Trade Openness and Economic Growth: A Panel Data Analysis of Baltic Countries

Abstract

The theoretical propositions suggest that trade openness leads to a greater economic activity, due to the spread of knowhow and technological transferability. In that framework, it is generally expected that as trade openness increases, economic growth will follow the same trend because of innovation and productivity. Henceforth, establishing the contribution of trade openness to economic growth is of high priority, especially in the case of developing countries such as the Baltic ones. The current paper examines the causal relationship between trade openness and economic growth in the case of three Baltic countries for the period 1990-2020, using the recently developed by Dumitrescu and Hurlin (2012) non-causal Granger test for heterogenous panel data. The findings of the current study suggested that there is a cross-sectional dependence on the model time series between the counties under investigation, which proved that Baltic countries have common factors and common economic links. The theoretical and empirical studies previously conducted, are useful starting points for the discussion on policies which could increase the development of Baltic countries. For the development to be increased, the developmental procedures in the Baltic countries should upload their “development chains”. Such transformation of the “development chains” will be achieved through investments in capital equipment, human capital and innovations by securing a favorable and stable economic climate.