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Trade and Growth

Paper Session

Monday, Jan. 4, 2021 10:00 AM - 12:00 PM (EST)

Hosted By: Econometric Society
  • Chair: Arnaud Costinot, Massachusetts Institute of Technology

Income Distribution, International Integration and Sustained Poverty Reduction

Pinelopi Koujianou Goldberg
,
Yale University and World Bank
Tristan Reed
,
World Bank

Abstract

What is the model of development in a world with less international integration? We answer this question within a model that emphasizes the role of demand-side constraints on national development, which we identify with sustained poverty reduction. In this framework, development is linked to the adoption of an increasing returns to scale technology by imperfectly competitive firms, who need to pay the fixed setup cost of switching to that technology. Sustained poverty reduction is measured as a continuous decline in the share of the population living below $1.90/day PPP in 2011 US dollars over a five year period. This outcome is affected in a statistically significant and economically meaningful way by both domestic market size, which is measured as function of the income distribution, and international market size, which is measured as a function of legally-binding provisions to international trade agreements, including the General Agreement on Tariffs and Trade, the World Trade Organization and 279 preferential trade agreements. Counterfactual estimates suggest that, in the absence of international integration, the average resident of a low and lower-middle income country does not live in a market large enough to experience sustained poverty reduction.

International Relocation of Production and Growth

Francisco Alcalá
,
University of Murcia, Ivie and CEPR
Marta Solaz
,
Ivie

Abstract

Abstract Over the last decades, the relocation of production from developed to developing economies have generated notable political unrest in some rich countries and precipitated a certain return to protectionism. Using data on approximately 5,000 products, this paper describes the relocation process between 1996 and 2014 and assesses its impact on cross-country growth. Relocation to developing countries –mostly, but not only, to China– had a significant negative aggregate impact on the low-income countries that were initial exporters of the relocated products. In the case of a country at the first quartile of the income distribution, a one-standard negative deviation of the country's exposure to the relocation process reduced its annual growth by 0.61 percentage points. However, this potentially negative impact on the original exporters of the relocated products was zero or not significant in the case of high-income countries. On average, high-income countries facing increased competition from developing economies changed and upgraded their export baskets, whereas low-income countries in the same circumstances failed to do so.

Globalization and the Ladder of Development: Pushed to the Top or Held at the Bottom?

David Atkin
,
Massachusetts Institute of Techonology
Arnaud Costinot
,
Massachusetts Institute of Techonology
Masao Fukui
,
Massachusetts Institute of Techonology

Abstract

We study the relationship between international trade and development in a model where countries differ in their capability, goods differ in their complexity, and capability growth is a function of a country's pattern of specialization. Theoretically, we show that it is possible for international trade to increase capability growth in all countries and, in turn, to push all countries up the development ladder. This occurs because: (i) the average complexity of a country's industry mix raises its capability growth, and (ii) foreign competition is tougher in less complex sectors for all countries. Empirically, we provide causal evidence consistent with (i) using the entry of countries into the World Trade Organization as an instrumental variable for other countries' patterns of specialization. The opposite of (ii), however, appears to hold in the data. Through the lens of our model, these two empirical observations imply dynamic welfare losses from trade that are pervasive, especially among developing countries.

Specialization, Market Access and Real Income

Dominick Bartelme
,
University of Michigan
Ting Lan
,
University of Michigan
Andrei A. Levchenko
,
University of Michigan

Abstract

This paper estimates the impact of foreign sectoral demand and supply shocks on medium-term economic growth. Our empirical strategy is based on a first order approximation to a wide class of small open economy models that feature sector-level gravity in trade flows. The framework allows us to measure foreign shocks and characterize their impact on growth in terms of reduced-form elasticities. We use machine learning techniques to group 4-digit manufacturing sectors into a smaller number of clusters, and show that the cluster-level growth elasticities can be estimated using high-dimensional statistical techniques. We find clear evidence of heterogeneity in the growth elasticities of different foreign shocks. Foreign demand shocks in complex intermediate and capital goods have large growth impacts, and both supply and demand shocks in capital goods have particularly large impacts on growth for poor countries. Counterfactual exercises show that both comparative advantage and geography play a quantitatively large role in how foreign shocks affect economic growth.
JEL Classifications
  • F1 - Trade
  • F6 - Economic Impacts of Globalization