Income Convergence and trade Openness: Fuzzy Clustering and Time Series Evidence

In the now extensive literature on the convergence of per capita income (output) across countries over time, there is surprisingly little attention paid to the role of international trade in goods and services. Some more recent studies have illustrated that standard trade theories provide no clear prediction as to the impact of trade liberalization on output convergence. These studies have also provided somewhat ambiguous empirical evidence regarding this relationship, under-scoring the need for additional results in this area. This paper uses both standard and new approaches to testing for convergence in order to explore the extent to which the degree of trade openness may affect output convergence among countries. Using annual time-series data for 88 countries from the Penn World Tables, we obtain somewhat mixed results, but on balance they are quite supportive of a positive relationship (though not necessarily causality) between trade openness and income convergence. These results also suggest certain directions that further research might take in order to shed more light on this important issue.

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