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Q1: Why is Openness to trade good for economic growth? :1.1
FAQID:1023

: global,

InputDate: 8/21/2007
Reference: Winters, L. Alan ; Neil McCulloch; Andrew McKay. 2004. "Trade Liberalization and Poverty: The Evidence So Far." Journal of Econo~nic Literature Vol. XLII (March 2004) pp. 72-115
A: Economic theory offers many reasons to expect trade liberalization to stimulate economic growth.
Static Efficiency
In the medium term, reaping the static (efficiency) benefits of trade could look rather like growth.

Access to Technologies, capital goods
In the long run, the potential positive forces include access to technology and to appropriate intermediate and capital goods;
Scale Merit
the benefits of scale; If a firm export to the global market, it can expand the scale of production and if the scale is larger, many parts of the factory can specialize in specific production line and, thus, the productivity of the firm will increase. (Typical source of productivity gain sinse Adam Smith)

Prevent government corruption
the flexibility induced by relymg on market signals, and the constraints on government incompetence or corruption (see Gene M. Grossman and Elhanan Helprnan 1991, or Robert Lucas 1988, for discussion).

Openness-Growth link is an empirical matter
Unfortunately, none of the benefits is guaranteed, and it is not difficult to construct models in which openness pushes countries into less dynamic sectors (e.g. primary extraction) and harms growth-see, for example, Francisco Rodriguez and Dani Rodrik (2001).

Therefore, ultimately the openness-growth link is an empirical matter, .
Reference:
Grossman, Gene M. and Elhanan Helpman. 1991. lnnocation and Growth in the Global Econointj. Cambridge, MA and London: MIT Press.
Lucas, Robert E. 1988. "The Mechanics of Economic Development," J. Monet. Econ. 22, pp. 342.
Rodriguez, Francisco and Dani Rodrik. 2001. "Trade Policy and Economic Growth: A Sceptic's Guide to the Cross-National Evidence," NBER Macroeconoinics Annual 2000. Cambridge, MA: MIT Press, pp. 261-324.
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Q2: Is Trade good for economic growth? :1.2
FAQID:1024

: global,

InputDate: 8/21/2007
Reference: Winters, L. Alan ; Neil McCulloch; Andrew McKay. 2004. "Trade Liberalization and Poverty: The Evidence So Far." Journal of Econo~nic Literature Vol. XLII (March 2004) pp. 72-115
A: Over the 1990s the conviction that openness is good for economic growth was fostered by several highly visible and well-promoted cross-country studies,
Dollar (1992), Sachs & Warner (1995) show Openness is good for growth
Over the 1990s the conviction that openness is good for economic growth was fostered by several highly visible and well-promoted cross-country studies, for instance by David Dollar (1992), Jeffrey Sachs and Andrew Warner (1995), and Sebastian Edwards (1998).

Rodriguez and Rodrik (2001) severelt criticised these works
Recently, however, these were subjected to searching criticism and reworking by Rodriguez and Rodrik (2001), who argue that:
- their conclusions rest on very weak empirical foundations such as flawed measures of openness and seriou econometric shortcomings.
- Moreover, liberal trade is usually only one of several indicators of openness, and one that often seems to weigh rather lightly in the overall results.
Reference:
Dollar, David. 1992. "Outward-Oriented Developing Econolnies Really Do Grow More Rapidly: Evidence from 95 LDCs, 1976-1985," Econ. Devel. Cult. Change 40:3, pp. 52344.
Sachs. Jeffrey D. and Andrew M. Warner. 1995. , J "Econornic. Convergence and Economic Policies," Brookings Pap. Econ. Act. 1,pp. 1-95.
Rodriguez, Francisco and Dani Rodrik. 2001. "Trade Policy and Economic Growth: A Sceptic's Guide to the Cross-National Evidence," NBER Macroeconoinics Annual 2000. Cambridge, MA: MIT Press, pp. 261-324.
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Q3: How to measure the Openess to Trade? :1.3
FAQID:1025

