. None of the studies cited above
has suggested trade protection as an element of a development strategy, since protection
does not seem to have a positive impact on growth in any of the empirical specications.
Their main policy conclusion is that a development strategy should not be based solely on
openness, but also on good macroeconomic policies and efcient institutions, which seem
to be more robust in growth regressions.
As already mentioned, one of the main problems in the empirical literature on trade and
growth is its reliance on data mainly for the decades after 1970. The poor availability of
data covering longer periods has been an obstacle. However, in order to give valid
recommendations regarding trade policy, long run evidence can provide useful insights. It
could clarify, or raise even more questions about, an issue that remains still open, the
growth-openness connection.
A related shortcoming of the recent literature is that the impact of domestic trade
policies on growth has typically been analyzed only in the context of an open world
economy, neglecting the consequences of a different world trade regime. The world
economy has been relatively open during the last three decades, but not in earlier periods.
HOW ROBUST IS THE GROWTH-OPENNESS CONNECTION? 59
There are good theoretical arguments that protection in the rest of the world will limit the
gains from openness.
2.2. Theoretical Studies
Most of the early theoretical studies on the growth-openness connection argued that trade
intervention can increase growth and welfare under certain circumstances. The infant
industry argument is one of the most popular examples (see Bardhan, 1970, chapter 7).
Traditional trade models (for example, Dornbusch et al., 1977, and Rodriguez, 1974) have
shown that there is an optimal level of protection for a country that can inuence its terms
of trade. Brecher (1974, 1992) has shown that protection can raise income when there is no
full employment. The MundellFleming model predicts that the expenditure shift towards
domestic products caused by trade protection can raise income.
5
Some of the recent studies have also shown that protection and growth may be
positively correlated when certain conditions are met. Sachs (1996) argued that protection
is often accompanied by scal expansion and a variety of government interventions to
support industrialization, which leads to fast growth in the short term, but slow growth, or
even economic crisis, in the long run. Redding (1999) presented a model in which
comparative advantage becomes endogenous and technological progress in the past
determines comparative advantage in the present, which then determines technological
progress in the future. Under free trade, an economy will specialize in sectors in which it
has a static comparative advantage. However, these may not be sectors in which it has a
comparative advantage in terms of potential productivity growth and, therefore, selective
protection may increase welfare and result in faster technological change (assuming that
the government can select the right sectors). Spilimbergo (2000) presented a model in
which a more advanced country (North) can lose from trading with a less developed
country (South), if preferences are nonhomothetic, the South is large with respect to the
North and/or the South's preference for low-technology goods is high.
Even though the studies cited above describe conditions under which protection may
result in faster growth, none advocates protection as a long run development strategy, in
contrast to what many developing countries have adopted in the past. Protection in most of
these studies is a short-term strategy, to prepare an economy to compete in the
international market in the long term.
The literature against trade protection focuses mainly on the long run implications of
government intervention in trade. Many of the recent theoretical models on trade and
growth focus on issues of R&D, increasing returns to scale, and the technological
spillovers caused by trade. The motivation for this is that increases in the capitallabor
ratio account for less than half of the growth rates observed in the data; the residual is
considered to represent technology improvements. Some of the representative studies are
Grossman and Helpman (1991), Rivera-Batiz and Romer (1991), Romer (1990) and
Krugman (1990, chapter 11). In these models, the benets from free trade are derived
primarily through scale effects. These effects are channeled through R&D, which
generates innovations either in the form of new consumer products or new capital goods.
Innovation is a positive function of past innovations, which represent the stock of existing
60 ATHANASIOS VAMVAKIDIS
knowledge. International trade fosters innovation by increasing the stock of knowledge
through the ow of ideas and technological spillovers. A large international market raises
the temporary monopoly gains to innovators, resulting in more R&D and faster growth.
Moreover, trade enables countries to avoid redundant R&D efforts, which may siphon
resources away from more productive uses.
These models predict that the importance of domestic trade openness declines when
protection in the rest of the world increases. For example, in the polar case where the rest
of the world is closed, domestic openness is irrelevant for growth. Therefore, the trade
regime of the world economy is a crucial factor in determining the impact of domestic
trade policy on growth, something already emphasized in BhagwatiSrinivasan (1985).
Furthermore, the impact of trade protection on growth is sensitive on the parameters and
assumptions of these models. For example, Grossman and Helpman (1991) discuss cases
in their model in which economic integration among dissimilar countries leads one of
them to specialize in a slow growing sector, and therefore, protection of a fast growing
sector could lead to faster growth. Baldwin et al. (2001) presented a stages-of-growth
model, in which international trade driven by lower transportation cost and market
opening triggers a global divergence process, in which the North industrializes and grows
fast, diverging from the South. Agglomeration creates incentives for investment and
innovation in the North, driving global divergence, which is both the cause and the result
of growth in the North.
