6.1 INTRODUCTION
The political and economic dispensations of the 1990’s have resulted in significant changes in the economies of the Eastern European countries. Furthermore, the market reforms and prerequisites for accession to the European Union have resulted in the change of the trade patterns for these countries. This development coupled with the expansion of the European Union has altered the economic spheres of these countries as well as that of the European Union.
This has resulted in the growth of interest in many researchers who have taken particular interest in the investigation of the relationship between openness and growth.
This dissertation contributes to the existing literature on the relationship between openness and trade by specifically focusing on testing the hypothesis of convergence as well as testing the hypothesis that openness leads to trade.
The main thrust of this section will be the summary of both the theoretical and empirical findings of this dissertation. The proposition of possible areas of further research will also form part of this section.
6.2 MAIN RESULTS OF THE DISSERTION
The literature on the relationship between openness and growth can be categorised into two strata. The first strata consist of literature that advocate for the proposition of the existence of a positive relationship between openness and trade. The second strata comprise of literature that do not assert the existence of a positive relationship
between openness and trade.
However, the focal divergence in literature is the choice of measures of openness. Sachs and Warner (1995) use an openness index constructed by five elements. Edwards (1998) uses nine indicators of trade openness, while Wacziarg (1998) uses
an index of openness constricted by three elements. Frankel and Romer (1999) uses measure of openness that depend on geographical characteristics.
Dollar and Kraay (2002) use the trade to GDP ratio as a measure of openness. Leamer’s openness index, growth rate of exports and collected tariff ratios are measure that are also used for measuring openness.
This dissertation uses two approaches. The first approach uses the panel estimation of groups of countries. This econometric analysis tests two hypotheses, namely, the convergence hypothesis and the hypothesis that openness leads to growth. The second approach is an econometric analysis to test whether average growth is higher or lower after liberalisation.
The main findings of the this dissertation are;
The convergence hypothesis is validated for all groups but one. The exception is the group of Eastern European countries that have just joined the European Union. The relationship between openness and growth is positive for the first three groups of countries while it is negative for the fifth group. There is no clear evidence about the effect of openness on growth in the fourth group of countries.
Since education and fertility play a major role in economic growth, the positive effects of fertility and educational attainment are expected results. However, the negative effect of government consumption expenditure is an unexpected result. The negative relationship between government consumption expenditure and change in GDP may be attributed to inefficient allocation of resources. The negative effect of the health means that the funds spent of health in these economies have not resulted in the increase of the growth rate.
The reverse relationship, that growth leads to openness has also been analysed in this dissertation. It has been validated in groups one, two and three where trade share has been used as a dependent variable. The proposition that growth results in openness has also been validated in groups two, three and four where the ratio of exports to the sum of exports and imports has been used as a dependent variable. There is a need for a careful interpretation of the nature of the relationship between openness and growth as a result of the existence of this reverse relationship that growth causes trade.
The granger causality test results show that for all the groups openness causes growth and also that growth causes openness. However, there is only one exceptional case, for the fourth group-the Eastern European countries that have just joined the European Union growth does not result for openness when the ratio of exports to the sum of imports and exports as a measure of openness.
6.3 AREAS OF FUTURE RESEARCH
The main aim of this study was to examine the effect of openness on growth. However, it is equally important to note that some aspects that are relevant to the research of the relationship between trade and growth were external to the compass of this study. It goes without saying that the inclusion of these aspects will significantly enrich to the study of the relationship between openness and growth.
The relationship between the quality of institutions and growth could be a useful approach. This could also incorporate the measure of the quality of institutions. An index of democracy, political rights, rule of law and indicators of political stability could be added to the analysis of the effect of openness on growth. With the inclusion of quality of institutions and an analysis of openness indicators, it would also be possible to examine how openness leads to the eradication of poverty by specifying the measures of poverty reduction.
6.4 THE RESERCHER’S PERSPECTIVE
This dissertation has attempted to identify the effect of openness on growth. The analysis shows that there is a positive effect of trade on growth in the European Union as well as in Eastern European countries. The analysis further demonstrates that the market reforms and trade liberalisation undertaken by these economies has generated positive growth and the enhancement of economic welfare.
However, economic growth is a complex matter, which is determined by numerous factors. It for that reason, that caution should be exercised, by taking into
consideration many factors when analysing the effect of openness on growth. While openness is crucial constituent in the attainment of higher economic growth rates it is important to point out that it is not a panacea for high economic growth rates.