Trade and economic development: global causality and development- and openness-related heterogeneity

This paper reconsiders the classic relationship between trade and economic development. We examine the short-term and long-run dynamics between trade and income for 167 countries over the period 1970-2011 and assume that the effect is not homogenous for all countries but rather varies according to the development stage and the degree of trade openness. We apply panel cointegration, Granger causality and panel error correction in combination with Dynamic Ordinary Least Squares and General Method of Moments estimation to explore the causal relationship between these two variables. The results suggest a statistically significant positive short-run and long-run global relationship between trade and income. However, when splitting the panel into different income and trade openness groups, a long-run relationship is observed only for high-income countries and countries with a relatively high degree of trade openness.