Nonlinearity Between Trade Openness and Economic Development

This paper utilizes the instrumental variable threshold regressions approach to reassess the trade-development link. It finds evidence that trade openness contributes to uneven development. Greater trade openness tends to have beneficial effects on real development of high-income countries. For low-income ones, however, trade openness appears to influence real income in a significant and negative way. The data also reveal that greater trade openness has a positive effect on capital accumulation, productivity growth, and financial development in high-income countries, but a negative impact in low-income ones.