Globalisation describes the increasing integration of national
economies through international trade, capital transfers, and the
exchange of information or knowledge. This paper focuses exclusively on
trade integration. Most economists hold that reducing trade barriers has
a decisive positive effect on economic growth and poverty reduction
(“openness hypothesis”). However, some economists diagnose deficient or
weakly enforced non-market institutions as the major cause of slow
growth. The main goal of this paper is to show that these two seemingly
contrary points of view do not exclude each other. Openness is not only
influenced by trade policy but also by other policies and the quality of
institutions. Available data show a high negative correlation between
the logarithm of tariff rates and indicators of the quality of
institutions. Cross-national growth regressions demonstrate that the
explanatory power of trade protection and a combined measure of
openness, on the one hand, and institutional quality, on the other hand,
is comparable. Therefore, it is concluded that liberal trade policies
are recommendable, but must be complemented by sound macroeconomic
management, micro-policy to strengthen domestic competition, and
institutional improvements.
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