Analysis of Trade-Growth Nexus

Analysis of Trade-Growth Nexus

DOI: 10.4018/978-1-4666-5848-6.ch009
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This chapter delves deeper into the controversial trade-growth debate – controversial because empirical evidence has provided a wide variety of findings, although one of the stylized facts of global growth is that economies which have opened-up for trade have grown very strongly. The focus is China, the regional and international trade-giant, with an objective of analyzing the impact of trade on economic growth. The motivation of this chapter is due to a number of reasons. First, as stated above, while theoretical economists broadly converge to the agreement that trade has positive growth effects (with various conditionalities), empirical findings have been conflicting. Second, these conditions and other important issues surrounding trade openness are important and must be adequacy explored. Third, the Chinese (or Asian economies) data provides the best grounds of experimenting on both trade and growth, especially in the era when they dominate both world trade and growth rates. And finally, this chapter is an application of the extension developed by Rao and Singh (2007) for estimating the impact of trade openness on economic growth of China.
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Although there are limited theories discussing the role of trade on growth and with those available, only a handful conform to the current global trade patterns, traditional theories argue that differences in countries’ endowments, preferences and technology that might dictate comparative advantage present the reasons for engaging in international trade. Such specific advantage(s) are vested in a country’s resource and or technical endowments that represent the competitive edge for selected production possibilities. It is argued that trade enables import of goods and services which can add to the domestic production capacity needed to improve quality of lives and standards of living. Helpman and Krugman (1985), Blecker (2002, 2003) and Bhagwati (1988) for example, argue that trade openness through export promotion policies can also have positive effects on economic growth. More recently, the donor countries and international agencies have made available resources through aid-for-trade to help develop trade potentials in other developing economies. The realization here is that massive aid inflows into many of the developing economies have failed to reverse the low rates of growth but those for building domestic capacity seem to work. The new theories of trade discuss the role of inter and intra industries, product diversification, imperfect competition and market power as important determinants of trade. The global trade patterns seem to better align to these dimensions, see Krugman and Obstfeld (2006) for a summary, as opposed to the traditional idea of resource endowments and sectoral productivities.

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