Do reforms affect countries' response to trade opening? Cross-country evidence and a case study of Albania

This dissertation is composed of three essays on the topics of trade and reforms. Essay one studies how complementary reforms affect the link between trade openness and economic growth. This issue is illustrated with a Harris-Todaro model where output gains after trade liberalization depend on the degree of labor market flexibility. The model suggests that trade liberalization unambiguously increases per capita income only when labor markets are sufficiently flexible. The empirical section uses a non-linear specification and presents panel evidence on how the growth effect of openness depends on educational investment, financial depth, inflation stabilization, public infrastructure, governance, labor-market flexibility, ease of firm entry, and ease of firm exit. It finds that the growth effects of openness are positive and economically significant if certain complementary reforms are undertaken. Essay two uses the results of essay one to investigate whether reforms in a particular country, Albania, are sufficient for trade liberalization to be good for economic growth. The paper simulates the growth-producing effects of Albania's reforms given a pre-established change in trade openness. It then studies alternative reform proxies by comparing their level with that predicted by Albania's per capita income. The essay concludes that Albania's most urgent reforms are in the areas of financial development, infrastructure, and governance. Essay three studies how initial reform conditions affect the link between trade policy and trade outcomes. It first presents a theoretical model with convex adjustment costs that is broad enough to address the role of reforms in the link between various policy and outcome measures (including the link between openness and growth explored in essay one). Improvements in trade policy and/or reforms are conducive to greater trade outcomes. However, under some conditions, the effect on trade outcomes may be larger for less reformed countries. The empirical section adopts a non-linear specification and an event study methodology for a panel dataset; it suggests that for some initial conditions the trade outcome effect of trade policy changes may be larger for less advanced reformers.