The purpose of this study is to analytically explore and empirically test the relationships between economic growth, inequality and trade using a panel data set of 65 developing economies from 1965 to 2010.
This study sets a theoretical framework to explain the growth-trade nexus differentials in the developing economies. The study uses different econometric methods such as General Method of Moments to address the relationship of trade with growth in the presence of high inequalities.
The study determines the positive effect of trade on growth both in the short-run and in the long-run. However, the growth effect of trade is substantially influenced by the domestic context in terms of the prevalence of high initial inequalities. The study identifies high initial inequalities in developing countries as the likely reason for a negative relationship between trade and economic growth. The trade-growth nexus is significantly negative for the unequal group but strongly significantly positive for the less unequal one.
Those developing economic which mange to ameliorate inequalities are in a better position to compete in an open economy.
The study contributes in the existing literature by answering the question why growth effects of trade are not definitely positive or negative. The findings of the studies may help the policy-makers of developing economies to take the advantage of increasing international trade.