Some of the recent studies have found investment to be the main link between trade and
growth. Baldwin and Seghezza (1996) have argued that trade fosters investment because
of the following three reasons: (i) the traded sector is more capital intensive than the non-
traded sector; (ii) the production of investment goods uses imported intermediates; and
nally, (iii) competition in the international market of machinery and capital equipment
lowers the price of capital. Lee (1995) presented a neoclassical growth model in which
trade liberalization fosters growth if foreign capital goods are used relatively more than
domestic capital goods for the production of capital stock.
3. Historical Versus Recent Evidence: Openness and Growth in the
Period 19201990
Since the existing theory on the growth-openness connection does not seem to provide a
denite answer, this section lets long term empirical evidence address the issue. This
section provides results for growth regressions estimates in the period 19201990. First,
the section replicates previous literature by estimating an empirical growth model for the
period 19701990, and then it estimates a similar model for earlier decades. The growth
regressions are similar to the models estimated in Barro and Sala-i-Martin (1995), Sachs
and Warner (1995), and Levine and Renelt (1992).
6
Following criticism by Temple (2000)
on the growth empirics, the reported results include White heteroskedasticity-consistent
standard errors, the Jarque-Bera test statistic for testing whether the residuals are normally
distributed, the White heteroskedasticity test (without cross-terms), the Ramsey RESET
test for specication errors, even though such tests are very rarely reported in the growth
literature, and robustness results for extreme bounds analysis for the openness measures.
7
HOW ROBUST IS THE GROWTH-OPENNESS CONNECTION? 61
The countries and variables in the regressions vary according to data availability in the
different time periods. Appendix 2 describes the data set and sources. Since previous
studies have found that the impact of openness on growth is sensitive to the openness
measure, we use a variety of openness measures for most of the periods we consider
(although, this is not possible for the very early periods).
3.1. Trade and Growth from 1970 to 1990
The estimates for the period 19701990 are based on six different variables that proxy for
openness to international trade: the Sachs and Warner (1995) openness dummy, the
average tariff rate and the average non-tariff barrier coverage from the Barro and Lee data
set, the average ratio of import duty revenues to total imports, the average trade share and
the average trade share PPPadjusted.
8
Since none of these six openness measures perfectly
captures the extent to which a country is open to international trade, using all of them can
provide a better understanding of the growth-openness connection.
Openness seems to have a positive impact on growth for the period 19701990, but its
statistical signicance depends on the measure of openness used. This nding is in
agreement with the recent empirical trade and growth literature as discussed in the
previous section. The parameter estimates are in Table 1. The openness dummy, the trade
share and the PPP adjusted trade share have positive and statistically signicant estimates
at least at the 5 percent level. The average tariff rate has a negative and statistically
signicant estimate at the 5 percent level when the investment share is included, and at the
10 percent level when the investment share is excluded. However, the duty ratio and the
non-tariff barriers do not have statistically signicant coefcients, although they are both
negative, which is in agreement with the ndings of Barro and Sala-i-Martin (1995) and
Rodriguez and Rodrik (1999). It is important to note that the sample is reduced
considerably when the tariff and non-tariff rates are included in the regression, because
many developing countries do not have available data for these variables.
To address model and parameter uncertainty problems, we perform extreme bounds
analysis for the variables that measure openness.
9
As shown in Table 1, the openness
dummy and the trade share are the only trade related variables that are robust to extreme-
bounds analysis. These results conrm what was noted above, namely that the estimated
correlation between openness on growth during the period 19701990 depends on the
measure of openness in the regression.
The regressions also include the initial real GDP per capita, the average investment
share, the average secondary school enrollment ratio, the average population growth, the
average ination rate and the average black market premium.
10
The regressions with the
trade shares include the level of GDP in 1970 to control for the negative correlation
between the size of an economy and its trade share. The results are robust to the inclusion
or exclusion of the non-trade related independent variables in the regression. The table
presents such a sensitivity exercise for the investment share. Excluding the investment
share from the growth regressions is justied by evidence of reverse causation found in
Blomstrom et al. (1996), suggesting that the positive estimate of the investment share in
growth regressions is attributed to the impact of growth prospects on investment. The
62 ATHANASIOS VAMVAKIDIS
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a
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i
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d
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c
a
t
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s
r
o
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t
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t
o
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x
t
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m
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-
b
o
u
n
d
s
a
n
a
l
y
s
i
s
.
HOW ROBUST IS THE GROWTH-OPENNESS CONNECTION? 63
estimates show that excluding the investment share from the regression does not change
the main results. This is in contrast to other studies, which showed that including the
investment share in a growth regression reduces the estimated impact of openness on
growth, although this seems to be the case with the two trade share variables.
