Trade openness, volatility and governance

Abstract

The paper tests and confirms the hypothesis that trade openness tends to generate GDP growth volatility, and that such growth volatility is mitigated by good economic and political governance. This may explain why some economies do not exhibit a high degree of GDP growth volatility even though they are highly-open. The main implication of these results is that countries that are highly dependent on international trade, including most small states, would be exposed to GDP growth volatility, which has various downsides, as explained in the literature review. However, it does not necessary follow that highly trade-open economies -small states in particular - are the ones that experience the highest degree of GDP growth volatility, if these countries adopt appropriate policies to attenuate the effect of openness on volatility.