Uzbekistan Quality Job Creation as a Cornerstone for Sustainable Economic Growth

Trade and Foreign Direct Investment in Uzbekistan
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5.4. Potential Gains from Trade and foreign
Direct Investment
International trade and FDI are essential catalysts for economic growth 
in developing economies. Trade facilitates innovation and more efficient 
production of goods and services in which countries have a comparative 
advantage. Trade liberalization or openness to trade reflects the removal of 
barriers to trade between countries. These barriers include tariff obstacles, 
such as import and export duties and nontariff measures, including licensing 
rules (e.g., quotas) and antidumping measures. Conventional wisdom is that 
the more open economies grow faster than the less open ones. A study by 
Wacziarg and Welch (2008) indicated that the average annual growth rates of 
countries that lowered trade barriers were about 1.5 percentage points higher 
than those not undertaking trade liberalization.
Furthermore, trade fosters economic growth by encouraging innovation, 
reducing poverty and reallocating resources from less efficient to more 
efficient uses. After trade liberalization, economies experience better market 
access and a tougher competitive environment. Improved access to external 
markets in turn increases profits, leading to more innovation. A seminal 
work by Aghion et al. (2001) suggests that the more competitive markets 
may induce firms to innovate more to escape from competition. Coelli et al. 
(2016) investigated whether the global tariff reductions during the 1990s had 
any effect on innovation (patenting) in more than 60 countries. Between 
1990 and 2000, as a result of regional trade agreements and unilateral trade 
liberalization, developed economies experienced an average reduction in 
tariffs of 8%–5%, and developing economies’ average reduction was 25%–15%. 
Their results suggest that freer trade accounted for a 7% increase in innovation 
(patenting), thus emphasizing an important role of trade liberalization on 
innovation and thereby economic growth.