TRADE AND GROWTH RESEARCH

A paper that summarizes some of main points of the empirical research detailed below is Trade, Growth and Disparity Among Nations, from Income Disparity and Poverty, World Trade Organization Special Study 5, Geneva: WTO Publications, 11-42, June 2000.

The papers listed below are classified into five different groups. For convenience, the research summary that follows this list refers only to each paper's number and not to it's complete title. The purpose of the research summary is to show how the various papers relate to one another.

 

A. General Evidence on Convergence

1.        "Convergence Clubs and Diverging Economies "

 

B. Trade Liberalization and Convergence

2.        "Equalizing Exchange: Trade Liberalization and Income Convergence ," Quarterly Journal of Economics, 108, 653-679, Aug. 1993.

3.        "Income Disparity Among Countries and the Effects of Freer Trade ," in Economic Growth and the Structure of Long-Run Development, Luigi L. Pasinetti and Robert M. Solow (eds.), London: Macmillan, 45-64, 1994.

4.        "Evidence on the Contribution of Trade Reform Towards International Income Equalization ," Review of International Economics, 5, 246-255, May 1997, with Alok Bohara.

 

C. Trade (in general) and Convergence

5.        "Trade and Convergence Among Countries ," Journal of International Economics, 40, 279-298, May 1996.

6.        "Trade and the Rate of Income Convergence ," with Ayal Kimhi.

7.        "Catch-Up, Trade and Technological Diffusion "

 

D. Structural Changes in Output Growth and Trade

8.        "International Trade and Structural Change," Journal of International Economics, 43, 513-523, December 1997, with David Papell.

9.        "Slowdowns and Meltdowns: Postwar Growth Evidence from 74 Countries ," Review of Economics and Statistics, 80, 561-571, November 1998, with David Papell.

10.    " The Great Wars, the Great Crash, and Steady State Growth: Some New Evidence About an Old Stylized Fact ," Journal of Monetary Economics, 36, 453-475, December 1995, with David Papell.

11.    " Unit Roots, Postwar Slowdowns and Long-Run Growth: Evidence From Two Structural Breaks ," Empirical Economics, 303-319, February 2003, with Robin Lumsdaine and David Papell.

12.    "Some Evidence on the Continuity of the Growth Process Among the G7 Countries ," Economic Inquiry, 38, 320-330, April 2000, with David Papell.

 

E. Theoretical Models Consistent with the Above Empirical Results

13.    " Free Trade, Growth and Convergence ," Journal of Economic Growth, 3, 143-170, July 1998, with Michael Loewy.

14.    "Knowledge Dissemination, Capital Accumulation, Trade and Endogenous Growth ," Oxford Economic Papers, 52, 637-650, October 2000, with Michael Loewy.

15.    " Trade and the Neoclassical Growth Model ," Journal of Economic Integration, 18, 1-16, March 2003, with Michael Loewy.

16.    " Teach Your Children Well: Planting the Seeds of Education and Harvesting the Benefits of Trade "

17.    " Convergence Clubs and Subsistence Economies ," Journal of Development Economics, 55, 153-169, February 1998.

 

RESEARCH SUMMARY

If countries are arrayed along a spectrum of per capita incomes, there appear to be only two segments of the income spectrum where the likelihood of finding income convergence is not less than the likelihood of finding income divergence among countries. These are the segment comprising the world's wealthiest countries and the segment comprising the world's very poorest countries.

In particular, if one randomly groups together countries chosen from the subset of the world's wealthiest countries, then the probability of finding convergence within the random groupings while not particularly high is not as negligible as it is among most other income segments of the world. Where the convergence appears to be the most prevalent however, is among the poorest countries. Paper 1 provides this overall convergence picture.

Since the likelihood of finding convergence within a randomly-chosen group of countries at the upper end of the income spectrum while greater than among most other income levels is not very high overall, there remains the question of whether there might exist a common thread that ties together the converging countries from those that did not converge. The papers in groups B and C focus on the contribution of international trade toward the convergence process.

Group B papers take trade liberalization programs as exogenous and examine how they impact on income convergence among the affected countries. Choosing groups of countries that created and adhered to formal timetables for the elimination of trade barriers facilitates natural experiments that make it possible to examine the liberalizing countries prior to, during, and after the trade reforms. Other benchmark groups of countries are also chosen for comparison purposes. The outcomes of these experiments suggest that income differentials that had remained stable for decades between countries began to decline with the reduction of trade barriers. After completion of the respective liberalization phases in each of the groups, these income differentials continued to remain lower than they had been prior to the reforms. The figures in papers 2 and 3 provide visual evidence of the link between the trade reforms and the reduction in income differentials, as well as of the resultant increases in trade.

