Investigating the impact of economic openness on the economic growth of Islamic countries

Master's Thesis

Economic Sciences Department

Economic Sciences Orientation

July 2012

Abstract:

  Considering the importance of the issue of economic growth, examining the impact of the openness of the economy on economic growth has always been considered as one of the important issues of the economy. In this research, the role of openness of the economy on economic growth in Islamic countries has been investigated using the panel data method (cross-sectional data-time series). For this purpose, using the annual data of 2005-2010 for 57 Islamic countries (whose data are available), by determining the appropriate model (integrated model, fixed effects, random effects), the specified model of the ordinary least squares method has been used for panel data. The obtained results indicate that the profit obtained through economic openness, human capital and foreign direct investment leads to strengthening the economic growth of Islamic countries. Of course, the transparency of macro policies and the stability of institutions in Islamic countries already Conditions for more and better impact are economic openness and foreign direct investment. However, although economic openness is not the driving engine of growth, it can act as a catalyst to strengthen economic growth through research and development, access to larger markets and reducing production costs.

Key words:

  Trade openness - economic growth - Islamic countries

Chapter One

General research

1-1- Introduction

  A wide range of studies in the past decades have investigated the degree of trade openness in developing countries. Almost all these studies are based on comparison. In applied literature, the simplest measure of the degree of trade openness between countries is based on trade flows, in which the total ratio of exports and imports to GDP or the ratio of imports and exports or their growth rates to GDP is considered. The problem in using such criteria is that they are directly based on policy instruments; But they show themselves as commercial levels. The measure of the degree of commercial openness is a variable that has a potential endogeneity in nature. In this article, we will examine the degree of economic openness and its impact on the economic growth of Islamic countries. Whether the openness of the economy has a positive effect on economic growth or not has been the subject of many debates in the empirical growth literature. The openness of the economy in terms of trade, capital flow and immigration can have an effect on economic growth. Because historically, periods of high economic growth in the global economy have been symmetric with the intense development of international trade (Baldwin 2003, Rodr?guez 2006, Tubal and Bach 2009) [1]. In the case of foreign trade, factors such as better utilization of limited resources, improvement of technology and benefit of economic scales can describe the effect of trade on economic growth (Rodrigues and Roderick 2000)[2]. Foreign direct investment (FDI) [3] can also be important for economic growth; Because FDI is a conduit for technology to enter the domestic market (George and Greenway 2004)[4].

  During the last 30 years, the world has experienced significant changes in economic activity and in the nature of the global economy. Nations have become closer to each other through trade and international financial affairs. The international monetary system has changed and many developing countries are facing continuous development problems and large amounts of external debt (Dennis and Field 2003) [5]. Since the 1980s, these countries have been integrated into the world economy at a faster rate. In other words, from this date onwards, these countries have actively participated in the process of globalization. A number of developing countries, by applying outward-looking policies, expected to improve resource allocation and production processes through integration in global markets and greater participation in international trade and wider attraction of foreign capital.A number of developing countries, by applying outward-looking policies, expected to improve the allocation of resources and shape the production processes in their countries based on comparative advantage through integration in world markets and greater participation in international trade and wider absorption of foreign capital. Also, increase the efficiency of their companies by increasing competition with foreign companies and encourage learning and transfer of technology and finally provide the basis for further economic growth in their country (1996) [6]. Governments and international organizations have made great efforts in the past decades to expand international trade by reducing tariffs and liberalizing exchanges. Trade liberalization can increase the competitiveness of countries, for this reason, the attention of many international forums has been directed to this sector in recent years. To implement these policies, three main factors must be considered. The country's economic and commercial politicians should take the implementation of these policies seriously and really demand their realization. There should be a detailed and long-term planning. Government agencies that are involved in export and import should cooperate closely [7].

  The relationship between liberalization and economic growth is a controversial issue. Some economists and politicians believe that trade openness leads to better macroeconomic performance and faster economic growth. Many empirical studies support this view. International organizations such as the World Bank, the International Monetary Fund, and the Organization for Economic Cooperation and Development advise member countries to believe that trade liberalization and foreign investment have a positive effect on economic growth. Even the World Bank and the International Monetary Fund have made market-oriented reforms and trade liberalization a condition for their financial assistance[8].

  From the 1980s onwards, especially after the dismantling of the Berlin Wall in 1989, the tendency of countries towards economic liberalization has increased, so that even socialist countries have turned to the market system. In recent years (2006), many theoretical and experimental studies have addressed the issues of economic liberalization and its effect on economic variables, especially economic growth. Among these, choosing the appropriate scale for liberalization is particularly important (Hamid Azarmand and Ahmad Jafari Samimi 2014). In this sense, in general, the studies can be divided into two general categories.

  Studies that have introduced numerical indicators for economic openness, and by considering several influencing factors, measure a number as the degree of economic liberalization. This method is particularly important because it reflects the complexities of the economic environment and is also a suitable tool for policy making. 1-3- The importance and necessity of research. In many developing countries, the gap between national savings resources and investment needs, as well as the imbalance between foreign exchange expenses and income, causes these countries to turn to foreign sources, especially foreign direct investment, to fulfill their macroeconomic goals and to supplement domestic resources. Compared to indirect foreign investment, foreign direct investment is one of the stable and sustainable sources of foreign financing, which not only does not have the problems of foreign borrowing, but is considered a factor to compensate for the lack of capital in countries.

  In the late 1960s, some developing countries in Asia successfully benefited from direct investment by foreign companies in favor of an export-based growth strategy. As a result, more countries in the world recognized that the net benefits of foreign direct investment for the host country were more a function of the government's policies and the capacity to absorb this type of investment in the country than to be affected by the strategy of foreign investment companies.

  In empirical studies (Feder 1982 and Edwards 1998) it has been argued that the international transfer of technology is related to the flow of trade. The more sectors of the economy are exposed to international competition, the higher the level of possession of superior technology and the pressure to adopt and adapt technology in order to maintain competitive power.