Trade liberalization and its economic impact on developing and least developed countries

Abstract

Purpose – This paper aims to investigate the impact of trade liberalization on economic growth of selected developing and least developed economies by augmenting standard production function. Design/methodology/approach – The panel fixed effect model is used to estimate impacts of macroeconomic variables on economic growth. Real GDP million US$ is taken as proxy for economic growth. The capital stock series for each cross-section is generated from gross fixed capital formation. The total trade to GDP is taken as proxy for trade liberalization. Findings – The result shows significant positive impact of selected macroeconomic variables on economic growth, except trade liberalization index. The one unit increase in trade liberalization deteriorates economic growth, of developing countries by −280.86 million US$ and least developing by −3555.09 million US$. Research limitations/implications – The significant negative impact indicates the relatively greater share of import than exports. The developing nations should develop production side and adopt export promotion policies besides managing imports for the achievement of sustainable growth. Originality/value – This study uses augmented production function and constructed capital stock for individual countries. The total trade to GDP is taken as index for trade liberalization and was found to have significant negative impact.