The papers in group C generalize on these findings by grouping together countries that trade extensively with one another on the basis of each country's directional trade data. The results from these studies provide further support of a trade-convergence link. Paper 5 examines non-poor countries those with at least 25% of the U.S. real per capita income in 1960 and shows that grouping these countries on the basis of trade produces a much higher incidence of income convergence than does a random grouping from the same pool of countries. Paper 6 shows that not only do countries that trade extensively with one another exhibit a greater likelihood of converging, increases in their trade correspond with increases in their rates of convergence.

Paper 7 goes further by examining why income convergence might result from international trade. Assuming that trade acts as a conduit for knowledge spillovers among countries, the paper formalizes a trade-related version of the catch-up hypothesis. The implications of the model are then empirically examined by deflating each country's annual output levels by its capital stocks and levels of education, creating TFPs that then proxy for the intangible knowledge stocks of the countries. It is shown that the majority of the major trade partners not only exhibit TFP convergence, the size of their initial TFP gap is strongly and positively related to the extent of their subsequent TFP convergence a finding that is not evident among countries not trading extensively with one another.

While the evidence suggests that there exists a link between international trade and income convergence, there still remains the question of whether this convergence is really beneficial for all countries concerned, or whether the trade-related convergence comes at the expense of the wealthier countries, i.e. is this a zero-sum game? Paper 8 shows that the postwar movement towards removing obstacles to trade has coincided with a marked increase in trade-output ratios. At the same time however, a large number of countries have also experienced postwar growth slowdowns (paper 9). So, if taken at face value, one might conclude that more trade has led to slower growth. But there is another way to view this evidence the long-run perspective.

Papers 10 and 11 examine the long-run growth paths of 16 OECD countries since 1870. Paper 10 uses sequential trend break tests to endogenously identify the primary structural break along the 120 year growth paths of each country. Paper 11 utilizes a two-break unit root test to identify two structural breaks for each country. The pictures and tables (in both papers) of the actual paths and how they compare with the extrapolations of the old paths provide an indication of how the growth paths of the countries have risen over time both in levels and in growth rates. A more recent technique for determining the existence of multiple breaks is used in Paper 12, which focuses on the growth paths of the G7 countries. This test facilitates a more precise delineation of each country's particular growth periods since the late 1800s.

Convergence at the upper end of the income spectrum and convergence at its lower end manifest themselves quite differently. The upper-end convergence is the result of catching-up by the poorer countries within the respective groups, whereas the low-end convergence is due to a convergence downward (paper 1). Paper 17 concentrates on the convergence at the lower end of the convergence spectrum, providing a simple theoretical explanation that is consistent with the empirical evidence.

While the papers in groups A through D provide an idea of what the stylized facts look like, the papers in Group E suggest some theoretical frameworks that can help understand how these empirics are tied together under the assumption that international trade acts facilitates the dissemination of knowledge among countries. In particular, the empirical work indicates a trade-related convergence in incomes while the FPE theorem from trade theory refers only to equalization in factor prices which is not necessarily the same thing. On the other hand, the Solow model predicts income convergence but is a closed economy model. Furthermore, the long-run findings suggest that growth rates have risen, and neither of the traditional frameworks can account for this. Endogenous growth models which can, tend to be silent about trade-related convergence in levels.

Hence, paper 13 gives a simple endogenous growth model that can account for the various empirical findings by focusing on knowledge spillovers resulting from trade. The goal in paper 13 is to develop a model that can provide not only steady-state outcomes, it can also depict the transitional behavior between steady states that results from policy changes. Paper 14 adds physical capital to a two-country version of the model and provides proofs of existence and of the impacts on the steady state that arise from unilateral trade liberalization. Paper 15 merges the models in papers 13 and 14 into an open-economy modification of the Solow-Cass-Koopmans model. As in SCK, countries exhibit conditional convergence in income levels, though here, trade policy can affect steady state growth. The multi-country model developed in the paper in contrast with the more common two-country, or two region models facilitate an analysis of how unilateral trade liberalization, or a trade agreement by a subset of countries, will affect not only the liberalizing countries, but also other countries that are not partners to the agreements. Paper 16 and the model in paper 7 distinguish between two forms of human capital: knowledge (the stock variable) and education (the flow variable), where it is not enough to trade with one another a country must also have the capability to absorb the resultant knowledge spillovers for its growth to be positively affected by changes in its trade policy.

 

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