Does Trade Openness Make Countries Vulnerable?

Abstract:     
This paper focuses on the welfare costs of exposure to shocks linked to trade openness, an issue that is of main interest for international economic policy. It addresses the question as to whether the current process of trade liberalisation has a net destabilising effect on partner countries, increasing their vulnerability.

Starting from a broader definition of vulnerability than simply vulnerability to poverty because of trade openness, this paper highlights, presenting both probit and 3SLS estimates, a robust and significant long term relationship (1960-2007), in a large sample of countries, between the “extreme volatility” of consumption (crisis and boom) - induced by trade openness - and the deviation of consumption growth from its expected path.

The novelty of this paper lies in its ability to match two strands of the literature (volatility and vulnerability). It improves the existing literature on aggregate volatility by adding a forward looking lens; a feasible notion of benchmark and a counterfactual, all essential elements of a vulnerability framework.

Number of Pages in PDF File: 27

Keywords: trade openness, vulnerability, volatility, probit, 3SLS

JEL Classification: F40, C82, E17, D60

working papers series