Trade openness and structural vulnerability in developing countries

Abstract

Purpose – The purpose of this paper is to investigate how trade openness affects the structural vulnerability of developing countries. The analysis is conducted on both the entire sample of 105 countries as well as two sub-samples, namely least developed countries (LDCs) and non-LDCs. Design/methodology/approach – To perform the analysis, the author employs fixed-effects (within) regressions supplemented by instrumental variables technique based on the two-step generalized methods of moments approach. Findings – The author finds empirical evidence that although trade policy liberalization reduces the structural vulnerability on the entire sample developing countries, no statistically significant effect of such liberalization is obtained either on LDCs or non-LDCs. However, trade policy liberalization appears to reduce countries’ exposure to shocks, result that applies to the entire sample as well as the two sub-samples. The author also observes that trade policy liberalization exerts no (statistically) significant effect on the size of shocks that affect developing countries, result that applies to both the full sample and the sub-samples of LDCs and non-LDCs. Research limitations/implications – In the absence of a well-established theoretical framework on how trade openness affects the structural vulnerability of developing, the author adopts a pragmatic approach by drawing upon many insights of Loayza and Raddatz (2007) who study the structural determinants of external vulnerability. Practical implications – Developing countries in general and LDCs in particular could address their structural weaknesses by making optimal use of their trade policies. In particular, they could better use the flexibilities available to them in provisions of the World Trade Organization (WTO)’ Agreements. In this respect, the international community, notably donors of the developed world has a key role to play. Originality/value – This is the first study exploring how trade openness, capturing here through trade policy liberalization affects the structural vulnerability of developing countries.