The Impact of Trade Openness on the Volatility of Economic Growth in 2001-2019 in Countries with Poorly Diversified Exports

This paper investigates the interconnection between the country’s openness to trade, its export basket characteristics (e.g., economic complexity, the degree of diversification) and the volatility of gross domestic product growth rates. Using a comprehensive sample of 126 countries spanning the years 2001-2019, an intertemporal clusterization is performed to establish a list of countries with the least diversified exports according to the Theil index. A System GMM dynamic panel regression applied to 69 of these countries confirms a significant positive relationship between trade openness and growth rate volatility. However, volatility can be considerably attenuated given that the country diversifies its export basket, especially at the extensive margin. High levels of economic complexity are found to reverse the “openness – volatility” link, meaning that the country which exports complex goods can decrease growth volatility by increasing trade openness. A two-step strategy is proposed for poorly diversified countries. The first step involves signing preferential trade agreements and fostering knowledge spillovers in partnerships with the MNCs, which has been found to create rich opportunities for improving economic complexity and diversification at the extensive margin. The second step consists in lowering transaction and market entry costs for exporters through export promotion programs. Special attention is given to Russia’s export basket which decreased its complexity and diversity relative to other countries during the sample period. The product space methodology is used to propose perspective industries that could be prioritized instead of highly volatile resource-oriented economic sectors.