The Impact of Trade Liberalization on Economic Growth and Development

During the 1980s and 1990s more and more countries opened up for international trade. At the same time, income inequality increased in many parts of the world. Until now, there has been a debate in the literature of whether trade liberalization is good or bad for the development of countries. This study investigates the relationship between trade liberalization and economic growth as well as trade liberalization and income inequality in detail. New enhanced trade openness measures, such as the Composite Trade Intensity and the Freedom to Trade Internationally index, are used in the analysis. The correlation between trade openness and growth seems to be positive but fragile. The relationship between trade liberalization and income inequality is ambiguous. Outcome based trade measures find support for the basic Heckscher-Ohlin framework that openness leads to a reduction in inequality and increases with the initial level of GDP. However, the coefficients of the trade policy variables come to contradictory findings. Trade liberalization is associated with higher inequality and is reduced as countries raise their incomes. This result is in line with the empirical evidence in the literature.