What is trade openness and what is the effect of trade openness on economic/financial development?

Trade openness refers to the outward or inward orientation of a given country's economy. Outward orientation refers to economies that take significant advantage of the opportunities to trade with other countries. Inward orientation refers to economies that overlook taking or are unable to take advantage of the opportunities to trade with other countries. Some of the trade policy decisions made by countries that empower outward or inward orientation are trade barriers, import-export, infrastructure, technologies, scale economies and market competitiveness.

The degree of global trade openness existing in countries is measured on a number of economic issues and tracked in the Open Markets Index (OMI). The OMI grades four central categories of economic issues:

• Trade openness (including trade to GDP ratio and real growth of imports)


• Trade policy regime (including applied tariffs, tariff profile, border efficiency)


• Openness to foreign direct investment (FDI) (including FDI inflow to GDP and ease of business establishment)


• Infrastructure open for trade (including logistics performance, communications infrastructure, telephone lines, Internet)

Economic Effect of Trade Openness

Economic research has focused on the economic effect of openness to trade over the last decade, and there is no firm consensus on the economic effect of trade openness. Theories of economics held that open economies would experience increased economic growth while closed economies, those with restrictive tariffs and not open to trade, would experience no economic growth. Many studies have been performed wherein the theory of openness-to-growth correlation has been upheld.

An example is the early economy of Ghana. In a span of time covering the 1960s through the 1980s, when Ghana had restrictive economic policies inhibiting trade openness, their economy struggled and did not grow. Efforts to reshape economic policy so that it favored openness resulted in increasing economic growth. Measures Ghana took included:

• assistance from the World Bank and the International Monetary Fund in the way of loans and aid.

• improvement of infrastructure for logistics and various communications.
  stabilization of currency in the foreign exchange market (FX).
  removing of distortions in trade restrictions (reconfiguring trade tariff policy). 

• correcting imbalances between economic structure and macro-economic factors, some of which are GDP, output, investments, savings, and international trade.

Ghana set an 8 percent economic growth target for 2020 (later amended to 2015). The 8 percent growth target, in 2005, had not been approached, with growth at only 5.1 percent. With this slow growth--after the initial resuscitating economic growth of the 1980s--economic policy makers in Ghana are now divided on the role of trade openness.

Notwithstanding, the theory still holds sway in academic discussion that (1) non-restrictive tariff policy, (2) active involvement of the World Bank and the IMF, and (3) openness and accessibility of infrastructure and communications affect an increase in economic growth, such as was seen in the 1980s in Ghana (where growth leveled out thereafter).