: global,

InputDate: 8/21/2007
Reference: Winters, L. Alan ; Neil McCulloch; Andrew McKay. 2004. "Trade Liberalization and Poverty: The Evidence So Far." Journal of Econo~nic Literature Vol. XLII (March 2004) pp. 72-115
A: Measiring trade stance is difficult:
- Tariff need to be aggregated,
- quantitative ristrictions assessed and then aggregated,
and the levels of credibility and enforcement measured.
Difficulties inaggregation
These difficut dimensions are far from perfectly correlated(Lant Pretchet 1996)and need to be aggregatedinto a single index for econometric purposes.

James Anderson and Peter Neary's (1996) Trade Restrictiveness Index provides a coherent way of aggregating tariffs, but can handle non-tariff barriers only once their tariff equivalents are known.

The latter are difficult to establish on a case-by-case basis, and quite impossible for all goods in a broad range of countries.
Reference:
Pritchett, Lant. 1996. "Measuring Outward Orientation in Developing Countries: Can It Be Done?']. Decel. Econ. 492, pp. 307-35.
Anderson, ames E. and Peter J. Nealy. 1996. "A New Approac6'to Evaluating Trade Policy," Rec. Econ. Stud 63, p~ 107-25,
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Q4: What are the alternative trade strategies for development? (Balassa 1980) :2
FAQID:687

: global,

InputDate: 7/26/2006
Reference: Balassa, Bela. 1980. The process of Industrial Development and Alternative Development Strategies. Princeton University International FInance Section, Essays in International Finance No. 141 (Dec. 1980)
A: Industrial development generaly begins in response to domestic denand generated in the primary sector, which also provides investible funds for manufacturing industries. Demand for industrial products and investible savings respresent possible use of the surplus generated in agriculture (understood in a larger sense to include crops, live-stock, fisheries, and forestries) or in mining as primary output comes to exceed subsistence needs. More often than not, the surplus generated in the primary sector is associated with export expansion. The effect of primary exports on industrial development, in turn, depend to a considerable degree on input-output relatinships and on the disposition of income generated in the export sector.

The process of industrial development may be accelerated if natural present-day developmentis complemented by teriff or quota protection. This last point leads me to the next step in the industrialization process: the first, or "easy," stage of import substitution.
The first Stage of Inport Substitution: easy stage of substitution
With the exception of Gritain at the time of the Industrial Revolution and Hong Kong more recently, all present day industrila and developing countries protected thier incipient manufacturing industries producing for domestic markets. There were differences, however, as regards the rate and the form of protection. While the industrial countries of today relied on relatively low tariffs, a number of present-day developing countries applied high tariffs or quantitative restrictions that limited, or even excluded, competition from imports.

Indeed there is no need for high protection at the first stage of import substitution, entailing the replacement by domestic production of imports of nondurable consumer goods. These commodities suit the conditions existing in developing countries when they begin the industrialization process: they are intensive in unskilled labour; the efficient scale of output is relativelt low, and cost do not rise substantially at lower output levels; production does not involve the use of sophisticated technology; anda network of suppliers of parts, components, and accessories is not required for efficient operation.
Inward-oriented Industrial Development Strategies
High industrialization stage:
- either moving to second-stage import substitution or
- turning to the exportation of manufacturing goods.

Second-stage import substitution involves the replacement of import of intermediate goods and producer and consumer durable by domestic production.

These commodities have rather different characteristics from those replaces at the first stage:
- Intermediate goods, such as petrochemicals and steel tend to be highly capital-intensive.
- They are also subject to important economies of scale:
- efficient plant size is large compared with the domest needs of most developing countries, and
- costs rise rapidly at lower levels.
- Moreover margin of processing is relatively small, and
- organizational and technical inefficiencies may contribute to high costs.

Developing countries may face disadvantages in second import substitution
Given the relative scarcity of physical and hman capital in developing countries, they are at a disadvantage in the manufacture of highly physical-capital intensive intermediate goods and skill-intensive producer and consumer durables.

