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Impact of trade openness on economic growth in a small, open, and developing economy: new instrumental variables for trade openness

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The existing huge literature on measuring trade openness, on the one hand, and the effect of trade openness on economic growth, on the other, all have failed to reach a clear–cut conclusion. Therefore, this paper's idea emerges by searching for an answer to the following two questions: how to measure openness to trade? And what is the actual impact of trade openness on economic growth? Taking Jordan as the case study, the main results of this paper are: 1) introducing reliable measures for trade openness; 2) collected tariff ratio (CTR) is the best indicator for trade policy measurement; 3) trade performance is very weakly explained by trade policy; 4) economic reform programmes under the supervision of IMF and World Bank did not improve the trade outcomes; 5) there is a robust and negative relationship between trade openness policy and economic growth in a developing country with a small size economy; 6) the qualified industrial zones (QIZs), which are a form of institutional measures for trade liberalisation, boosted exports but such a pattern of exports is not associated with economic growth.

Keywords: trade outcomes, trade policy, instrumental variables, Jordan, stationary time series, economic growth, qualified industrial zones, QIZs, sustainable economy, trade openness, open economies, emerging economies, collected tariff ratio, trade performance, economic reform programmes, small economies, trade liberalisation

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