How Does Trade Openness Influence Budget Deficits in Developing Countries?

Author/Editor:

Jean-Louis Combes ; Tahsin Saadi Sedik

Publication Date:

January 1, 2006

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

This paper analyzes the effects of trade openness on budget balances by distinguishing the effects of natural openness from those of trade-policy induced openness. Using the GMMsystem estimator, the econometric analysis focuses on 66 developing countries during 1974-98. The results show that trade openness increases a country's exposure to external shocks regardless of its underlying causes. This reinforces the adverse effects of terms of trade instability on budget balances. However, trade openness also influences budget balances through several other channels: corruption, income inequalities, etc. The paper shows that these additional effects of natural openness and trade-policy induced openness on budget balances go in opposite directions: the former deteriorates budget balances whereas the latter improves them.

Series:

Working Paper No. 2006/003

Subject:

Budget planning and preparation Expenditure Government debt management Terms of trade Trade policy

English

Publication Date:

January 1, 2006

ISBN/ISSN:

9781451862638/1018-5941

Stock No:

WPIEA2006003

Pages:

22

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