The diagnostic tests conrm previous results in Temple (2000) on the econometric
problems of growth regressions, but for a relatively small number of the empirical
specications. At the 5 percent level, the null hypothesis of normality distributed residuals
is not rejected in 7 out of the 12 reported empirical specications; the null hypothesis of no
specication errors based on the RESET test cannot be rejected in 10 out of the 12 reported
empirical specications; and nally, the null hypothesis of no heteroskedasticity based on
the White test cannot be rejected in all empirical specications. The null hypothesis of
normality distributed residuals is rejected when the investment share is excluded from the
regression, or when the trade share is included, while the null of the RESET test is rejected
when the openness dummy is included in the regression. As pointed out by Temple (2000),
the models for which the null hypothesis of either of these two tests is rejected are not
correctly specied, and more robust methods than least squares should be considered.
Since most of the specications in Table 1 seem to be correctly specied when the
investment share is included, we do not consider alternative estimating methods.
Estimating this regression for the period 19901998, the most recent period with
available data, does not change the results considerably.
11
The openness dummy estimate
is again positive and statistically signicant in all specications; the duty ratio estimate is
insignicant; and the trade share and the PPP adjusted trade share are statistically
signicant at the 10 percent level, but only when the investment share is not included in the
regression. The tariff and the non-tariff rate variables are not included in the regression
since they are not available for the 1990s. Since the results are broadly similar to what was
found for the period 19701990, we do not report the estimates from these regressions.
3.2. Trade and Growth from 1950 to 1970
Openness and growth are not correlated in earlier decades. Table 2 presents results from
growth regressions for the 1950s and 1960s. Five variables were used to proxy for
openness: the Sachs and Warner openness dummy;
12
the average ratio of import duty
revenues to total imports; the average trade share; and two dummy variables for non-tariff
barriers for US imports (approximating for non-tariff barriers in general), import license
requirements and exchange controls (see Appendix 1). Average tariff rate data are not
available for most of the countries in the sample during this period, but the duty ratio could
be considered as its proxy, although not a very accurate one (as found in the growth
regression for the period 19701990, the two variables do not lead to the same conclusion).
None of these trade variables is statistically signicant, except for the import license
requirements dummy variable, which is positive and signicant when the regression
excludes the investment share. The regressions control for fewer independent variables
compared with the regressions for earlier decades, because of data unavailability. Also, the
average illiteracy rate is used as a proxy for the human capital level of a country, because
secondary school enrollment ratios are not available for all countries in the sample during
64 ATHANASIOS VAMVAKIDIS
T
a
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:
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i
a
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p
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t
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r
s
i
n
p
a
r
e
n
t
h
e
s
e
s
.
HOW ROBUST IS THE GROWTH-OPENNESS CONNECTION? 65
this period. Similar results are found for separate growth regressions for the 1950s and the
1960s.
The diagnostic tests for this period also show the presence of econometric problems for
some of the empirical specications. Although the null hypothesis of normality distributed
residuals is not rejected, at the 5 percent level, the RESET test shows that there are
specication errors in 5 out of the 10 reported empirical specications, and the White test
shows heteroskedasticity in 4 out of the 10 reported empirical specications. These results
may be driven by omitted variables, since the regressions for this period do not include the
ination rate and the black market premium, which are statistically signicant in
regressions for later decades. However, omitting these variables does not seem to matter
for the interwar period, as shown below.
3.3. Trade and Growth from 1920 to 1940
Data unavailability is an important problem for earlier decades. For the period 19201940
the growth regressions include only 22 to 23 countries. Also, the only available protection
measure for this period is the average tariff rate.
13
However, the tariff rate is a good proxy
for trade orientation, since it is a direct measure of trade policy, and it is highly correlated
with other openness measures in recent decades. In addition, the tariff rate has been
extensively used in the trade and growth literature to measure the impact of trade
protection on growth (see Barro and Sala-i-Martin, 1995), and as shown in Table 1, it has a
negative and statistically signicant impact on growth in recent decades. The trade share,
another openness measure used extensively in the literature, is available for some
countries in the interwar period, but the sample is too small.
14
The tariff rate data for this period are calculated as averages from any available annual
observations for the rst half of each decade (for most countries in the sample data were
available for only one or two years). The average tariff rate for the period 19201930 was
calculated as the average of these two points (we could not nd tariff rate data for the
second half of the two decades for all countries in the sample).
Table 3 presents estimates of growth regressions for the 1920s and 1930s. The rst six
regressions are for both decades, while the next three are for the 1930s and the nal three
for the 1920s. According to the results, countries characterized by low GDP per capita and
low illiteracy rates grew faster during this period. The population growth does not seem to
have a robust impact on growth. It is also surprising that the investment share is not
signicant in these regressions.
