Is Trade Liberalization a Curse or Blessing for Developing Countries? Evidence from China and Zambia

Nchungo Josephat^{1, 2,}

¹The University of Zambia (UNZA), School of Humanities and Social Sciences, Department of Development Studies

²Southeast University (SEU), Nanjing, China, School of Economics and Management, Department of International Economics and Trade

Cite this paper:
Nchungo Josephat. Is Trade Liberalization a Curse or Blessing for Developing Countries? Evidence from China and Zambia. Journal of Finance and Economics. 2023; 11(1):25-57. doi: 10.12691/jfe-11-1-3

Abstract

In response to the ongoing debates about the lucrativeness of free trade economics, this paper presents findings on whether trade liberalization is a curse or blessing for developing countries with evidence from China and Zambia. The study is premised on three specific objectives; firstly, to find out how openness to trade influences economic performance as measured in GDP; secondly, the subsequent overall welfare of people in the economy and thirdly, the constraints behind gains from trade in a liberalized regime. In order to yield composed results, the study uses both descriptive and empirical approaches. In the descriptive part, the study analyses statistics on the economic performance of China and Zambia two decades after their respective market reforms (1978-1998) and (1991-2011). Using trade to GDP ratios as a proxy for trade liberalization, results indicate that, firstly, Zambia is more open to trade than China. Secondly, China was able to double its GDP in the first decade from $US 188, 900 million to $US 492,000 million while Zambia’s GDP only increased from $US 5,000 million to $US 5,900 million in the same interval. Beyond a decade, China’s GDP was more than quadrupled (to $US 1,230,538 million) while Zambia’s was only doubled (to $US 10,469 million). The paper further finds that, the GDP per capita for China rose from $US 197 to $US 972 in two decades while Zambia’s per capita GDP rose from $US 660 to $US 767 in two decades after trade liberalization. In terms of economic wellbeing, the percentage of people living below income poverty PPP$ 1.25/day is found to be 6% for China and 74.3% for Zambia suggesting a poor economic performance for Zambia. The study finds that, high natural resource contribution to GDP and high exports in primary commodities are the major constraints to the gains from trade. In the empirical part, the study uses Cobb-Douglas Production Function Model based on linear regression methods using time series data for Zambia from 1990 to 2014. Regression results show that; the influence of openness to trade on Zambia’s GDP is positive and statistically significant at 99.9% level of significance and that, any unit increase in trade openness can increase Zambia’s GDP by 73.2%. However, the influence of manufacturing, total reserves and taxes on goods and services is negative but statistically significant suggesting that their increase may cause a decline in GDP. Policy implications; Zambia is more open to trade than China yet its economic performance is low. Additionally, like many other developing counties, majority (67%) of Zambia’s top exports are primary commodities. Contrariwise, 94% of China’s top exports are manufactured goods. Therefore, it follows that, while a few countries like China get blessed from trade liberalization, many others get cursed due to their high natural resource dependence. The paper gives the following recommendations; firstly, developing countries like Zambia should moderate their integration into the global economy until they establish a concrete base for industrialization to compete with industrialized countries. More openness to trade will perpetually keep them on the downstream of the global value chain system as suppliers of raw materials. Secondly, any Investment must be channelled towards value addition to revamp the industrial system. Thirdly, preconditions such as stable energy supply, road network, communication etc. must be put in place to enhance productivity. Therefore, future studies should consider scaling up the sample to more than two countries for conclusive results.

Keywords:
trade liberalization GDP GDP real growth GDP per capita GNI per capita developing countries China Zambia

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