The Impact of Free Trade on GDP per Capita: The GCC Perspective

Free trade increases overall world production of goods and services and is a positive sum game in which all participating countries realize economic gains, a fact which is suggested in the theory of comparative advantage. Vast literature also uses cross-country regressions to search for empirical linkages between trade and income. However, research within the Gulf Cooperation Council (GCC) context remains limited; this study is an attempt to fill this gap by determining the correlation between trade freedom and GDP per capita for the six GCC countries over a period of 13 years (1999-2012). The evaluation of data from the GCC countries in this study demonstrates a strong correlation between KSA and UAE’s level of trade freedom (according to its Trade Freedom Index) and its GDP per capita. Exceptions to this trend taking into consideration the different sizes (economically and population) are Kuwait, Bahrain, Oman, and Qatar, as these countries have experienced different economic systems and trade barriers. A crosssection regression model concludes that the convergence hypothesis is supported and their unique economic and repression tends to constrain the trade liberalization index influence on the economic growth. One unit change in FTI leads on average to 0.22 point change in GDP per Capita rates on average, ceteris paribus. It can be concluded that, the GDP per capita in the country is mainly driven by greater trade liberalization.