Method and data sources

The model used to determine the impact of the variables identified as the binding constraints on trade and, subsequently, the impact of trade on growth is composed of two stages. In the first stage, it quantifies the magnitude and direction of the direct effect of the binding constraints on trade indicators (exports, imports, and openness). In the second stage, the model quantifies the magnitude and direction of the composite effect of the binding constraints on the economy’s growth rate through their effect on trade indicators. This procedure isolates the explained variation in trade accounted for by the binding constraints on the economy’s growth rate by using the Two Stage Least Squares (TSLS) estimator. Contrary to conventional applications of the econometric estimator, in this application, the first stage of the model is equally as important as the second. Therefore, the variables to be included in each stage need to be chosen carefully.