Economic Openness

The term economic openness appeared in comparative political economy in the early 1980s. However, as a concept, it has a much longer history, particularly in the field of international economics. Actually, the [Page 249]history of studying the causes and effects of the open economy dates back as far as the eighteenth century and figures prominently in the work of classical economists such as Adam Smith and David Ricardo. These classical economists were concerned about the consequences of international trading on the domestic economy, on the one hand, and the positive and negative effects of free trade, on the other hand. Originally, the focus of analysis was on commodity exchange and exchange rates; at present, the focus is more on the ramifications of economic openness on domestic economic systems per se.

Economic openness can be defined as the degree to which nondomestic transactions take place and affect the size and growth of the national economy. The degree of openness is measured by the actual size of registered imports and exports within a national economy, also known as the Impex rate. This measure is presently used by most political economists in analyzing empirically the impact and consequences of trading on the social-economic situation of a country.

Openness of an economy is not a recent phenomenon, having existed since the heydays of economic liberalism and industrial development in the second half of the nineteenth century. For instance, Angus Maddison reported in 1995 that the volume in world trade grew from 3.4 percent (average between 1870 and 1913) to 3.7 percent (1973 to 1992) in volume. During the same time span, however, prices (constant dollars of 1990) went up twelve times. In addition, the number of countries involved grew dramatically across the world during this period. Labor costs were falling simultaneously, so the locus of industry shifted and economic liberalism (or free trade) prevailed, and this implied that national economic growth became more dependent in the movements on the world market. Conversely, but simultaneously, democratization took place, albeit in various waves over time, which changed the role of the state in most countries. The results of these changes included the emergence of the welfare state as well as the idea of welfare economics. This interaction has been at the core of political economists researching the effects of economic openness. Some authors fear the crowding out effect of public expenditures, harming the national economy and its competitive nature. Others have argued that welfare economics is more important than the welfare state. In this view, the beneficial effects of international trade and related domestic activities would prevail and produce welfare in terms of income redistribution, affluence in terms of a higher level of per capita gross domestic product (GDP) and welfare in general.

Table 1 shows some comparative indicators with regard to openness and socioeconomic developments, based on Maddison's 1995 work.

The levels are comparatively quite similar with respect to economic openness (Impex) with the exception of Latin America in the 1980s and Southeast Asia [Page 250]throughout. Hence, one would expect higher levels of economic growth almost everywhere and a certain reduction of inequalities across most regions. This is, however, not the case. International trade does indeed link a country with the world economy. However, it does not reduce its level of affluence and does not always produce more economic growth and income inequality. The literature accounts for this weak relationship by pointing to demographic and geographic factors, on the one hand, and to political factors on the other hand.

...