Trade Liberalization, Export Performance and Economic Growth in Jamaica*

Article excerpt

I. INTRODUCTION

Since the 1980s trade liberalization has become an increasingly common feature of economic policy in developing countries. Some developing countries have unilaterally liberalized trade in an attempt to integrate into the global economy and promote economic growth. In other cases countries have had to liberalize trade in order to satisfy the requirements of international lending agencies. At the global level, multilateral trade negotiations under the auspices of the World Trade Organization are pushing for freer trade in response to the demands of globalization.

The increasing emphasis on trade liberalization represents a reversal of the inward looking economic policies pursued by developing countries during the 1950s and 1960s. This policy reversal is largely due to the view that open economies outperform protectionist economies. The relationship between openness and economic growth has been studied extensively. A number of empirical studies for example World Bank (1987), Dollar (1992), Sachs and Warner (1995), Edwards (1998) and Panagariya (2004) provide evidence of a positive relationship between openness and economic growth. The World bank 1987 study of economic performance in 41 developing countries concluded that "the evidence suggests that the economic performance of the outward-oriented economies has been broadly superior to that of inward oriented economies in all respects" (World Bank, 1987:85). More recently Panagariya (2004) reviewed the performance of 138 developing countries over the period 1961-1999 and found that virtually all developing countries that experienced sustained growth did so while pursuing outward oriented policies.

Openness is multifaceted in that an open economy is one that is open not just to international trade but to foreign capital and foreign technology (Grossman and Helpman, 1991). Nevertheless, the link between openness and economic growth implies that trade liberalization is necessary to promote openness and generate economic growth. Consequently, international lending agencies such as the World Bank and the International Monetary Fund recommend trade liberalization as an essential component of economic reform programs in developing countries. However, trade liberalization may not necessarily promote growth. Rodriquez and Rodrik (1999) argue that the relationship between trade and economic growth is dependent on a range of factors including the characteristics of the country and external economic conditions. Further study of the impact of trade liberalization on individual countries is therefore needed.

The objective of this paper is to analyze the impact of trade liberalization on exports and economic growth in Jamaica. The paper is structured as follows: section 2 provides an overview of the relationship between trade liberalization and economic growth. section 3 reviews Jamaica's trade liberalization program. section 4 examines Jamaica's export performance before and after trade liberalization. section 5 presents empirical evidence on the impact of trade liberalization on economic growth in Jamaica. Finally, conclusions are presented in section 6.

II. TRADE LIBERALIZATION AND GROWTH

Neo classical trade theory suggests that international trade promotes economic growth by promoting specialization in the production of goods and services in which a country has a comparative advantage. Such specialization entails the reallocation of resources from relatively inefficient sectors to more efficient sectors thereby improving the efficiency of the economy. The increased competition provided by international trade is also expected to have positive effects on economic efficiency. Other things being equal improved efficiency should contribute to higher rates of economic growth. In addition, specialization in sectors in which a country has a comparative advantage promotes export expansion which in turn stimulates economic growth.

The two gap model identifies foreign exchange shortage as an important constraint on economic growth in developing countries (Chenery and Strout, 1966). …