- By limiting the scope for exploitation of economies of scale, the relatively small size of their national markets contributes to high domestic costs in these countries.
- At the same time, net foreign-exchange savings tend to be small because of the need to import materials and machinery.

In several developing countries, the cost of protection is estimated to have reached 6 to 7 per cent of GDP.
Second inport substitution reduced the TFP growth
There is further evidence that the rate of growth of total factor productivity was lower in countries engaging in second-satge import substitution than in the industrial countries.

Rather than reduce the economic distance between the industrial and developing countries, then, infant-industry protection may have caused this lag to increase over time.
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Q5: Is tarde liberalization policy superior to the import substitution? (Ranis 1984) :2.1
FAQID:679

: global,

InputDate: 7/19/2006
Reference: Meier, Gerald M. and James E. Rauch. 2000. International Trade and Technology Transfer: Overview. Leading Issues in Economic Development, Seventh Edition. p156
A: In the period following Worl War II virtually every LDC government capable of implementing a coherent economic policy attempted to encourage industrialization by protecting domentic manufacturing from inport competition.Among thier motivation were the perception that exports of primary products were a dead end and some form of the infant-industry argument.
Two options to follow the first phase of import-substitution
As a result, Gustav Ranis looks at what follows the first phase of import-substituting industrialization to find differences in trade policies and economic performance across countries. He argues that countries that were able to complete the process of substitution for imports of labour-intensive, low-technology goods such as consumer nondurables faced a choice between two ways of continuing rapid growth of manufacturing production.
(i) They could remove protection for consumer nondurables producers in the hope that the infants had grown up and could expand into foreign markets, or
(ii) They could extend protection to more capital-intensive, high-technology goods such as consumer durables.
Korea and Taiwan took the first option, while Latin America, China, India took the second
South Korea and Taiwan took the first path and the more advanced countries of Latin America took the second. Ranis suggests that, in part, the first path was forced on South Korea and Taiwan by lack of natural resources needed to genarate exports sufficient to finance the imports of intermediate and capital goods still needed during the next phase of import-substitution. Auty (1994) argues that China and India took the same path as Latin America despite poor resource endowments because they were "market-rich": their huge population made their domestic markets large enough to allow economies of scale to be achieved even in the capital-intensive industries protected in the second phase of import substitution.
Delay in liberalization made a contrating economic performance
By the 1970s, SOuth Korea, Taiwan, and Latin American countries such as Brazil and Mexico appeared to have wound up in the same place, with diversified industrial structures andsubstantial exports of labour-intensive manufactured goods. Ranis claimes, howeve, that as a result of the differenct path taken, both light and heavy industy in Korea and Taiwan were internationally competitive whereas Latin American industry suffered from high costs, requiring subsidies to push out manufactured exports and continued tariff and quota protection for the domestic market. Latin America ultimately felt compelled to undertake substantial liberalization in the 1980s and 1990s. The delay in liberalization relative to East Asia has been blamed for Latin America's relatively high income inequality and for the severity of the 1982 debt crisis and the lost decade of growth that followed (and for the prolonged slow growth of India)
Korea and Taiwan's second phase of industrialization relyied uopon market forces
Ranis argues that the introduction of more capital-intensive and technologically sophisticate industry in South Korea and Taiwan was much more of a market process in East Asia than in Latin America.

Reference:
Ranis, Gustav. 1984. Typology in Development Theory: Retrospective and Prospects, in Moshe Syrquin, Lance Taylor, and Larry E. Westphal, eds., Economic Stucture and Performance (Orlando: Academic Press, 1984) pp. 29-37.

