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To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.jdeveco.2008.06.011 Byline: Roberto Chang (a)(b), Linda Kaltani (c), Norman V. Loayza (d) Keywords: Openness; Growth; Economic reform; Policy complementarity Abstract: This paper studies how the effect of trade openness on economic growth may depend on complementary reforms that help a country take advantage of international competition. This issue is illustrated with a simple Harris-Todaro model where welfare gains after trade openness depend on the degree of labor market flexibility. The paper then presents cross-country, panel-data evidence on how the growth effect of openness may depend on a variety of structural characteristics. For this purpose, the empirical section uses a non-linear growth regression specification that interacts a proxy of trade openness with proxies of educational investment, financial depth, inflation stabilization, public infrastructure, governance, labor market flexibility, ease of firm entry, and ease of firm exit. The paper concludes that the growth effects of openness may be significantly improved if certain complementary reforms are undertaken. Author Affiliation: (a) Rutgers University, United States (b) NBER, United States (c) International Monetary Fund, United States (d) The World Bank, United States Article History: Received 15 August 2006; Revised 30 May 2008; Accepted 12 June 2008 Article Note: (footnote) [star] We gratefully acknowledge the valuable support of the World Bank's Poverty Reduction and Economic Management Network. We are also grateful to Cesar Calderon, Romulo Chumacero, Marco Cipriani, Mieke Meurs, Lant Pritchett, Romain Ranciere, Klaus Schmidt-Hebbel, Luis Serven, Vicente Tuesta, Roberto Zhaga, two anonymous referees, and seminar participants at George Washington University, Villanova University, the World Bank, the Central Bank of Chile, the Central Bank of Peru, the Federal Reserve Bank of Philadelphia, and the Tenth Conference of Dynamics, Growth, and International Trade for valuable comments and suggestions. Finally, Chang thanks the hospitality and financial support of Princeton University. The views expressed in this paper are those of the authors, and do not necessarily reflect those of the World Bank, their Boards of Directors, or the countries they represent.