On the Relationship between Openness to Trade and Efficiency Levels in Low Income Countries: Evidence from the Latin American and the Caribbean Countries

The paper tested for the relationship between three different measures of efficiency and the degree of openness to trade for a sample of countries from Latin America and the Caribbean plus the Unites States and Canada.

The existence of dichotomies in growth rates observed among some Latin American and Caribbean countries is often explained in some respects by the degree of openness to trade. Because efficiency is an important determinant of economic activity, we are interested in determining whether there is evidence of a significant relationship between openness to trade and efficiency levels in these two regions. The analysis is for the period 1992 to 2003 and includes 27 countries. Nonparametric analysis is used that allowed breaking down economic efficiency into two measures: technical and allocative efficiency. The estimated efficiency measures are regressed against the respective lagged efficiency indicator, the current openness-to-trade index and  against one and two-period lagged openness indexes. In general, results do not support the hypothesis that openness to trade is correlated to efficiency for Latin America. However, in the case of the Caribbean, the twoperiod lagged openness-to-trade index has a positive and statistically significant impact on allocative and economic efficiency levels. Results  are qualitatively the same when the relationship between openness to trade and efficiency is analyzed on a yearly basis.