Trade Integration and Economic Well-being: Evidence from Generalised Methods of Moments (GMM) in the D-8 Countries

Abstract

This paper contributes to the trade–development nexus by investigating the link between trade integration and economic well-being in the developing eight (D-8) countries comprising Bangladesh, Egypt, Indonesia, Iran, Malaysia, Nigeria, Pakistan, and Turkiye. Essentially, this paper examined how trade openness, financial openness, and the exchange rate contributed to gross national income (GNI) per capita (a proxy for economic well-being). The panel data obtained from the United Nations Conference on Trade and Development (UNCTAD), the World Bank’s World Development Indicator (WDI), and the Chinn-Ito index between 2005 and 2021 were analysed using the two-step generalized method of moments (GMM), panel unit root, and Rao cointegration, among others. Evidence of a long-run relationship among the variables was established from the Kao cointegration test results at the 5 per cent significance level. This suggests that trade integration has a forecasting ability for economic well-being in the D-8 countries. The results of the two-step GMM revealed that trade openness significantly enhanced the economic well-being of the D-8 countries. This finding explains that cross-border trade among the members of the D-8 countries plays a substantial role in improving the standard of living of the population. Similarly, the results showed that as the degree of financial openness grew, economic well-being improved significantly. However, the results further revealed that exchange rate depreciation had an insignificant negative effect on economic well-being. Given the findings, this paper recommends that policymakers in the D-8 countries should synergise to implement a non-restrictive trade policy, gradually collapse the barriers to financial openness, and promote exchange rate stability to create more opportunities for economic development.