Settling the trade/growth dispute – the impact of the Uruguay Round
The link between greater openness to trade and higher growth, once held sacred by economists, has come under contestation in recent years. Lowering trade barriers was perhaps the 1990s Washington Consensus’ most controversial prescription to developing countries, and numerous empirical studies claimed the growth effects of lower tariffs to be minimal.
However, the authors of DP 6942 argue that these studies are based upon a weak empirical basis. By using a growth model with a basis for trade they are able to extract the often unmeasured, dynamic gains from trade. The analysis compares pre- and post-Uruguay Round data, measuring the difference between the countries that liberalised and those that did not during this round of trade talks. They find that greater openness to trade led to an increase in growth of about 1% of GDP each year.
This may appear to be quite small. However, Taylor and Estevadeordal remind us that almost 20 years on from the Uruguay Round, the countries that liberalised have since benefited from an impressive 15-20% boost in income growth – a gain that has surely made a significant difference to their development.
Summary by CEPR staff