Abstract
Studies of the impact of trade openness on growth are based either on cross-country analysis—which lacks transparency—or case studies—which lack statistical rigor. This paper applies a transparent econometric method drawn from the treatment evaluation literature (matching estimators) to make the comparison between treated (that is, open) and control (that is, closed) countries explicit while remaining within a statistical framework. Matching estimators highlight that common cross-country evidence is based on rather far-fetched country comparisons, which stem from the lack of common support of treated and control countries in the covariate space. The paper therefore advocates paying more attention to appropriate sample restriction in cross-country macro research.
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Notes
Some theoretical models developed in the literature imply negative (or at least not necessarily positive) growth effects from trade; see the short discussion in Rodriguez and Rodrik (2001). By and large, however, macro theory has identified international exchange as a potential source of growth, theoretical exceptions being often associated with market failures that should be corrected by national policies different from protectionism; see, for example, the discussion in Bhagwati (2002). The December 2004 issue of the Journal of International Trade and Economic Development provides a recent review of the debate.
See Section II for a description of the SWWW indicator.
Rodriguez (2006) takes stock of recent developments in this respect.
In fact, Irwin and Tervio (2002) and Rodriguez and Rodrik (2001) find that geographical latitude has a significant effect on growth, casting doubt on the identifying assumption used by Frankel and Romer (1999). Furthermore, these instruments relate primarily to trade volumes, not trade policies, as discussed by Rodriguez and Rodrik.
Wacziarg and Welch (2003) essentially conduct difference regressions in growth, or diff-in-diff regressions in log income.
For a comparison of various indicators, see Harrison (1996).
The SWWW dummy captures, in fact, more than just openness to trade, for example, also the socialist origin. Nevertheless, we base our initial analysis on this dummy, given the prominence it has achieved in the literature. Sachs and Warner (1995, p. 25) note that the socialism indicator serves as a proxy for central planning, which could be viewed as a substitute for overt trade policies such as tariffs.
We are grateful to an anonymous referee for this suggestion.
See Vamvakidis (2002) for a detailed description of the data sources.
See Imbens (2004) for a review of nonparametric estimation methods under this assumption.
To identify the ATT, a weaker version of these conditions suffices: Y(0)⊥T∣X and Pr(T = 1∣X)<1.
See Abadie and others (2004) for a description of this algorithm and the program that implements it in Stata.
Following Abadie and others (2004), we let V be the diagonal matrix with the inverses of the variances of the covariates on the main diagonal. All the estimates presented in this section are robust to the utilization of a different distance metric—the Mahalanobis distance suggested by Rubin (1980).
We label as developed all countries that joined the Organization for Economic Cooperation and Development (OECD) between its foundation in 1961 and 1973—the end of the initial participation wave that concluded with the accession of New Zealand. In addition, we add Cyprus and Israel for lack of better options. Countries that joined the OECD more recently (starting with Mexico in 1994) are allocated to their geographic region. The label transition is used for all countries in central and eastern Europe that are contained in the sample, including for the period before 1990.
See the online appendix mentioned in footnote 14 for a precise list of treated and untreated countries across regions.
See Tables 9 through 12 in the online appendix.
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Additional information
*Andreas Billmeier is an economist in the IMF's Middle East and Central Asia Department. Tommaso Nannicini is an assistant professor of economics at Bocconi University; he is also affiliated with IGIER and IZA. Large parts of this paper were written while Nannicini was a visiting scholar at the IMF, and he would like to express his gratitude for the hospitality and support extended to him. An online appendix to this article is posted at http://www.tommasonannicini.eu/Portals/0/trade_matching_only_appendix.pdf. The authors would like to thank Guido Tabellini, Athanasios Vamvakidis, and Marla Ripoll for sharing their data; Klaus Enders, Christian Keller, Luca Ricci, Athanasios Vamvakidis, seminar participants at the IMF and ASSET 2007, and an anonymous referee for helpful suggestions; as well as David Einhorn, Anna Maripuu, and Judith Rey for their help with the data and editorial issues.