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Q6: Is Free Trade really good for economic development? (Deraniyagala & Fine 2006) :3
FAQID:688

: global,

InputDate: 7/27/2006
Reference: Deraniyagala, Sonali, and Ben Fine.2006. Kicking Away the Logic; Free Trade is Neither the Question nor the Answer for Development, Zed Books, London and New York?@
A: The authodox approach to international trade is based on the proposition that free trade promotes economic growth and global prosperity. The neoliberal resurgence in international economics since the early 1980s gave almost axiomatic status to the virtue of free trade, a view that is now the conventional wisdom.Belief in free trade was an essential part of the Washington Consensus propagated by the neoliberal resurgence.
Benefit if Free Trade claimed by neoliberalists
This orthodox position on international trade and trade policy consists of several propositions on the benefits of free trade;
- optimising global resource allocation;
- maximizing consumer welfare;
- increasing productivity growth and promoting economic growth;
-

Government intervention creates lower welfare and growth
In contrast, government intervention in trade policy is generally presented as distortionary,reducing welfare and growth. Thus countries with liberal trade regimes supposedlly grow faster the countries with 'closed' regimes, while trade liberalization,by lowering tariff and non-tariff barriers, should be the focus of trade policy.
Neoliberalism emerged in responce to the collapse of protectiost developing economies in 1980s
Neoliberal trade policy in 1980s supposedly responded to the economic collapse of developing countries which, untill then, had followed protectionist import substitution policies. Orthodox trade economists blamed poor performance on interventionist trade policy. This interpretation was influenced by important empirical studies of trade protection that highlighted the magnitude of static inefficiencies in import substitution regime (Balassa 1988). As noted by Rodrik (2001), however, there are several problems with this
Trade policy was not the sole source of the growth collaps
Many developing countries experienced satisfactory rates of economic growth under protection until around the mid-1970s with Sub-Saharan African countries being among the faster growing developing countries. Productivity growth in some import substitution regime, especially in Latin America, was also robust. While developing countries did experience serious economic downturn after mid-1970s, this is better explained by external shocks (in particular, the 1973 oil price hike) and the inability to adjust macroeconomic policy to cope with these shocks. To attribute the growthcollaps of the late 1970s to trade policy alone, therefore, involves confusing macroeconomic or other failures with trade poicy failure.
Reference:
Balassa, Bala. 1988. Interests of Developing Countries in the Urguay Round. World Economy, 11(1):39-54
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Q7: What is the heterodox Trade Policy? :3.2
FAQID:708

: global,

InputDate: 7/31/2006
Reference: Deraniyagala, Sonali. 2006. Analysis of Technology and Development. The New Development Economy after the Washington Consensus, Jomo aand Fine, eds. Zed Books, London
A: The heterodox approaches also question the neoliberal stance that open trade policy alone are sufficient to induce technologocal dynamism. Neoliberal arguments relating to the technology-related benefits of liberalization remain at the level of casual observation with weak theoretical premises (Rodrik 1995).
Does opennes lead to increased competition? and does competition lead to more innovation?
Thus, for instance, it is argued that the notion that opennes leads to increased competition which induces cost-cutting technological change across all sectors is theoretically fragile and not empirically robust (Deraniyagala and Fine 2001).

