Measuring the Dynamic Gains from Trade.pdf

the world bank economic review, vol. 15, no. 3 393–429 Measuring the Dynamic Gains from Trade Romain Wacziarg This article investigates the links between trade policy and economic growth in a panel of 57 countries between 1970 and 1989. It develops a new measure of trade policy openness based on the policy component of trade shares, using it in a simultaneous equations system to identify the effect of trade policy on several determinants of growth. The results suggest a positive impact of openness on economic growth, with the accel- erated accumulation of physical capital accounting for more than half the total effect; enhanced technology transmission and improvements in macroeconomic policy account for smaller effects. This decomposition is robust with respect to alternative specifica- tions and time periods. The article also successfully tests whether the model exhaus- tively captures the effects of trade policy on growth. The relationship between trade openness and economic growth has been the subject of numerous empirical studies. Most uncover a positive empirical asso- ciation between trade openness and per capita income growth; until recently, few economists challenged the findings.1 Although theories promoting inward- oriented development strategies flourished in the 1950s and 1960s, the policies’ unsustainable effects had, by and large, discredited the idea that the costs of an open trade regime may outweigh its potential benefits. Recently, however, Rodrik and Rodríguez (2000) have questioned the em- pirical results on trade and growth, pointing to methodological problems asso- ciated with the measurement of openness and the specification of estimated equations.2 In particular, the collinearity between trade protection and other mea- sures of (possibly domestic) policy, such as the quality of macroeconomic policy, might lead rese