15
The most interesting result, however, is that countries with higher protection grew faster
during this period. Considering both decades together, the average tariff rate has a positive
and statistically signicant coefcient, at the 5 percent level in most specications.
Furthermore, when the regression excludes outliersthe two observations with the largest
residuals(the last three regressions for the period 19201940 in Table 3), the estimate of
the average tariff rate becomes larger and its signicance increases.
16
The results are
robust when regressions are estimated excluding one country at a time. They are also
robust to the inclusion or not of the investment share in the regression, as Table 3 shows.
According to the estimates, an increase in the average tariff rate by one-standard-deviation
66 ATHANASIOS VAMVAKIDIS
T
a
b
l
e
3
.
T
h
e
d
e
t
e
r
m
i
n
a
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1
9
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1
9
4
0
.
1
9
2
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1
9
4
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1
9
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1
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1
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(
1
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2
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3
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(
1
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2
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(
3
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(
1
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2
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3
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1
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HOW ROBUST IS THE GROWTH-OPENNESS CONNECTION? 67
(8 percent) raises the growth rate by at least 0.3 percent. When the two decades are
considered separately, the estimated coefcient of the tariff rate is still positive and
signicant at the 10 percent level for the 1930s, but is not signicant for the 1920s.
The positive correlation of tariff protection and growth during the period 19201940
can been seen in Figure 1. The rst graph shows the average real GDP per capita and the
average tariff rate during this period, while the second graph shows these variables after
other growth determinants have been kept constant. Although the countries in these graphs
Figure 1. Growth and tariff rate, 19201940. Note. The countries are symbolized as follows: 1: Argentina; 2:
Australia; 3: Austria; 4: Belgium; 5: Brazil; 6: Canada; 7: Chile; 8: Colombia; 9: Finland; 10: France; 11:
Germany; 12: India; 13: Italy; 14: Japan; 15: Mexico; 16: The Netherlands; 17: Portugal; 18: Spain; 19: Sweden;
20: Switzerland; 21: UK; 22: USA.
68 ATHANASIOS VAMVAKIDIS
are not along a straight positive line, it is clear that the positive correlation of growth and
tariff protection during this period is not driven by outliers.
To address model and parameter uncertainty problems, we perform extreme bounds
analysis for the tariff rate. As shown in Table 3, the positive estimate of the tariff rate is
robust to extreme bounds analysis, for the period 19201940 and the 1930s.
It is also interesting that the diagnostic tests show considerably better results than for the
growth regressions in later periods. At the 5 percent level, the null hypothesis of normality
distributed residuals and of no specication errors based on the RESET test cannot be
rejected, while the White test rejects the null hypothesis of no heteroskedasticity for only 1
out of the 12 reported empirical specications. These results suggest that even though
some determinants of growth that have been found to be statistically signicant in recent
decades are omitted from these regressions, we cannot reject the hypothesis that the
estimated model is correctly specied.
It could be argued that what is driving the positive correlation of the tariff rate with
growth during the interwar period is that the benets from being open to free trade in a
world economy characterized by high protection are small, if any. Moreover, trade
protection can raise income if there is unemployment, especially in a xed exchange rate
regime. The 1930s meet these conditions. All countries may have ended up worse off by
increasing protection but, given the trade policies in the rest of the world and the economic
conditions at that time, protection of domestic production may had sustained adequate
employment levels and output growth in the short run.
It could also be argued that these results may be driven by some other factors correlated
with trade and growth during this period that are not included in the regressions. It is not
easy to fully address this issue, given the difculty of nding data for this period. One such
factor could be resource abundance. Recent literature has argued that resource abundant
economies grow more slowly (see Lane and Tornell, 1996; Rodriguez and Sachs, 1999).
On the other hand, resource abundant economies have relatively high trade to GDP ratios,
and they could, therefore, be characterized as open economies. However, since the
empirical specication for the period 19201940 uses tariff rates and not trade shares, a
negative correlation between resource abundance and growth could not be driving the
negative estimate of the tariff rate. We do not have primary production data for this period
to test this hypothesis directly. However, if we construct a resource abundance dummy
variable, or use actual primary production to GDP ratios from 1960 (the rst year with
available data for our sample), and assuming that countries that were resource abundant
relative to the other countries in our sample during the interwar period remained resource
abundant in 1960, we nd that even though resource abundance variables have negative
and signicant estimates, the tariff rate estimate remains positive and signicant at the 5
percent level (these results are available from the author).
