# **1. Introduction**

There is a large theoretical and empirical literature that explores trade as a potential source for the dispersion in income levels across countries. The achievements of several Asian countries on sustained growth while pursuing a strong export orientation has made export-led growth theories highly acknowledged. Studies like Frankel and Romer (1999), Alcala and Ciccone (2004), and Wacziarg and Welch (2008) among many others find a positive causal link between openness and high economic performance.<sup>2</sup> This positive link between openness and growth led many governments to embark on trade liberalization programs. Wacziarg and Welch (2008) show that in 1960, only 22% of countries representing just 21% of global population had open trade policies. By 2000, around 73% of countries representing 46% of population were open to international trade. The liberalization policies led to an almost 30 fold growth in the volume of international trade between 1950 and 2006 which is three times faster than the growth in global GDP. However this increase has not been homogeneous across countries. Countries in East Asia had more than 800 percent increase in real exports since early 1970s, whereas countries in Sub-Saharan Africa had only 70 percent increase. Since openness is a significant contributor of high economic performance, the large variation in export performance of countries has raised concerns that only some countries are benefiting from globalization. This study investigates the possible reasons that prevent convergence of countries in export performance. In particular it shows how trade policies, trade facilitation, and the investment climate (IC) affect export performance.<sup>3</sup> For a long time, trade policies such as tariff rates, quotas, non-tariff barriers have been the major policy tools to improve export performance. Studies like Hoekman and Nicita (2008) and Anderson and Marcouiller (2002) show that bilateral tariff rates significantly reduce export performance. In this study, I use two indices to measure the restrictiveness of tariff policies. Both indices are constructed by Kee et al. (2009).<sup>4</sup> The first index is trade tariff restrictiveness index (TTRI) which shows the restrictiveness of domestic trade policies on imports. The second index is market access trade tariff restrictiveness index (MATTRI) which shows the ease of foreign market access of the country. Unlike simple or weighted average tariff rates, these indices are well grounded in trade theory and provide sound aggregate measures of trade restrictiveness.

Despite of the substantial decreases in tariff rates since 1960s’ in many countries, the gap in trade performance across countries has not closed. Clarke (2005) and Morrissey (2005) note that the adoption of significant trade liberalization policies in the majority of African countries have resulted in a reduction of import tariff rates from 33% in early 1980s to 15% in 2002. However Gupta and Yang (2006) shows that the share of manufactured goods in total exports remains at about 30% during the same time span. Focusing on the low export performance of African countries, Iwanow and Kirkpatrick (2009) show that liberalizing trade is not sufficient to achieve high export performance.

> 2 See Berg and Krueger (2003) and Hallaert (2006) for literature surveys on the link between trade and growth.

> 3 Throughout the text, I use business environment and investment climate interchangeably.

> 4 The methodology developed in Kee et al. (2009) is built on the work of Anderson and Neary (1994,1996) on trade restrictiveness. A detailed discussion on the construction of the indices is provided in Kee et al. (2009).

2