Trade Liberalization, Economic Growth and Institutional Quality in Selected Countries

This paper examines the issue of the existence of the threshold effects in the relationship between trade openness and output growth in 30 oil-exporting countries, during the period 1995-2005, applying panel regressions. The model is estimated by dynamic panel methodology. We suggest, the ability of a country to exploit liberalization benefits depends critically on the institutional quality. In countries enjoying sufficiently good institutions, liberalization has a positive and significant effect on the economic growth; while in the ones suffering bad institutions, liberalization have a negative and significant effect on economic growth. The lower the institution quality, the more deterrent is the effect of liberalization on the economic growth. In this article we derive the kink point or threshold of institutional index whereby liberalization effect on the economic growth changes from negative to positive. The institutional quality index for Iran is much less than the estimated threshold, suggesting that mere liberalization without institutional provisions could not improve economic growth in this country.