One of the most common criticisms of the trade and growth literature concerns the
direction of causality: does more trade cause growth, or vice-versa? For the interwar
period, a proper test for the direction of causality would require annual data on protection,
which are not available. However, reverse causationfrom growth to protectionwould
imply that the more a country collapsed during and after the great depression, the lower the
tariff rate this country imposed. Although this is not as hard to justify as it may rst
appeara country with low growth may have a low import demand and, therefore, high
HOW ROBUST IS THE GROWTH-OPENNESS CONNECTION? 69
net exports and less domestic pressures to raise tariffsit does not seem to have been the
driving force of trade policy during the interwar period. According to a detailed discussion
of trade policy during this period in Sachs and Warner (1995), most countries increased
protection in order to improve their terms of trade or to achieve isolation from external
shocks after the USA and UK raised tariff rates. Furthermore, tariff rates used in the
estimations reported in Table 3 are from the rst half of each decade, which implies that
even if there was reverse causation between growth and protection during this period, it
should not be a problem for these estimations, except in the case that tariffs are constant
through time. This, however, does not seem to be the case here, because the correlation of
the tariff rate series for the 1920s and the 1930s is only 0.27.
The results suggest that the growth-openness connection that seems to exist in recent
decades is not present for earlier periods. It could be argued that countries realized the
growth benets of openness only when the rest of the world economy was also open,
although alternative explanations may exist. Even though the growth-openness connection
is not always robust in recent decades, as the results in Table 1 show, it is clear that it
disappears, and even changes direction, in earlier decades.
World trade has been considerably expanded in recent decades. Figure 2 shows the
evolution of the GDP-weighted world decade average trade-to-GDP ratio for the decades
from 1920 to 1990.
17
It shows that international trade expanded faster than ever in the
1970s, and reached a peak of 58 percent in the 1980s. Before the 1970s, the world trade
share was relatively low. It was 39 percent during the 1920s, but experienced a rapid
decline in the 1930s, reaching a minimum of 28 percent. World trade partially recovered in
the late 1940s and 1950s, but decreased in the 1960s.
18
It is therefore clear that the process
of globalization started in the 1970s. Other studies on this issue have also reached the same
conclusion using alternative methods and data sets (see Krugman, 1995; Irwin, 1996;
Slaughter and Larsen, 1997).
Figure 2. World trade share, 19201990, decade averages.
70 ATHANASIOS VAMVAKIDIS
Similar conclusions to the growth regressions above can be drawn by looking at the
convergence experience of open economies. As noted in Section 2, Ben-David (1993) and
Sachs and Warner (1995) have shown that in recent decades only open economies have
experienced unconditional convergence. Indeed, the Spearman rank correlation coefcient
for the level of per capita GDP in 1970 and the per capita GDP growth rate for open
economies from 1970 to 1990 is 0.66, with a t-statistic of 4.52 (using the Sachs and
Warner dummy to dene openness). This could be attributable to the fact that there was a
relatively open world economy during this period. However, not all open economies
converge when earlier time periods are considered. The Spearman rank correlation
coefcient for open economies during 19501970 is only 0.11, with a t-statistic of
0.65.
4. Trade and Growth From 18701910
The growth-openness connection at the end of the nineteenth century and the beginning of
the twentieth century has been examined by economic historians and does not seem to be
positive. Bairoch (1993) has presented evidence, based on tariff rates, showing that
protection in the world economy during 18701910 was high by today's standards. He also
showed that while economies open to free trade during this period experienced divergence,
it was the closed economies that underwent convergence. On the other hand, O'Rourke
and Williamson (1997) found that globalization was the dominant force accounting for
convergence of the European periphery four decades before World War I. In a more recent
study, O'Rourke (2000) found a positive correlation between tariff protection and growth
for ten countries in the period 18751914. This result was robust to three types of growth
equations: unconditional convergence equations, conditional convergence equations and
factor accumulation models.
The literature on this issue is large.
19
As an illustration, this section uses two openness
measures to estimate the correlation between trade and growth during this period: the
average ratio of duty revenues to total government revenues, and the average ratio of total
trade to GDP.
20
The results should be treated with caution, given the limited availability of
data during this period.
Looking at simple correlations, Figure 3 shows that growth was not correlated with duty
ratios during the period from 1870 to 1910. Figure 4 presents similar evidence suggesting
that trade shares were not correlated with growth during this period. If anything, the two
results actually indicate a slightly negative correlation between openness and growth,
which would be consistent with O'Rourke (2000).
21
However, this is sensitive to the
exclusion of some outliers from the sample.
Estimation of Spearman rank correlation coefcients, a methodology used extensively
in the early empirical literature on trade and growth, can be very instructive, since it has
the advantage of not allowing extreme observations to bias the estimates. The Spearman
rank correlation coefcient of decade averages between duty ratio and per capita GDP
HOW ROBUST IS THE GROWTH-OPENNESS CONNECTION? 71
growth for 18701910 is positive and statistically signicant, equal to 0.345 with a
t-statistic of 2.438. However, the correlation between trade share and growth for the same
time period is only 0.05 with a t-statistic equal to 0.29. Based on these results, it
could be argued that this period also shows no robust correlation between trade and
growth.
