The Relation between Openness and Economic Growth: Postwar Evidence from 124 Countries

Conventional wisdom suggests that openness of an economy promotes economic growth. Romer (1989) posits the positive relationship between openness and economic growth as a stylized fact. He uses only ex-post industrialized countries to "prove" his stylized fact thereby introducing a sample selection bias. We correct for this sample selection bias by analyzing the biggest available sample of countries using the Penn World Table 5.6. We also correct for the fact that trade does not mean export only. We obtain quantitative estimates of the impact of trade on growth. In doing so, we use modem time series techniques instead of relying on simple scatter diagrams. Results show that growth in openness is indeed significantly positively related to the growth in real GDP for 94 out of 124 countries.