The Relationship between Tax Revenue, Economic Growth, and Trade Openness in Developing Countries

Abstract

Purpose

This research examines the interplay between tax revenue, trade, and economic growth in Bangladesh, Indonesia, Malaysia, Vietnam, and Turkey from 1990 to 2024. It examines whether trade openness weakens growth, whether growth can be strengthened, and whether there is a nonlinear threshold at which excessive trade openness has a negative impact on growth.

Methodology

This study uses annual panel data from 1994 to 2024. Econometric techniques include the Fixed Effects Model (FEM), Generalized Least Squares (GLS), nonlinear estimation, and the System Generalized Method of Moments (GMM). These methods address heterogeneity and possible endogeneity. The models include interaction and squared terms to account for moderating and nonlinear effects of trade openness.

Findings

Tax revenue has a significantly positive impact on economic growth. This finding confirms the role of tax revenue in driving growth by improving fiscal capacity in emerging economies. The trade opening further enhances this relationship, suggesting that liberalization leads to greater efficiency, better allocation, and technological spillovers. Nonlinear analysis reveals no benefits when trade openness becomes excessively high. Hyper-globalization can reduce fiscal space and amplify external vulnerabilities. Control variables indicate that FDI has a positive impact on growth, while inflation, population growth, and high consumption have negative effects.

Conclusion

This paper presents a new analysis by jointly examining taxation and trade openness using a nonlinear panel model, providing specific evidence for emerging Asian economies. Future Research Directions. Further studies could include digital tax reforms, quality of institutions and environmental taxation or expand the analysis to other wider regional panels to test the cross-country heterogeneity.

Practical Implications

Policymakers should coordinate domestic tax reforms and maintain moderate levels of trade openness to support sustainable and inclusive growth in emerging economies.