- Schumpeterian and Neo-Schumpeterian theories point to the role of oligopolistic market structures in promoting technological change.
- A well-established body of empirical research on market structure and innovation also throw doubt on an unambiguously positive relationship between competition and technological dynamism,
- but this too is ingnored by the orthodox literature.
Absorbtion of technologies is costly for developing countries
It is also argued that trade liberalization rarely leads to the costless flow of technological information to developing countries. The tacit and specific nature of technological knowledge partly preventsthis, Further, the ability to absorb knowledge from international sources also partly depends on domesticskills and capabilities. For this reason, the responses of firms and organizationsin developing countries to greater availability of knowledge are likely to be heterogeneous, and the overall effect - at the sectoral or national level - cannot be easily predicted.
Strategic selective protection is needed
Contrary to the orthodox approach, heterodox writings propose that strategic selective protection can promote technology development and knowledge creation in developing countries. Several arguments justfy this.
Firstly, openness can, in some instances, result in very high levels of competition that are destructive and serve as a disincentive for technological change. The negative effect of trade liberalization on manufacturing performance and technology upgrading in Sub-Saharan Africa during the 1990s is illustrated of this.
Secondly, the cumulative and incremental nature of technological learning that is largely production-based means that production experience in some sectors needs to be accummulated without the constant threat of high levels of import competittion.
Thirdly, excessively high levels of import competition can be dissincentive to invest in capability acquisition, which is a key determinant of technology generation.
Fourthly, selective protection may encourage (due to the absebce of competition) technology development in sectors with pervasive externalities.
Heterodox trade policy supports infant industry protection
Overall, therefor, the heterodox literature provides arguments supporing infant industry protection for technology development. However, unlike the old infant industry literature of 1970s, it is argued that technology is central to ensuring that infant industries do, in fact, mature. Hence, effective selection of strategic sectors for trade protection in terms of technological criteria is seen as essential. All this is not to say, however, that the benefits of openness are wholly denied by the heterodox literature. The fact that developing countries often obtain technological knowledge through exporting is a common theme in the literature, although it is noted that the learning effects of exporting are not universal and vary according to sector.
Reference:
Rodrik, Dani. 1995. Trade and Industrial Policy Reform. in Behman and Srinivasan eds. Handbook of Development Economics. Vol. 3B (Amsterdam: North-Holland)
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Q8: What is the empirical evidence of the impact of trade volume on growth? (Cline 2004) :4
FAQID:690

: global,

InputDate: 7/28/2006
Reference: Cline, William,R. 2004. Trade Policy and Global Poverty. Center for Global Development Institute fro International Economy,
A: Cross-coutnry regression analysis to determine the sources of growth have proliferated in recent years.
Levine and Renelt test of robustness
A relatively early study that sounded a strong cautionary note was that by Levine and Renelt (1992). They tested for robustness in the by then already extensive literature. They first identify four core variables influencing growth: the share of investment in GDP, initial secondary school enrollment rate, GDP per capita in 1960, and the rate of population growth. Using data for 119 countries for the period 1960-89, they find the predicted signs for all four variables and significance at the 5 percent level except for population growth.

The results confirm conditional convergence (negative coefficient on initial income per capita), and a strong influence of capital accumulatin and human capital.

Extreme bounds test
Thier objective, howeve, is The method is essentially to see whether a particular variables remain significant and of the right sign when an alternative set of up to three control variables is added.

For all the resulting sets of regressions including the variable of interest, Levine and Renelt identify the highest and lowest value of the coefficient that cannot be rejected at the 6 percent level (Leamer's "extreme biunds"; Leamer 1983). If the highest and lowest value estimated for the coefficient remain significant af the same sign, the variable's results are considered to be robust. By this test, "almost all results are fragile". A broad array of fiscal, monetary and political variables are found not robustly correlated with growth or investment share.

Trade has two-step influence on growth
Levine and Renelt's results for trade are of special interest to this chapter. They find that while a trade varibles is not robust when entered in addition to the four variables, there is a "two-step" positive influence of trade on growth, working through the influence of trade on investment. they noted that this is somewhat surprising, considering that usually the trade influence is throught to work more through technical change than through induced capital formation. Their result also show a significantinfluence of trade if the investment rate is left out of the core variableset. Moreover, they find that it does not matter whether trade is measured by the ratio of exports, imports, or thier sum, to GDP. This is important, because whereas exports as a positive component of GDP would be expected to generate spurious correlation through a simultaneous-equation accountiing relationship, imports as a negative component would be expected to generate a spurious negative relationship from this standpoint.
Trade variable pass the stringent test through two-step interaction
Although it will be suggested below that the Levine-Renelt extreme bounds test may be too stringent, it is important to note that the influence of trade does seem to pass even this strong test for their resultsthrough two-step interaction with investment.

