Trade Openness Impact on Economic Growth in Central Asia

Abstract

Trade openness impact on economic growth is one of the most widely discussed and contradictory questions in economics. It is also an actual question today for CA countries as these countries are one after another joining WTO and/or other trade unions. While international organizations especially WTO promoting globalization and trade liberalization, empirical studies found mixed but predominantly positive, sometimes negative and no relationship between trade openness and growth. The study benefited from macroeconomic data for the period from 1992 to 2012 for five CA countries. Main obstacle to accept trade openness as a main engine of economic growth is also related with estimation issues of endogeneity of the variables and probability of existence of reverse causality between dependent and independent variables. To deal these issues system-GMM and Error correction models have been implemented. System-GMM estimation revealed that there is an economic and statistically very significant negative relationship between trade openness and economic growth, while, physical capital has statistically and quantitatively significant positive association. Interestingly, even natural resources exports comprise considerable part of total exports, no relationship was found between resource rent and GDP growth. Indicator of macroeconomic stability, inflation also found to have negative relationship with economic growth. Error correction model estimations revealed bidirectional causality between export and GDP in a short run. In a long-run; GDP granger causes export and GDP with export cause import. There is no causality running from trade toward GDP in a long run. Imports also does not granger cause neither GDP nor export in a short run. Even though our empirical estimations suggest more restrictive trade policies we proposed to become trade open but under certain conditions.