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Trade and economic development: global causality and development- and openness-related heterogeneity T. Gries 1 & M. Redlin 1 # The Author(s) 2020

Abstract This paper reconsiders the classic relationship between trade and economic development. We examine the short-term and long-run dynamics between trade and income for 167 countries over the period 1970–2011 and assume that the effect is not homogenous for all countries but rather varies according to the development stage and the degree of trade openness. We apply panel cointegration, Granger causality and panel error correction in combination with Dynamic Ordinary Least Squares and General Method of Moments estimation to explore the causal relationship between these two variables. The results suggest a statistically significant positive short-run and long-run global relationship between trade and income. However, when splitting the panel into different income and trade openness groups, a long-run relationship is observed only for highincome countries and countries with a relatively high degree of trade openness. Keywords Trade . Openness . Development . Panel cointegration . Causality . Error

correction JEL classification F10 . F15 . F43 . O10

Electronic supplementary material The online version of this article (https://doi.org/10.1007/s10368-02000467-1) contains supplementary material, which is available to authorized users.

* M. Redlin [email protected] T. Gries [email protected]

1

Economics Department, Paderborn University, Warburger Strasse 100, 33098 Paderborn, Germany

M. Redlin, T. Gries

1 Introduction The relationship between international integration and economic development has long been a subject of interest and even controversy.1 With regard to the theoretical relationship between trade and development, most studies support the proposition that openness to international trade positively affects income. Romer (1993), Grossman and Helpman (1990, 1991), and Barro and Sala-i-Martin (1995), among others, argue that countries that are more open to trade are better able to catch up to the leading technologies. International trade promotes the efficient allocation of resources through comparative advantages and allows the dissemination of knowledge and technological progress through high-tech imports (Chang et al., 2009; Baldwin et al., 2005). Additionally, trade openness encourages competition in domestic and international markets and allows to better reap the potential benefits of increasing returns to scale and economies of specialization by increasing the market size (Melitz and Ottaviano, 2008; Alesina et al., 2005). However, the empirical evidence on the relationship between trade and income varies a lot, depending on the econometric technique used, the sample studied, and the exact definition of the variables used.2 Further, recent developments suggest that trade openness is not always beneficial to economic growth and that the relationship between trade and development may vary with the level of development and