Trade Diversion

Otaviano Canuto, Mona Haddad, and Gordon Hanson in the World Bank’s Economic Premise write:

How dependent are developing countries’ exports on de- mand in developed countries? This note shows that much of the recent growth in developing countries’ exports was driven by demand in other developing countries. This means that developing countries may continue to rely on South- South trade to recover from the crisis. In fact, countries like China are leading the recovery through strong import demand. Over the medium term, the development of an “export-led growth v2.0,” in which South-South trade plays a more important role, will be essential. Policy makers can support this process by continuing to liberalize South-South trade, focusing in particular on nontariff measures.

Blattman, Hwang, and Williamson (2007), “Winners and losers in the commodity lottery: The impact of terms of trade growth and volatility in the Periphery 1870-1939,” Journal of Development Economics.

Differences in price trends and volatility across primary commodities explain much of the global income divergence observed in the last century and a half. We show that most countries outside Western Europe and the US have been specialized in the export of the same handful of primary commodities for most of their history. Moreover, some commodity prices have proven more volatile than others, and some have enjoyed better secular growth…

In reconstructing nearly a century of terms of trade experience from 1870 to 1939 and assessing its impact on economic performance, we see that some commodities proved more volatile in price than others, and that those countries with more volatile terms of trade grew more slowly than other commodity-specialized nations. Countries with just one standard deviation higher volatility, moreover, grew on average more than half a percentage point per annum slower.

Another paper applying trade theory to India’s intranational trade? You bet! It’s Dave Donaldson’s “Railroads of the Raj: Estimating the Impact of Transportation Infrastructure.” The model is a multi-industry version of Eaton & Kortum (2002), and the data come courtesy of the British Empire’s meticulous recordkeeping:

How large are the benefits of transportation infrastructure projects, and what explains these benefits? To shed new light on these questions, I collect archival data from colonial India and use it to estimate the impact of India’s vast railroad network. Guided by six predictions from a general equilibrium trade model, I find that railroads: (1) decreased trade costs and interregional price gaps; (2) increased interregional and international trade; (3) eliminated the responsiveness of local prices to local productivity shocks (but increased the transmission of these shocks between regions); (4) increased the level of real income (but harmed neighboring regions without railroad access); (5) decreased the volatility of real income; and (6), a sufficient statistic for the effect of railroads on welfare in the model accounts for virtually all of the observed reduced-form impact of railroads on real income. I find similar results from an instrumental variable specification, no spurious effects from over 40,000 km of lines that were approved but never built, and tight bounds on the estimated impact of railroads. These results suggest that transportation infrastructure projects can improve welfare significantly, and do so because they allow regions to exploit gains from trade.

Bill Easterly, writing on the “anarchy of success” in the New York Review of Books, isn’t very fond of the policy recommendations in Ha-Joon Chang’s Bad Samaritans. As the book has been out for nearly two years, I suspect that his criticisms won’t deter many sales. Easterly’s bottom line is that “third-world growth seems to have been fairly expert-proof.”

Abhijit Banerjee and Esther Duflo make the case against aggregative theories of economic growth:

The premise of the aggregative approach to growth was that markets function well enough within countries that we can largely ignore the fact that there is inefficiency and unequal access to resources within an economy when we are interested in dynamics at the country level. The evidence suggests that this is not true: The cross-country differences in marginal products or technology that we want to explain are of the same order of magnitude as the differences we observe within each economy. A theory of cross-country differences has to based on an understanding and an acknowledgment of the reasons why rates of returns vary so much within each country.