Trade Openness, Financial Openness, and Growth in Emerging Market Economies: A Dynamic Panel Approach

Abstract

The greatest challenge facing most economies today is how to grow their economies and reduce over-dependence on imports in the midst of increasing integration of world economies. Addressing this challenge seems to be difficult despite all efforts by policymakers at different times to salvage the situation, the problem persists as evident in the global financial crisis of 2008 and the Eurozone crisis of 2012 which were generally viewed as a glaring illustration of limitless pursuit of economic integration and governance failure at the expense of carefulness, prudence, due diligence, and regulation. It also reflects the lack of proper coordination and lack of proper economic integration facing most emerging market economies of the world. Against this background, this study focuses on the reexamination of the impact of trade openness (TOP) and financial openness (FOP) on economic growth in emerging market economies. The direct and interaction effect of the both openness variables on economic growth in these markets is investigated using data from 2000 to 2017 adopted from World Development indicators of the World Bank. Over 30 emerging market economies covering Asia, Latin America, and Europe are included in the study. For empirical analysis, the study uses one measure of FOP: de facto (total capital flow) variables following Aizenman and Noy (2009) and a measure of TOP as total trade–GDP ratio. The study applies the Dynamic Panel Approach, that is, the Arellano–Bond GMM estimation technique and Granger Causality Test to address the objectives. The results of this study show that TOP has a positive and significant impact on all the countries studied, whereas FOP has positive but no significant impact on economic growth of these countries, implying that these countries have not harnessed the benefit of financial liberalization and integration. It is recommended that the emerging market economies should open not only their economies to trade but also open their economies to finance so as to reap the benefits of FOP and integration.

Citation

Stanley Nwodo, O. and Romanus Ukwueze, E. (2019), "Trade Openness, Financial Openness, and Growth in Emerging Market Economies: A Dynamic Panel Approach", Bhattacharyya, R. (Ed.) The Gains and Pains of Financial Integration and Trade Liberalization, Emerald Publishing Limited, Leeds, pp. 63-75. https://doi.org/10.1108/978-1-78973-999-220191012