Figure 3. Duty ratios and growth, decade averages 18701910.
Figure 4. Trade shares and growth, decade averages, 18701910.
72 ATHANASIOS VAMVAKIDIS
5. Concluding Remarks
Previous literature has found a positive impact of free trade on growth for recent decades.
However, looking at historical evidence from 1870 to the present, no support for this
relation can be found. For the 1930s, the correlation is even negative. Changes in the world
trade regime may explain these results. The unprecedented expansion in world trade
during the 1970s and 1980s may have been the driving force of the benets that trade
openness has for growth during this period, since a world economy with low protection is a
prerequisite for openness to foster growth. This implies that domestic trade policy cannot
be set independently of the trade policy followed by the rest of the world.
The results presented in this paper provide a better understanding of the issue of trade
and growth, both for the past and present. They imply that if there is a positive correlation
between trade and growth, it is true only in recent decades. But the results also imply that
more research is necessary to understand the existence or non-existence of the growth-
openness links. Future research should also focus on coming up with better openness
measures for both recent and historical periods.
Appendix 1: Historical Data
Data in the growth regressions for the period 19201940.
Country
GDP per cap.
Growth
Tariff
Rate
Investment/
GDP
Population
Growth
Illiteracy
Rate
Argentina 0.008 0.215 0.026 0.023 0.259
Australia 0.007 0.239 0.133 0.014 0.015
Austria 0.025 0.241 0.188 0.002 0.015
Belgium 0.009 0.127 0.265 0.005 0.069
Brazil 0.015 0.235 0.395 0.020 0.627
Canada 0.012 0.258 0.147 0.014 0.055
Chile 0.011 0.255 0.282 0.015 0.310
Colombia 0.026 0.368 0.144 0.020 0.530
Finland 0.024 0.400 0.146 0.008 0.230
France 0.010 0.245 0.145 0.003 0.068
Germany 0.037 0.267 0.135 0.007 0.015
India 0.005 0.184 0.077 0.012 0.909
Italy 0.012 0.322 0.166 0.008 0.256
Japan 0.016 0.161 0.153 0.013 0.025
Mexico 0.005 0.213 0.217 0.017 0.649
Netherlands 0.003 0.045 0.156 0.013 0.015
Portugal 0.044 0.245 0.158 0.012 0.629
Spain 0.006 0.392 0.112 0.010 0.387
Sweden 0.030 0.194 0.133 0.006 0.015
Switzerland 0.019 0.185 0.328 0.004 0.015
UK 0.017 0.275 0.083 0.005 0.015
USA 0.008 0.348 0.154 0.011 0.057
Source: see Appendix 2.
HOW ROBUST IS THE GROWTH-OPENNESS CONNECTION? 73
Protection in the period 19501970.
Country Open
Trade
Share
Import
Duty Ratio
Import License
Required
Exchange
Controls
Argentina No 12.52 4.30 No Yes
Australia No 30.28 13.58 Yes No
Austria Yes 50.20 6.80 Yes Yes
Belgium Yes 87.50 3.19 Yes Yes
Bolivia No 58.62 Yes No
Brazil No 13.27 Yes Yes
Burma Yes Yes
Canada Yes 38.70 8.11 No No
Chile No 27.64 74.78 Yes Yes
Colombia No 26.28 18.88 Yes No
Costa Rica No 54.82 29.71 No Yes
Cyprus Yes
Denmark Yes 61.13 Yes Yes
Dominican No 43.58 41.46 Yes No
Rep.
Ecuador Yes 34.38 Yes No
Egypt No 36.92 Yes Yes
El Salvador Yes 50.41 29.68 No No
Ethiopia No No Yes
Finland Yes 43.93 4.71 Yes Yes
France Yes 26.68 Yes Yes
Germany, West Yes 6.23 Yes Yes
Greece Yes 23.04 32.24 Yes Yes
Guatemala Yes 32.59 25.17 No No
Guyana No 110.80
Honduras Yes 52.91 18.70 No No
Iceland 76.78 Yes Yes
India No 7.57 22.77 Yes Yes
Ireland No 74.46 25.37 No Yes
Italy Yes 28.70 Yes Yes
Japan No 19.53 4.61 Yes No
Kenya No 61.31
Korea, South No 27.01 Yes No
Luxembourg Yes 155.95
Mauritius No 77.39
Mexico No 17.61 17.11 Yes No
Morocco No 39.47 Yes Yes
Netherlands Yes 85.21 5.61 Yes Yes
New Zealand No 45.28 10.61 Yes No
Nicaragua Yes 56.42 Yes No
Nigeria No 24.81
Norway Yes 72.39 3.49 Yes Yes
Pakistan No 24.05 57.95 Yes No
Panama 14.57 No No
Paraguay No 30.30 No Yes
Peru Yes 38.48 12.40 No No
Philippines No 31.98 133.02 Yes No
Portugal Yes 46.45 14.18 Yes Yes
South Africa No 50.82 13.09 Yes No
74 ATHANASIOS VAMVAKIDIS
Appendix 2: Data Sources for Historical Time Series
Data for the period 19501970 are from the Summer-Heston data set, while data for the
period 19701998 are from the World Development Indicators (World Bank, 2001),
except if a different source is indicated in the text. The data for the period 18701910 are
from Easterly and Rebelo (1993). Other sources are described below.
