Estimation of the effect of Trade Openness on the Steady State growth rate of selected Asian countries

Abstract

While there is almost no doubt on the positive effect that trade openness has on growth, this certainly does not mean that all countries are affected in the same manner or that such effect is permanent. This paper attempts to apply the extended exogenous Solow model of growth to country-specific data by using an Error Correction framework. The aim is to verify and measure the long and short-run contribution of trade openness for Indonesia, Taiwan, Vietnam, and Sri Lanka for policy suggestion. The model will also attempt to control the effect of trade by using the share of government spending as a proxy for responsible policies. The findings suggest a positive effect for Vietnam and Taiwan and a negative for Indonesia and Sri Lanka in the long-run, indicating that country specific characteristics play a role on how trade liberalization affects growth.