04 July 2020

ARTICLE REVIEW
OPENNESS, TRADE AND ECONOMIC GROWTH In India
By Swapnanil SenGupta

INTRODUCTION
Trade Openness is the sum of imports and exports normalized by GDP. Mishra (2007) and Lane and
Milesi-Ferretti (2008b) state that bilateral equity investment is strongly correlated with underlying
patterns of trade. Investors are better able to attain accounting and regulatory information on foreign
markets through trade and thereby invest in foreign assets. Default risk is also ameliorated by tighter
trade integration. Finally, trade transactions may directly generate cross-border financial flows including
trade credits, export insurance, payment facilitation. The data on Trade Openness are from World
Bank’s World Development Indicators.

Trade openness is another determinant that is generally accepted to play a role in the determination of
currency crises. Several studies find that greater trade integration reduces a country's financial fragility
and the likelihood of a currency crisis by increasing both the ability and willingness to service external
obligations (IMF, 2002b). A greater export ratio decreases the likelihood of sharp reversals of capital
flows, as the country is more able to service its foreign-currency-denominated debt. In addition, trade
openness serves as an incentive to meet external obligations by making a country more vulnerable to
creditors' sanctions in case of default. Hence, higher trade integration tends to reduce the frequency of
external financial crises. This is supported by Figure 33.5, which shows that currency crises over the
period 1975–99 were more frequent in countries that are less integrated into the global trading system.

Problem statement
The main reason behind the support of trade openness is the failure of import-substituting
industrialization (ISI) strategies taken up by several developing countries after the World War II.
The strategy’s shortcomings like situations leading to misallocation of resources and the fact
that this strategy only favored a few powerful interest groups in many developing countries, led
to the abandonment and many countries opted for trade liberalization measure in the 1970s.
The High-Performance Asian Economies like Hong Kong, China, Singapore took up the strategy
of Export-oriented Industrialization and witnessed accelerated economic growth. In the 1990s,
the Washington Consensus, a collection of 10 major development policy recommendations
from organizations such as the IMF and the World Bank acknowledged trade openness as
crucial to accomplish higher economic growth. According to World Development
Objectives
To analyze the dynamic impacts of trade openness on economic growth in India.
This paper aims to present an analysis on the impacts of trade openness on economic growth
exclusively in India over the period 1960-2018. As a contribution to the existing literature on
the subject, a dummy variable has been used to control for time shocks and policy dynamics
(years pre and post 1991 Economic Reform) and a unique combination of several variables

Literature review
The existing literature do not provide a clear trade openness and growth
relationship. Traditional trade theory suggests that trade openness helps a
country achieve growth through investment in innovation, specialization,
productivity improvement or enhanced resource allocation. In development
literature, the role of trade policy in economic development has been a matter
of focus. According to the comparative advantage theory, in situation of
international trade, a country would produce goods in which it has comparative
advantage. It specializes in sector in which it has better factor endowments and
produces commodities on huge scales. Consequently, productivity and export of
this sector will go up boosting the overall economic growth. The Heckscher-Ohlin
Model indicates that if two countries have different resources i.e. one is more
capital intensive and the other is more labor intensive, then opening up trade can
result to higher output in both the countries.
Methodology

 This study extensively examines the dynamic impact of trade openness on economic
growth in India using ARDL Bounds Test approach. A complex trade openness index is
constructed using PCA (Principal Component Analysis) and a time dummy variable is
used in an effort to capture the Economic Reform Policy dynamics of 1991 in India. Per
capita GDP growth rate has been used as a standard measure of economic growth.
Annual time series data has been used for estimation over the period of 1960- 2018

Findings and results

 It is found that the trade openness has negative impact on economic growth in India in
both the short and long run. The result conforms to several findings on the same
topic. Applications: This study incorporates measures to control for the shocks by the
new economic policy of 1991. It is also discussed why trade openness might have had a
negative impact on the economy of India in spite of it being a desirable phenomenon.
Discussion for me
The results show that trade openness has positive effects on economic growth both in the short
and long run. Furthermore, they reveal a positive and strong complementary relationship
between trade openness and capital formation in promoting economic growth.
There are theoretical studies suggesting that trade may negatively impact economic growth or
there exists no relationship at all. The rationale behind is, because of technological and financial
constraints, developing countries may lack the efficiency required to adopt technologies of
advanced economies and hence, higher trade openness negatively impacts growth in
developing economies.

Conclusion
We conclude our report that the openness of a country and the trade that a country makes
with another country will increase its economic growth. We have such a great example like
India and China.India, The Economic Reforms had significant impacts on the economy. Real GDP
growth was at 5.7% per annum in the 1990s, which rose to 7.3% per annum in 2000s.
The GDP was 320.979 billion (current US$) in 1990 and rose to 458.82 billion (current US$) in
1999 and 1.823 trillion (current US$) in 2011 (World Bank Data). A significant growth in GDP can
be observed after 1991.

Recommendations
We recommend that even if there is a closed economy in the world remaining to open the
country to gain from trade. If the country opens its economy they will get: Jobs for their citizens
and technology skills from other countries.

Reference
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