Regional Trade Agreements Versus Board Liberalization: Which Path Leads to Faster Growth? Time-Series Evidence


WP/98/40-EAWP/98/40

Regional Trade Agreements Versus Broad Liberalization:
Which Path Leads to Faster Growth? Time-Series Evidence
Athanasios Vamvakidis

Should a closed economy liberalize by opening trade to all countries, or
discriminate by participating in regional trade agreements (RTAs)? Based on a
data set for the period 1950-92, this paper estimates the growth performance of
countries that liberalized to world trade (nondiscriminatory, or broad
liberalization) or joined an RTA (discriminatory liberalization).


Time-series evidence shows that economies have grown faster on average after
broad liberalization, both in the short and long run, but not after joining an
RTA. The impact of participation in an RTA is significantly negative for most
empirical specifications. In addition, economies have higher investment shares
after broad liberalization, but lower ones after joining an RTA.


The results show that the impact of openness on growth is direct and indirect
(through higher investment). This contrasts with the literature that uses
cross-country evidence and finds only an indirect effect. The results suggest
that closed economies that want to open their markets to free trade and face
the dilemma of global versus regional integration should choose the global
path.