Reference:
Ross Levine; David Renelt. 1992. A Sensitivity Analysis of Cross-Country Growth Regressions The American Economic Review, Vol. 82, No. 4. (Sep., 1992), pp. 942-963.

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Q9: What was the performance of developing countries which globalized after 1980s? (Dollar & Kraay 2002) :4.1
FAQID:699

: global,

InputDate: 7/30/2006
Reference: Dollar, David and Art Kraay. 2002. Trade, Growth, and Poverty. draft July 2002 forcecoming in the Economic Journal, 2004
A: We single out the top one-third of developing countries in terms of increases in trade to GDP over the past 20 years.
Globalizers doubled the ratio of trade to GDP in the last 20 years
So, by construction thiis group has had a particularly large propotionate increase in trade, doubling from 16% of GDP to 33% of GDP, compared to a 70% increase from 29% to 50% for the rich countries. What is striking is that the remaining two-third of developing countries have actually had a decline in trade to GDP over this period. The globalizing group has also cut inport tariffs significantly, 22 points on average, compared to 11 points for the non-globalizers. The list of post 1980 globalizers includes some well-known reformers (Argentina, China, Hungary, India, Malaysia, Mexico, the Philippines, and Thailand).

post-1980 globalizers also increased thier growth rates
The recent globalizers have experienced an increase of their growth rates, from 2.9% per year in the 1970s to 3.5% in the 1980s, and 5.0% in the 1990s, while rich country growth rates slowed down over this period. What about developing countries not in the globalizing group? They had a decline in the average growth rate from 3.3% per year in the 1970s, to 0.8% in the 1980s and recovering to only 1.4% in the 1990s.
Pair-wise comparisons
There are many interesting pair-wise comparisons between the globalizing group and the non-globalizing group: Vietnam versus Burma, Bangladesh versus Palistan, Cost Rica versus Honduras. In each of these cases, the economy that has opened up more has had better economic performance. Thus, what we have in the 1990s is an important group of countries growing faster than the rich countries and hence gradually catching up, while the non-gobalizing part of the developing world is falling further and further behind. That China, India, and some other large countries are in the fast-growing group meansthat well over half of the population of the developing world is included.
Sustematic regression is needed to generalize the results
These cases provide suggestive evidence about the effect of openness on growth. Nevertheless, examination of individual cases always raises questions of how general the results are. Is it truesystemmatically that countries that increase their trade grow faster? Many of the reformers noted abovemoved forward on a whole set of reforms at once: faster adjustment, stabilization, strengthening private property rights, exchange rate reform. Does the correlation between greater opennness and faster growthpersist after controlling for those other factors? Cross-section regressions are a usefull way of looking at how general are the relationships identified in case studies, and the next section summarize a number of these.
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Q10: How to tackle the Causality and Endogenuity issues? :4.2
FAQID:1026

: global,

InputDate: 8/21/2007
Reference: Winters, L. Alan ; Neil McCulloch; Andrew McKay. 2004. "Trade Liberalization and Poverty: The Evidence So Far." Journal of Econo~nic Literature Vol. XLII (March 2004) pp. 72-115
A: Openness of Trade is considered as the "cause" of the economic growth. But, economic growth will increase the exports and imports and push the trade/GDP ratio up. There is a difficult causality issue. To solve this issue, we need to find a good "instrumental variable" which coorrelate to the Openness of Trade, but influence economic growth only through trade openness. Winters, et. al. (2004) survey how this issue has been tackled.
Trade Openness indicators are subject to "endogenuity"
Causation is difficult to establish.

- Rodriguez and Rodrik (2001) rightly observe that actual openness, usually measures by imput plus exports relative to GDP, is likely to be endogenos
- there is also concern that even policy-based measures, e.g. average tariffs, could be so.

