Trade Openess Theory

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In the 1970’s and 1980’s trade openness and economics reform towards market mechanism flourished in many developing countries. This trend is much different as compared to those in the early 1950’s and 1960’s when many less developed countries favored protection policy, inward orientation, and import substitution. As a result of this change, there are substantial developments in world economy after applying outward orientation. According to Thilrwall (2011 p. 514), the implementation of trade openness has managed world output trade relative to world output gain a considerable growth in the period of 1960-2006. The volume of world trade has risen 25 times or nearly 8 percent per annum (at annual compound rate). In the meantime
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First, the large number of unskilled labors does not reflect the labor competitiveness if we take the productivity of labor into account. It might be more expensive for firms to hire low productivity workers. Second, the grouping problems might not reflect the real situation. Developing countries do not only trade with developed countries but also with the respective countries of the same group. Third, this model also disregards the possibility of capital inflow towards developing countries. It implies that the demand for skilled labor could become higher, therefore wage inequality between skilled and unskilled labor become wider. Going into deeper details, we need to know the meaning of “openness”. Nowadays the word openness is highly associated with ‘free trade’ that indicates no distortion in the trade system. Hence, it is crucial to understand the problem of openness definition, before moving to the theoretical implications and the linkages with growth of the economy. Furthermore, Thirlwall (2011 p.515) highlights that we need to be aware that trade openness has different meaning with trade liberalization.
Some economists try to define the openness into clear-cut indicators. Sachs and Warner (1995 as cited in Thirlwall p.516) developed the openness index by distinguishing countries into two groups: “open” or “closed” based on five criteria.
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