MODELING GROWTH (AND LIBERALIZATION) USING SMOOTH TRANSITIONS ANALYSIS

I. INTRODUCTION There is a large and growing literature on liberalization and its effects, stimulated initially by the very extensive trade reform programs promoted in developing countries over the last fifteen years or so and sustained by the attempts to understand what is happening in the eastern and central European economies. The latter do not feature in this paper, though the techniques demonstrated here may in time prove to be useful for gaining insight into the effects of regime changes underway. Liberalization, in the sense of trade reforms which reduce anti-export bias in one way or another while improving the information content of relative price changes, has been promoted in some eighty or so developing countries in the 1980s and 1990s. Some of these liberalizations are unilateral, most are policy conditioned under the aegis of World Bank Structural Adjustment Loans (SALs).(1) All have been undertaken on the assumption that liberalization will ultimately improve export and growth performance. The evidence on liberalization and growth, however, is at best somewhat mixed. On the one hand, one has the exhaustive study of Papageorgiou, Michaely and Choksi [1991] which claims a close and direct association. On the other hand, Greenaway and Sapsford [1994] find only a limited role for liberalization, and a range of studies of SALs associate adjustment with a deterioration in growth performance.(2) These studies generally rely either on crude data inspection, simple correlation analysis, or multivariate regression. This paper takes a new approach to the question. It starts from the presumption that any changes in economic performance following a liberalization may be more appropriately modeled as a steady transition rather than a discrete change. To model the change in this way, we make use of the recent work of Granger and Terasvirta [1994], who explore the properties of a variety of nonlinear specifications that facilitate modeling structural change as a smooth transition between states. We estimate and test the adequacy of a number of such specifications. Our analysis is in two stages. First we take a novel approach to the modeling of growth which allows us to model deterministic change without, as other analysts have done, imposing discrete changes. Not only does this help clarify the statistical properties of the time series, it also challenges the assumptions that underpin much growth modeling. Having identified the transitions in the growth series we are investigating, we then explore the coincidence of these transitions with well-documented episodes of liberalization. We do not formally test whether liberalization results in growth. Our results are, however, informative in two respects. Firstly, they place a question mark against the widely held presumption that liberalization is a panacea for growth. Secondly, they also point the way to the appropriate econometric modeling of these processes. The remainder of the paper is structured as follows. Section II briefly describes the context against which our analysis is set. Section III sets out the details of our methodology and the models to be tested. Section IV reports our results, contrasts them with those of previous work and evaluates the implications for policy. Section V concludes and identifies possible extensions. II. LIBERALIZATION, (EXPORTS) AND GROWTH: PREVIOUS EVIDENCE There are essentially two strands of the literature which provide relevant background: one which relates exports and growth; a second which relates liberalization to exports and growth. The exports and growth literature is an extensive one, which goes back some years.(3) It starts from the presumption that exports and growth are directly related, with causality running from changes in exports to changes in growth.(4) Analysts have deployed a variety of empirical methods, usually of growth accounting type models, and covering a range of countries and time periods. …