Frankel and Romer (1999) tried to solve this issue
Recently, Jeffrey Frankel a nd David Romer (1999) and Douglas Irwin and Marko Tervio (2002) have tried to address this problem by instrumenting openness in the income equation, with population, land areas, borders and distances between trading partners (Gravity Model). This appears to be successful,

Rodriguez and Rodrik criticized this approach
Rodriguez and Rodrik (2001) point out that:
- the instrument might be correlated with factors that boost growth independently of trade - for example, health and institutions
- adding geographical variables directly to the growth equation undermines the result.
Romer and Rose (2002) re-claim opennes to trade is good for growth
Deeper investigation of these concerns, however, by Frankel and Rose (2002) suggests that those worries are misplaced, and so imply that there is evidence for a psitive causal relationship between openness and income, and hence between liberalization and medim-term growth.
Reference:
Frankel, Je frey A. and David Romer. 1999. "Does Trade Cause Growth'? Amer Econ. Res. 89:3, pp. 379-99.
Frankel, Jeffrey and Andrew K. Rose. 2002. "An Estimate of the Effect of Common Currencies on Trade and Growth," Quart. J. Econ. 117:469, pp. 437-66.
Irwin, Douglas A. and Tervio, Marko. 2002. "Does Trade Raise Income? Evidence froin the Twentieth Century," J. Int. Econ. 58, p . 1-18,
Rodriguez, Francisco and Dani Rodrik. 2001. "Trade Policy and Economic Growth: A Sceptic's Guide to the Cross-National Evidence," NBER Macroeconoinics Annual 2000. Cambridge, MA: MIT Press, pp. 261-324.
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Q11: Is Export engine of growth? (Kusakabe, 2005) :4.2
FAQID:678

: global,

InputDate: 7/18/2006
Reference: Kusakabe, Motoo. 2005. ICT and National Innovation System: Is ICT Engine of Growth? Presentation at International Workshop on Workforce Development For Knowledge Economy, 7-13 September 2005, Seoul, Korea
A: In this analysis, I used as a first proxy for the 'openness to trade', average growth rate of export to GDP ratio during a decade and take a correlation with GDP per capita growth rate of the succeeding decades
Correlation between changes in export/GDP ratio to growth has been high for Higher Income Countries
The table above shows that increase in share of Export to GDP has a high correlation with economic growth , particularly in higher-income countries. However, among lower-income countries, the correlation is weak and in 1960s, even negative.
Export becomes important determinant of growth for Higher income countries
This finding is consistent with many previous studies, which shows that openness to trade, especially the export is the one of the most important determinants of the economic growth. Export becomes more important determinant for growth in higher-income where the countries have acquired enough human capability to pursue export-led growth strategy using either imported or innovative technologies.

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Q12: What is the relationship between economic growth and poverty reduction? :5
FAQID:1027

: global,

InputDate: 8/21/2007
Reference: Winters, L. Alan ; Neil McCulloch; Andrew McKay. 2004. "Trade Liberalization and Poverty: The Evidence So Far." Journal of Econo~nic Literature Vol. XLII (March 2004) pp. 72-115
A: So far we examined the link between Trade Opennes and Growth. But many people cast doubt on whether the growth in average income will automatically leads to the reduction of poverty. Winters et.al survey this important issue.
Studies support growth in avarage income will generally reduce poverty
Economists have long maintain that economic growth generally reduce poverty. Many have argue that , on average, growth does not have identifiable systematic effects on income distribution.

These early studies were based on rather small sample, but recent work has extended the sample and reached exactly the same conclusion, although at the expense of great controversy.
Dollar and Kraay (2002) study triggered a big debate
Most controversial has been the study by David Dollar and Art Kraay (2002), which examined the relationship between growth and poverty both in levels across countries and in changes through time (national growth rates).

Dollar and Kraay relate the mean income of the poor (bottom 20 percent of the income distribution) to overall mean income plus some additional variable^.^

They never reject the hypotheses that the mean income of the poor moves proportionally with mean income and, with the exception of inflation, that a variety of other variables (including measures of openness) affect it only via mean income.

The residual errors of Dollar and Kraay's equations are large and so are perfectly consistent with there being instances in which growth hurts the poor. On average, however, these are offset by those in which the poor benefit disproportionately.

