Openness and Growth: An Empirical Investigation

In a recent and influential study, Trade, growth and poverty, Dollar and Kraay (2001) advance the argument that trade liberalization improves the growth prospects of poor countries. They demonstrate this point principally using multiple regression analysis with data for 100 countries, through which the share of trade in an economy is shown to have had a statistically significant positive effect on income growth in the 1980s and 1990s. On the basis of this analysis, they assert that developing countries should enact more liberal trade policies to foster growth and reduce poverty. This paper finds several errors in the conceptual logic and methodology underlying the DK study. First, it argues that the authors employ selective evidence in support of their view while overlooking their data that is open to alternative interpretations. Next, it argues that their reliance on the share of trade in GDP as an indicator of trade liberalization is highly misleading. Third, the failure to carefully consider selection bias in the descriptive analysis further distorts the results. Finally, the regression analysis contains several problems relating to the data used and specification.