Trade Policy
19201930: League of Nations (1927) for Argentina, Australia, Austria, Belgium, Canada,
France, Germany, India, Italy, Netherlands, Spain, Sweden, Switzerland, UK, USA; Ito
(1992) for Japan; Woytinsky and Woytinsky (1955) for Colombia, Finland; Maddison
(1989) for Brazil, Chile, Mexico; and Cesar and Luis (1994) for Portugal. 19301940:
Woytinsky and Woytinsky (1955) for Austria, Belgium, Finland, France, Germany, Italy,
Sweden, Switzerland; Ground (1988) for Brazil, Chile, Mexico; Ito (1992) for Japan;
Cesar das Neves (1994) for Portugal; Gordon (1941) for Netherlands ( p. 210), UK ( p.
219); Barber (1955) for Canada; Towle (1947) for USA; Maddison (1985) and Ground
(1988) for Colombia; and United Nations Statistical Yearbook (various issues) for
Argentina, Australia, India, Spain.
19501990: Openness dummy from Sachs and Warner (1995); average ratio of duties
over imports from World Development Indicators for the period 19701990 and various
issues of the UN Statistical Yearbook for the period 19501970; average tariff rates and
non-tariff barriers for intermediate inputs and capital goods from the Barro-Lee data set;
non-tariff barrier for imports from US during the 1950s from Woytinsky and Woytinsky
Protection in the period 19501970. Continued.
Country Open
Trade
Share
Import
Duty Ratio
Import License
Required
Exchange
Controls
Spain Yes 21.92 91.47 Yes Yes
Sri Lanka No 72.69
Sweden Yes 43.97 4.79 Yes No
Switzerland Yes 57.14 10.30 No No
Taiwan No Yes Yes
Thailand 34.47 20.05 No No
Trinidad & Tobago No 106.50
Turkey No 8.92 15.04 Yes Yes
UK Yes 41.51 8.36 Yes Yes
USA Yes 10.04 6.23
Uganda No
Uruguay No 27.53 Yes No
Venezuela No 41.37 18.18 No No
Zaire No
HOW ROBUST IS THE GROWTH-OPENNESS CONNECTION? 75
(1955); and trade shares from the World Tables and World Development Indicators of the
World Bank, various issues.
Real Gross Domestic Product
19201950: Maddison (1982) for Australia, Austria, Belgium, Canada, Finland, France,
Germany, Italy, Japan, Netherlands, Sweden, Switzerland, UK, USA; Statistical Abstract
of Latin America for Argentina, Brazil, Chile, Colombia, Mexico; Maddison (1989, 1985)
for India; Mitchell (1992) for Spain; Cesar das Neves(1994) for Portugal.
Population
19201950: Maddison (1982) for Australia, Austria, Belgium, Canada, Finland, France,
Germany, Italy, Japan, Netherlands, Sweden, Switzerland, UK, USA; Statistical Abstract
of Latin America for Argentina, Brazil, Chile, Colombia, Mexico; Cesar das Neves (1994)
for Portugal; League of Nations (various issues) for India and Spain.
Illiteracy Rates
19201950: UNESCO (1953, 1957). 19501990: Unesco statistical yearbook (various
issues).
Note: UNESCO; (1953, 1957) does not report illiteracy rates for countries that have
rates less than 1.5. For these countries 1.5 was used as the illiteracy rate.
Investment
19211950: Mitchell (1983, 1993) for Italy, Sweden, UK, USA; Maddison (1989) for
Australia, Canada, Germany, India, Japan, Netherlands; Maddison (1991) for France;
Hjerppe (1989) for Finland; Cesar das Neves (1994) for Portugal; Kuznets (1956) for
Argentina; Economic Survey of Latin America (1949) for Chile, Mexico; Mitchell (1983,
1992, 1993) for Austria, Belgium, Colombia, Spain, and Switzerland, estimated based on
energy consumption (the growth rate of energy consumption from Darmstadter (1971) was
used as a proxy for the growth rate of capital; then, investment measures for 1950 were
used as the starting point in order to estimate investment in earlier decades).
