Trade and Development: The Growth Dimension L Alan Winters - PowerPoint PPT Presentation

Trade and Development: The Growth Dimension L Alan Winters Professor of Economics University of Sussex CEPR, IZA and GDN L.A.Winters@sussex.ac.uk

Preliminaries • Growth is a (the?) fundamental question for development • Intuitively trade is a major influence – Think how an autarkic village would fare – Theory and empirical evidence support this view • One determinant of trade is simple and cheap to change (technically) – trade policy 17th September 2015 WIDER 2

Why trade? Net Exports = Production - Consumption – Specialization • Economies of scale – Inputs and technologies from abroad – Competitive pressures • Selection, X-inefficiency, innovation – All these allow governments/countries to grow output without worrying about demand • Britain (1700) vs. China (1983) 17th September 2015 WIDER 3

The Long Run: Income or Growth? (1) ln y = f(o) → Δ ln y = f( Δ o) (2) Δln y = f(o) → Δ 2 ln y = f( Δ o) 17th September 2015 WIDER 4

Theory • Continuing interest • Neo-classical model: – Accumulation – Determinant of technology/efficiency • Multi-sectoral Models – ‘right’ sectors – Innovation sector – competes for resources, comparative advantage rules – Trade and spill-overs in innovation – Scale (+) and competition (-) 17th September 2015 WIDER 5

Theory • Continuing interest • Neo-classical model: – Accumulation – Determinant of technology/efficiency • Multi-sectoral Models – ‘right’ sectors – Innovation sector – competes for resources, comparative advantage rules – Trade and spill-overs in innovation – Scale (+) and competition (-) 17th September 2015 WIDER 6

The Long Run: Income or Growth? (1) ln y = f(o) → Δ ln y = f( Δ o) (2) Δln y = f(o) → Δ 2 ln y = f( Δ o) (2) y” (1) y’ ln(y) y Liberalisation ( Δ o ) time 17th September 2015 WIDER 7

Empirics I: Causation - Instruments • Early empirics debunked by Rodrik and Rodriguez • Frankel and Romer ( AER , 1999) gravity instruments • Two issues (Bazzi and Clemens, AEJ-Mac , 2013) • Instruments are weak, except country size - treacherous • Be serious about the exclusion restriction – Many studies in the literature take the form: growth = f(x, W, u); x=g(Z) – If you estimate: growth = h(y, W*, v); y=m(Z) – You strictly have to reject every one of them! 17th September 2015 WIDER 8

Other instruments • Feyrer (2009, NBER WP ) – Time varying instrument for trade – Importance of difference in sea distance and air distance becomes more significant as air travel cheapens • Romalis (2007, NBER WP ) – US tariffs (also time varying), but • Commodity structure; • Relates trade policy level to output growth 17th September 2015 WIDER 9

II: Conditions for trade to boost income • Heterogeneity of country studies • Weaker effects of liberalisation in poor countries • Benefits for low-income Africa uncertain • Interactions of openness with various conditions – Chang, Kaltani and Loayza (2009, JDE ) and – Bolaky and Freund ( JDE, 2008) 17th September 2015 WIDER 10

What does all this mean for policy? • Policy is a decision, not a hypothesis test – Have to decide (doing nothing is a decision) – Balance of evidence and priors • Evidence never fits your case precisely • Parameters imprecise (standard errors) • Model may also be wrong (more complex) – Consider the whole distribution of possible outcomes – Costs of different errors – Cost of uncertainty per se Brock and Durlauf (WBER, 2001) 17th September 2015 WIDER 11

Distribution of growth increments Mean effects is 2.38 (3.88) Percent change in growth over liberalisation Kneller et 12 al (2008) 10 Sample 8 of 47 number 6 liberal- 4 isations 2 0 Less 0 1 2 3 4 5 6 7 -2 -1 More than percent p.a. 17th September 2015 WIDER 12

Productivity • Trade liberalisation raises productivity – Basis of higher incomes – But recall structural change lit.’s concern • Several possible mechanisms – Competition/selectivity – Melitz – Imported inputs – Changes in extensive margin (product/market mix) – Learning from foreign interactions • Firm-level data, increasingly with trade data 17th September 2015 WIDER 13

