The effect of globalization of trade in services on economic growth: A simultaneous econometric analysis

Scope and method of study. The purpose of this study was to measure the effect of openness in trade of services on economic growth and to determine whether the level of economic development have an impact on the effect of openness in trade in services on growth. Two sectors were of major interest, telecommunication and financial services sectors. A simultaneous econometric model was built whose main objective was to estimate the effect of openness in trade of telecommunication and financial services on economic growth and to measure the cross-sectoral effects as well as to control as much as possible for the demand and supply equations in the two markets. Data from 64 countries were collected and cross-section regressions were used for the estimation. Jarque-Bera, Reset, Koenker-Basset and Hausman tests were used to test for misspecification.; Findings and conclusions. Results showed that openness in trade of services does affect economic growth. Whether the effect is beneficial depends on the level of economic development of each country. Low and middle-income countries benefit from openness whereas high-income countries do not gain from openness in trade of telecommunication and banking services. We hypothesized that the gain in case of low and middle-income countries was related to the spillover of technology from trading partners, whereas the loss in case of high-income countries was related to the loss in national employment due to foreign competition. On the other hand, cross-sectoral effects exist between the telecommunication and financial services sector. Results showed that openness in trade of telecommunication services has a positive impact on the supply of financial services.