Challenging Volatility Myths: Structural and Temporal Dynamics in MENA’s Growth-Openness Nexus

Abstract

This study addresses two critical gaps in the development literature: whether macroeconomic volatility necessarily undermines long-term growth or can generate productivity-enhancing dynamics under specific conditions, and whether trade openness amplifies or mitigates the volatility–growth nexus across structurally heterogeneous economies. By systematically comparing oil exporters and importers in the MENA region during 1990–2023, the research provides the first comprehensive regional analysis of how resource endowment fundamentally conditions the three-way interaction between volatility, openness, and growth in this strategically important yet understudied region. The rapid expansion of global trade has created a paradoxical dynamic: while openness provides growth opportunities through market access and knowledge spillovers, it also heightens exposure to external shocks and global volatility. Theoretical predictions range from neoclassical efficiency gains to Schumpeterian creative destruction mechanisms, with empirical evidence remaining inconclusive across different contexts. Recent disruptions such as the COVID-19 pandemic and geopolitical conflicts have revived debates on whether openness amplifies fragility or fosters resilience. To investigate these issues, a comprehensive unbalanced panel of 18 MENA countries covering 612 country-year observations is constructed, and System-GMM estimation is applied to address endogeneity concerns. A novel policy-adjusted Trade Openness Policy (TOP) indicator, derived from gravity model decomposition, isolates discretionary policy effects from structural determinants of trade flows. The indicator demonstrates high explanatory power (R² > 0.7) while maintaining weak correlation with conventional trade ratios (ρ < 0.3), ensuring cleaner identification of policy effects. Sequential specifications progress from baseline volatility–growth estimations to interactive moderation effects, with the Johnson–Neyman technique identifying precise threshold values where openness significantly alters volatility–growth relationships. Comprehensive robustness checks account for temporal structural breaks, alternative volatility measures, and conflict-related disruptions. Results fundamentally challenge conventional wisdom by demonstrating a positive volatility–growth relationship (β = 0.0526, p < 0.05), consistent with Schumpeterian “creative destruction” dynamics in resource-dependent developing contexts. Trade openness displays weak direct growth effects but proves decisive in moderation, with critical temporal variation: openness provided stabilizing effects before 2008 (β = 0.0104, p < 0.01) but became destabilizing after 2008 (β = −0.0109, p < 0.001), reflecting fundamental changes in global economic architecture. Government effectiveness emerges as the most robust growth determinant across all specifications, with one standard deviation improvements translating into 40–46% higher per capita income over two decades. The study makes three distinct contributions: it provides the first systematic region-wide analysis of volatility–openness–growth interactions in MENA, reveals pronounced structural heterogeneity between exporters and importers, introduces methodological innovation through policy-based openness measurement and threshold identification techniques that offer replicable tools for future research, and delivers policy-relevant insights demonstrating that optimal development strategies differ fundamentally between resource-rich exporters and diversified importers, with timing and institutional context proving critical for successful integration.