Thank you 17th September 2015 WIDER 14

Supporting Slides 17th September 2015 WIDER 15

Slower and Smaller Date of Initial Years to doubling Popn. Mn. double Britain 1700-1855 9 155 USA 1820-1873 10 53 Germany 1830-1894 28 64 Japan 1906-1939 47 33 China 1983-1995 1023 12 India 1989-2006 822 17 • Doubling of GDP pc from $1300 PPP to $2600; Maddison 17th September 2015 WIDER 16

Openness and Income Fundamental question for development • Theory • Long-run growth • Cross-country panels • Transmission/shocks • Structural models • Productivity • Firm-level data 17th September 2015 WIDER 17

Theory • Static trade model – opening trade increases the value of output at world prices • Neo-classical growth model y = AL α H β K (1- α - β ) – Trade may affect accumulation • Via factor returns – K and H • By affecting prices – K • Recent revival via structural modelling, e.g. – Anderson, Larch, Yotov (2015, NBER 21377) – Eaton, Kortum, Neiman, Romalis (2015) – Trade usually taken to affect A (levels or changes) • If introduce distortions, result is ambiguous 17th September 2015 WIDER 18

Determinants of Trade • Gravity model explains by economic mass and trade costs (incl. distance) • Can track back from trade to welfare to calculate benefits of Δ trade costs d ln W = - (1 – η ) d ln λ / ε − λ is share of domestic goods in expenditure − ε is elasticity of trade wtr trade costs − η determined by changes in mark-ups – small >0 Arkolakis, Costinot, Donaldson,Rodriguez-Clare (NBER 21370) 17th September 2015 WIDER 19

Multi-sectoral models • Structural models of development • Trade may → wrong specialisation - level or growth • Now recognise innovation as being produced — Competes for resources – trade may shift resources in or out — Trade affects size of market for ‘innovative’ goods — There is comparative advantage in innovation 17th September 2015 WIDER 20

Endogenous Growth • Knowledge has public elements, i.e. spill-overs – Between firms, partially between countries – May be conscious – FDI, learning from customers – May depend on trade or FDI (or other) links • Two effects – scale (+) and competition (-) • Can combine with comparative advantage Grossman and Helpman (1991, and 2015, AER P&P ) 17th September 2015 WIDER 21

Income, Openness and Labour Regulation (Bolaky-Freund; JDE 2008) Less regulated half More regulated half 17th September 2015 WIDER 22

Δ ln y = .. α o+ β C+ γ (C*o).. • Chang et al: • Linear interaction – Effect of openness i = α + γ C i • Conditions are highly correlated, tested 1-by-1 – Is it just development that matters? – Is it just catching Africa in 1980s/1990s? – Is Africa different in 2000s/2010s? 17th September 2015 WIDER 23

Policy-Relevant Growth Econometrics Brock and Durlauf ( Δ ln y = X α + Z γ + β Δ t ariff X ‘maintained’ variables; Z ‘optional’ variables • Hypothesis testing H 0 : β =0 H 1 : β >0 against • Trade policy ‘affects’ growth if t -statistic on β > 2 • Issues: (a) uncertainty about β (specification as well as sampling ), (b) relative size of Δ ln y and β Δ t ariff 17th September 2015 WIDER 24

Transmission/Shocks • Volatility affects growth (and welfare) • Trade transmits shocks from abroad • But also dissipates domestic shocks • Net effect on volatility uncertain • Raddatz ( JDE , 2007): most shocks are internal • Caselli et al (2015, CEPR 10775): – structural Eaton-Kortum model – In 2/3 rd countries trade reduced volatility 1972-2007 – Diversifications across partners important 17th September 2015 WIDER 25

Transmission/Shocks • Volatility affects growth (and welfare) • Trade transmits shocks from abroad Net • But also dissipates domestic shocks effect? – most shocks are internal – In 2/3 rd countries trade reduced volatility 1972-2007 – Diversifications across partners important • The Great Recession – Many theories for dip in trade/GDP and recovery – Credit, protection, demand for tradables, GVCs 17th September 2015 WIDER 26

Permanent Shocks • For example, advent of China as trading power – Competition effects on consumers and producers; – Demand for commodities → prices – Source of aid and FDI • Mexican firms (Iacovone et al, JIE , 2013) – Main locus of competition – US market – Heterogeneous effects – stronger did better 17th September 2015 WIDER 27

Creative Destruction? How Chinese Competition affects Mexican Manufactures Source: Iacovone, Rauch and Winters (2013) 17th September 2015 WIDER 28