Trade liberalization and its
economic impact on developing
and least developed countries
Department of Economics, University of Karachi, Karachi, Pakistan
Purpose – This paper aims to investigate the impact of trade liberalization on economic growth of
selected developing and least developed economies by augmenting standard production function.
Design/methodology/approach – The panel xed effect model is used to estimate impacts of
macroeconomic variables on economic growth. Real GDP million US$ is taken as proxy for economic
growth. The capital stock series for each cross-section is generated from gross xed capital formation.
The total trade to GDP is taken as proxy for trade liberalization.
Findings – The result shows signicant positive impact of selected macroeconomic variables on
economic growth, except trade liberalization index. The one unit increase in trade liberalization
deteriorates economic growth, of developing countries by ⫺280.86 million US$ and least developing
by ⫺3555.09 million US$.
Research limitations/implications – The signicant negative impact indicates the relatively
greater share of import than exports. The developing nations should develop production side and adopt
export promotion policies besides managing imports for the achievement of sustainable growth.
Originality/value – This study uses augmented production function and constructed capital stock
for individual countries. The total trade to GDP is taken as index for trade liberalization and was found
to have signicant negative impact.
Keywords Developing countries, Trade liberalization index, Exports, Investment level,
Paper type Research paper
The developing and least developing nations are persistently facing unfavorable trade
balance for several decades due to high import demand and lower export growth. The
trade balance has a strong positive impact on national income. The standard trade
theories argue free trade ow and propose market-oriented, competitive strategies for
trade and economic development. The increase in trade decits has deteriorated foreign
debt standings. Developing and least developing nations owe more than billions of US$,
and debt service payments have emerged signicantly in national income accounts.
The idea that foreign trade is engine for economic growth is very old, going back to
the early work of Adam Smith’s The Wealth of Nations in 1776. The world economies
JEL classication – F14, F43, C23
The authors thank Prof Dr Abdul Waheed, Department of Economics, University of Karachi,
for assistance and encouragement, and anonymous referees of Journal for their useful comments
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and its economic
Received 26 June 2013
Revised 16 April 2014
Accepted 13 July 2014
Journal of International Trade Law
Vol. 13 No. 3, 2014
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