Acknowledgments
Athanasios Vamvakidis is an economist at the International Monetary Fund. This paper
was part of his Ph.D. thesis at Harvard University. The author would like to thank his
advisors Donald Davis, Jeffrey Sachs, Aaron Tornell, David Weinstein and Jeffrey
76 ATHANASIOS VAMVAKIDIS
Williamson. The paper also beneted from helpful comments by Johanna Chua, Sergei
Dodzin, Ashish Garg, Maurice Schiff, Peter Timmer, Minh Trinh, Bruce Watson, Peter
Wickham, Alan Winters, the participants of the International Economics seminars of
Harvard University and The World Bank, the Editor of the Journal of Economic Growth
and three anonymous referees. The views expressed are those of the author and do not
necessarily represent those of the International Monetary Fund.
Notes
1. They found that the tariff rate has a negative and statistically signicant estimate in growth regressions after
controlling for other growth determinants, but that non-tariff barrier estimates are not statistically signicant
( p. 438).
2. This paper includes a detailed literature review on the empirics of the growth-openness connection.
3. For a discussion of the early empirical and theoretical trade and economic development literature, see
BhagwatiSrinivasan (1985).
4. However, Vamvakidis (1999) found that regional trade agreements, as opposed to broad trade liberalization,
seem to have a negative impact on growth and investment in xed effects growth regressions.
5. This result applies mainly for an economy with a xed exchange rate, but it can also apply for a exible
exchange rate system if domestic and foreign assets are not perfect substitutes.
6. Temple and Johnson (1998) have found that social development indexes constructed for the early 1960s are
positively correlated with growth. Such indexes are not available for other periods and thus are not included
in the estimations of this paper.
7. The Regression Specication Error Test (RESET) was proposed by Ramsey (1969). It is a general test for
omitted variables, incorrect functional form, and correlation of the independent variables with the residuals.
8. The Sachs and Warner openness dummy captures ve dimensions of trade protection. A country is
characterized as open to international trade if the average tariff rate is less than 40 percent, non-tariff barriers
cover less than 40 percent of trade, the black market premium is less than 20 percent of the ofcial exchange
rate, the economic system is not socialist and there is no state monopoly on major exports.
9. See Levine and Renelt (1992), Temple (2000) and Fernandez et al. (2001) for a detailed discussion on model
and parameter uncertainty and applications of extreme-bounds analysis in cross-country growth regressions.
10. The estimated impact of openness on growth during this period is robust to the inclusion of different regional
dummies in the regression (for example, dummy variables for Africa and East Asia). We do not report these
results here, since they have been discussed in more detail in Vamvakidis (1998).
11. The data for this period are from the World Development Indicators, World Bank, 2001.
12. Although the Sachs and Warner openness measure is only for the decades after 1970, the authors provide the
year of trade liberalization for each country that opened to trade after 1950. Based on this information, the
openness dummy was extended for the period 19501970.
13. The data are presented in Appendix 1 and described in Appendix 2.
14. Even though the trade share is available for some countries during this period (see below), it is not available
for all countries in the sample used in the regressions.
15. An earlier draft of this paper included the infant mortality rate as an independent variable. The inclusion of
this variable in the regressions makes the investment share statistically signicant.
16. The countries excluded from this estimation are Portugal and Sweden. The average tariff rate is statistically
signicant, although at the 10 percent level, even when the four observations with the largest residuals are
excluded from the regression (Portugal, Sweden, Spain and India). Excluding more observations, however,
reduces the sample too much for a meaningful estimation.
17. The countries for the calculation of the weighted average world share are the following: Argentina, Australia,
Austria, Belgium, Brazil, Canada, Chile, Colombia, Denmark, Finland, France, Germany, Greece, Italy,
Japan, Mexico, Netherlands, New Zealand, Norway, Peru, Portugal, Spain, Sweden, Switzerland, UK,
Uruguay, USA and Venezuela.
18. The trade boom of the 1970s was not driven by the oil shocks. According to World Bank data, the trade in
HOW ROBUST IS THE GROWTH-OPENNESS CONNECTION? 77
fuels as a share of GDP doubled from 0.00019 in 1971 to 0.00038 during the 1970s, but these gures are too
small to account for the increase in total trade shares. It could be argued that these small shares could have a
signicant impact on the cost and prices of other goods. However, the world trade share also increased in the
1980s, even though the price of oil collapsed.
19. See O'Rourke (2000) for a detailed discussion of this literature.
20. Data are from Easterly and Rebelo (1993).
21. For a regression analysis using a different data set, see O'Rourke (2000). For our data set, a growth regression
which controls for the initial level of GDP per capita and population growth shows no correlation between
trade and growth.
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