Effects of trade openness on inflation, income inequality and economic growth in selected developing countries

Trade openness is important to the national growth and development. However, its impact on inflation, income inequality and economic growth among developing countries remain inconclusive. Additionally, the use of different measurements for trade openness such as the standard trade shares (TS) measurement, world trade shares (WTS) and composite trade shares (CTS), a new measurement for trade openness also yields different results. The first research objective examines the relationship between trade openness and inflation on 51 developing countries from 1995 to 2018. This is motivated by the mixed relationships between trade openness and inflation among the developing countries. The finding based on system GMM estimation indicates a positive and significant relationship between CTS and inflation but not for TS and WTS. The second research objective focuses on the relationship between trade openness and income inequality on 52 developing countries from 1995 to 2015. This is motivated by the existence of mixed relationships between trade openness and income inequality among the developing countries. The second objective was estimated using system GMM estimation and there is a positive and significant relationship between trade openness and income inequality for both CTS and WTS but there is an insignificant relationship when TS is used. The third research objective examines the relationship between trade openness and economic growth on 57 developing countries from 1995 to 2018. As suggested by new growth theory, the relationship between trade openness and economic growth is positive, however, empirical findings were mixed among the developing countries. The finding based on system GMM estimation reveals a positive and significant relationship between trade openness and income inequality for both CTS and WTS but there is an insignificant relationship when TS is used. In conclusion, policies towards greater trade openness need to be handled with care to prevent further rise of inflation and income inequality. For income inequality, higher real GDP per capita is needed to reduce income inequality. For economic growth, both higher trade openness and physical capital are needed for continuous economic growth.

Text TEE HENG GUAN - IR.pdf Download (1MB)

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