WIIW The Vienna Institute for International Economic Studies - Wiener Institut für Internationale Wirtschaftsvergleiche

Florian Kaulich

This study investigates the effect of trade liberalisation on GDP per capita in a global panel of countries. While the theoretical literature broadly suggests a positive impact, the empirical verification of this relationship is complicated by the well-known problem of endogeneity. A relatively new approach to overcome this limitation is the synthetic control method (SCM), which compares the post-liberalisation GDP trajectory of a country that liberalised with the trajectory of a combination of similar economies that did not liberalise. Although this method is widely praised for being data-driven, transparent and less prone to specification searching, it has recently come under heavy criticism for actually failing to meet any of these criteria. The aim of this study is, therefore, to reassess the trade-income-relationship in light of the current debate on the possibilities and limitations of SCM, and to extend earlier studies by estimating the average effect of liberalisation for different groups of countries.