Trade, Regulations, and Growth

Abstract

Abstract: Trade does not stimulate growth in economies with excessive regulation. We examine the effect of openness on growth using cross-country regressions on data from more than 100 countries. Results from levels regressions imply that increased openness is, if anything, associated with a lower standard of living in heavily-regulated economies. Growth regressions confirm that the effect of increased trade on growth is absent in highly regulated countries. Once we control for the effect of domestic regulation, the evidence that trade positively affects growth is stronger than has been found in previous studies. Excessive regulations restrict growth because resources are prevented from moving into the most productive sectors and to the most efficient firms within sectors. In addition, in highly regulated economies, increased trade is more likely to occur in the wrong goods—i.e. goods where comparative advantage does not lie. The results imply that regulatory reform enhances the benefits of trade liberalization.