No Miracles Here: Trade Policy, Fiscal Policy and Economic Growth
GEP Working Paper No. 02/26
31 Pages Posted: 23 Jun 2003
Date Written: December 2002
In this paper we consider whether the effects of trade liberalisation on GDP growth are offset by changes in other policy variables, namely changes in fiscal policy. Governments increase welfare spending as a response to greater exposure to international trade. We find for a sample of developing countries that this is not the case. Countries that liberalise their trade regimes do increase their spending on welfare, but once we control for fiscal policy trade liberalisation still has no effect on the rate of growth. Fiscal policy itself has the expected effect on GDP growth. The paper uses a difference-in-difference approach for a matched sample of non-liberalising countries.
JEL Classification: F43, H5, 040, 057
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