Panel Paper: Trade Liberalization Policy and Unemployment: Evidence From Developing Countries

Saturday, November 10, 2012 : 10:55 AM
Carroll (Sheraton Baltimore City Center Hotel)

*Names in bold indicate Presenter

Rashmi Krishnamurthy, Arizona State University

There is an increasing interdependence of world economies due to an expansion in markets, and this interdependence, is increasing the links between domestic and international policies. Public policy evaluations at the national levels often times overlook the influence of transnational policies in shaping domestic policies. Transnational policy reforms favoring open market or free trade gained traction in 1980s and are on raise since then. One of the factors favoring this shift towards massive trade liberalization can be attributed to the financial crisis in 1970s. Many scholars argue that the trend towards open-interconnected market is a cost effective mechanism for achieving the mantra of ‘doing more with less’. Until the beginning of 21stcentury, many scholars measured the success of free trade policies on the criterion of increase in gross domestic product (GDP). There exists a huge literature in political science, international relations and economics evaluating the impact of trade liberalization/openness as an engine of economic growth.

From a public policy perspective, to have causal interpretation of impact of free trade reform on countries economy, it is important to analyze the impact of free trade within the context of poverty, unemployment and social well being etc. While significant studies support a positive correlation between trade liberalization and country’s GDP and economic growth, few scholars have explored the impact of trade openness within the context of social issues such as unemployment. Despite the adoption of the trade openness policy by approximately more than two third of the developing and under developing countries, the question evaluating the impact of trade openness on social issues such as unemployment remains unresolved by previous literature.

This paper uses a unique panel dataset spanning 18 years for 26 developing countries to determine the relationship between national level unemployment rate and trade liberalization and GDP. The dataset was constructed using information from United Nations (UN) database, International Labor Organization (ILO), World Trade Organization, World Bank, National Bureau of Economic Research and national government websites of 26 developing countries. A country and year fixed model were estimated. The primary results indicate a complicated story between unemployment rate and trade openness. To gain deeper insight into the nature of relationship, two sectors namely agriculture and manufacturing specific models were estimated. Interestingly, manufacturing sector trade openness showed a negative relationship to unemployment rate, and whereas in trade openness in agriculture sector showed a positive relationship. Overall, the results indicate that unemployment rate differs based on the sector and the degree of trade openness.