Geographic proximity, trade and economic growth: a spatial econometrics approach

ABSTRACT This paper examines economic growth in terms of ‘bilateral trade flow’ and ‘geographical distance’ using the spatial dynamic panel data model for the period 1992–2016. The findings illustrate that the effect of spatial spillover or spatial dependence is one of the main economic growth determinants. Also, we find out that spatial relationships across countries and the spatial effects of trade are quite relevant. A country’s economic growth is actually affected by the performance of its neighbours and trade partners. This result suggests that the spillover effects of geographical position and trade partners are the key determinants of economic growth. In fact, overlooking such factors can result in misspecification of models. In addition, the findings confirmed that growth rate of labour force has a negative impact on economic growth while the formation of gross fixed capital has a significant positive effect