TRADE LIBERALIZATION AND ECONOMIC GROWTH: A PANEL DATA ANALYSIS FOR TRANSITION ECONOMIES IN EUROPE

Abstract

Purpose- In this study, the long-term and the short-term relationships between economic growth and trade liberalization for 13 transition countries in Europe were examined. Methodology- The dataset includes 303 observations from 1995 to 2016 for the variables of gross domestic product (GDP), export (EXP), import (IMP), gross fixed capital formation (GFCF), foreign direct investment (FDI) and human capital (HC). PLS Test, Pesaran (2004) CD-Test, Pesaran (2007) Unit Root Test, Swamy S Homogeneity Test conducted before causality and cointegration analysis. Dumitrescu & Hurlin (2012) Granger Panel Causality Test for short-term causality, and Westerlund ECM Panel Cointegration and PDOLS Estimator for long-term relationships analyses were employed. Findings- The short-term outcomes revealed that there is a bidirectional causality between (a) EXP and GDP, (b) GFCF and GDP, (c) FDI and GDP, (d) HC and GDP, and a unidirectional causality (e) from IMP to GDP. The long-term results show that (i) a 1% raise in EXP boosts GDP by 0.39%, (ii) a 1% raise in IMP boosts GDP by 0.11% (iii) a 1% raise in GFCF boosts GDP by 0.37% (iv) a 1% raise in FDI reduces GDP by 1.35%, (v) a 1% raise in HC boosts GDP by 0.54% in the long-term. Conclusion- Both in the short-term and the long-term trade liberalization has a positive impact on economic growth in mutual way between EXP, IMP and GDP as it is argued by the feed-back hypothesis.