The elusive effects of trade on growth: Export diversity and economic take‐off

Abstract

The hallmark of the voluminous growth determinants literature is the absence of a clear‐cut effect of trade on growth. Numerous candidate regressors have been motivated by alternative theories and tested by a multitude of empirical studies, but not one trade regressor has been robustly related to growth. In this paper, we leverage Melitz's (2003) insights regarding sectoral export dynamics and Feenstra and Kee's (2008) approach to productivity and sectoral export diversity to propose a structured approach to trade and growth determinants. Instead of relying on aggregate trade measures as previous studies have done, we examine the diversity of sectoral exports and the development of broad‐based comparative advantage as a potential growth determinant. Controlling for model uncertainty and endogeneity, we find that export diversity serves as a crucial growth determinant for low‐income countries, an effect that weakens with the level of development.

Quantiles, corners, and the extensive margin of trade

“…In fact, in a model with heterogeneous …rms à la Melitz (2003), exporting opportunities in new sectors will drive up factor prices forcing less productive …rms to exit the market; this "natural selection"process leads to higher average productivity and more rapid growth. This link between diversi…cation of exports and increased productivity and growth has been shown to be empirically relevant, at least for certain groups of countries (see, e.g., Kee, 2008, andEicher andKuenzel, 2016). Therefore, trade facilitating policies that contribute to the 18 The origins of this literature can be traced back to the work of Krugman (1979) and Melitz (2003).…”

“…Third, the increase in the variety of imported goods has been associated to increased welfare in the importing country (see, e.g., Romer, 1994, Broda and Weinstein, 2006, and Ardelean and Lugovskyy, 2010. Finally, and perhaps more importantly, diversi…cation of exports has been linked to increases in productivity and more rapid growth (see, e.g., Feenstra et al, 1999, Feenstra and Kee, 2008, and Eicher and Kuenzel, 2016. In fact, in a model with heterogeneous …rms à la Melitz (2003), exporting opportunities in new sectors will drive up factor prices forcing less productive …rms to exit the market; this "natural selection"process leads to higher average productivity and more rapid growth.…”

“…Liu andBottai (2009) andBottai, Cai, andMcKeown (2010) Helpman, Melitz, and Rubinstein (2008), Chaney (2008), andManova (2013), developed trade models that explicitly take into account the extensive margin. Examples of recent empirical studies in this area include, among many others, Dutt, Mihov, and Van Zandt (2013), Kehoe and Ruhl (2013), Santos Silva, Tenreyro, and Wei (2014), Feenstra and Ma (2014), and Eicher and Kuenzel (2016). also bounded from above by the number of categories in the particular classi…cation of economic activities that is used to de…ne the sectors.…”

Have export compositions influenced economic growth of the European Union countries in Central and Eastern Europe?

“…High export diversification would make their economies better insulated against foreign economic shocks. It would help these countries to facilitate deeper industrialization process in the long run (Eicher and Kuenzel, 2016). As developing countries become middle-income countries, they gradually shift their emphasis toward export specialization to boost their export competitiveness (Naude and Rossouw, 2011).…”

European influence and economic development

“…We report the full specification here to facilitate comparisons with the previous literature, which uses the same set of variables.25 All regressions account for time and regional (East Asia, Latin America, sub-Saharan Africa) fixed effects.26 The endogenous regressors are InitialGDP, Investment, PopulationGrowth, Education, Openness, ExecutiveConstraints, GovernmentConsumption, Inflation, Hindu%, EasternReligion%, Orthodox%, Muslim%, OtherReligion%, Jewish%, Protestant%, ExportDiversity, ExportDiversity with three income interactions and ConstitutionSimilarity with the Turmoil interaction. Our instruments follow directly fromBarro (2003),Durlauf et al (2008) andEicher and Kuenzel (2016).27 The coefficient of 0.014 in column 6 and the 0.304 standard deviation of constitution similarity imply that a one standard deviation increase should raise growth by 100 × 0.014 × 0.304 = 0.426%.…”