White and Anderson (2001) classify grwoth into "pro-poor" and "anti-poor"
Howard White and Edward Anderson (2001) categorize growth histories into such "pro" and "anti" poor experiences,

They find that in over one-quarter of cases, distributional changes offset growth effects-i.e., that the mean and "poor" incomes moved in different directions.

They are not very successful, however, at identifying the factors that make growth pro- or anti-poor.

They run "standard growth equations for the income growth of each quintile and examine differences in the resulting coefficients.

Openness is associated with:
- significantly higher income growth everywhere
- except in the top quintile, and
- the greatest effects proportionally are for lower quintiles;
that is, openness appears to be progressive.
Criticism on reliability of data
Several concerns have been raised about the robustness of these studies of growth, openness, and poverty:

- The data on the incomes of the poor are clearly subject to error.
- Reporting errors and sample biases are likely to be serious at the bottom of the distribution, and
- in many cases Dollar and Kraay had to infer the share of the lowest quintile from a broader measure of income distribution.

The World Bank's sample of income and expenditure Gini coefficients has been criticized for severe implausibility by Tony Atkinson and Andrea Brandolini (2001).

Stephen Knowles (2001) shows that the relationship between inequality and growth can change once one distinguishes between data based on income measures of inequality and those based on consumption data.
Reference:
Dollar, David and Aart Kraay. 2002. "Growth Is Good for the Poor," J. Econ. Grouth (US) 7:3, pp. 195-225.
\17hite, Howard and Edward Anderson. 2001. "Growth versus Distribution: Does the Pattern of Growth Matter?" Devel. Policy Rec. 19:3, pp. 267-89.
Atkinson Ant ony B and Andrea Brandolini. 2001. "Promise and Pitfalls in the Use of 'Secondary' Data- Sets: Income Inequality in OECD Countries as a Case Study," J. Econ. Lit. 39:3, p f '771 800
Knowles, Stephen. 2001. "Inequality an Econoinic Growth: The Empirical Relationship Reconsidered in the Light of Comparable Data", CREDIT Res. Paper 01/03, U. Nottingham.
Ravallion, Martin.2001. "Growth, Inequality and Poverty: Looking Beyond Averages," World Devel. 29, pp. 1803-15.
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Q13: What are the results of case studies on Growth-Poverty Linkages? :5.1
FAQID:1028

: global,

InputDate: 8/21/2007
Reference: Winters, L. Alan ; Neil McCulloch; Andrew McKay. 2004. "Trade Liberalization and Poverty: The Evidence So Far." Journal of Econo~nic Literature Vol. XLII (March 2004) pp. 72-115
A: As with the openness-growth relationships, more convincing insights may be derived from country case studies.

Ravallion and Datt (2002) studies Indian case
Martin Ravallion and Gaurav Datt (2002) explore the factors behind pro-poor growth more thoroughly in the context of differences between Indian states:

- Higher farm yields, higher development spending, and lower inflation all appear to reduce poverty.

Most interesting, however, is higher nonfarm output: this also helps to reduce poverty:
- but much more strongly where farm productivity is higher,
- the rural-urban divide smaller and
- rural education better

Translated into terms of national growth, pro-poor growth seems more likely to occur where initial conditions (including openness) give the poor the ability to take advantage of the opportunities it generates.
No evidence to overturn the traditional view that growth on average reduces poverty
Despite the methodological challenges to the recent literature:
- there is no evidence to overturn the traditional conclusion that growth, on average, benefits the poor,
- nor to suggest that growth generated by greater openness is any worse than other growth in this respect (and may even be better).

It is quite clear, however, that on occasions growth has been accompanied by worsening poverty and the challenge is to identify why.

Reference:
Ravallion, Martin and Guarav Datt 2002 "Why Has Economic Growth Been More Pro-Poor in Some States of India Than Others?" J. Devel. Econ. 682, pp 381-400.
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