International trade has long been hailed as an engine of long-term growth (Lewis 1980). Theoretically, trade can have an impact on growth in developing countries through a series of channels. Greater trade integration fosters the efficient allocation of resources through comparative advantage and enables countries to realize economies of scale and scope.
It also facilitates the diffusion of technology and managerial know-how, becomes a tool to share risks that emerge from international macroeconomic shocks, reduces anti-competitive practices among domestic firms and encourages competition in both domestic and international markets.
Country experiences of sustained growth have been triggered and have come along with greater trade openness (Hausmann et al. 2005; Jong-A-Pin and De Haan 2011). For instance, increases in trade openness are associated with a 55 percent increase in the likelihood of a growth takeoff (Aizenman and Spiegel 2010). There is evidence that rapid growth in the long run and high levels of growth tend to comove: doubling the ratio of exports and imports to GDP would raise the growth of income per capita by 2.5 percent per year (Dollar and Kraay 2003).
Economic growth in countries that liberalized their trade regimes were 1.4 percentage point higher than pre-liberalization while the trade share in GDP increased by nearly 6 percentage points (Wacziarg and Welch 2008). More recent studies show that reduced tariffs on capital and intermediate goods led to a one percentage point growth acceleration for countries that liberalized their trade regimes (Estevadeordal and Taylor 2013).
Policies that foster international trade integration create growth opportunities, but also entail risks. If inappropriately managed, opening the economy could expose the country to lower growth, and increase instability and inequality. Trade integration, under certain conditions, can lead to underutilized physical and human capital and, hence, affect growth negatively.
Market and institutional imperfections, concentration in extractive activities and specializing away from technologically advanced sectors can curtail the gains from trade (Chang et al. 2009). For instance, commodity exporters and countries with uninsured production risk are more unstable in the event of adverse terms of trade shocks (Malik and Temple 2009). International trade integration has deepened over the past decades, not only in the world but also in Sub-Saharan Africa.
Global trade grew almost twice as fast as global output (6 and 3.2 percent per year, respectively) during the period 1983-2008. The trade share in GDP of Sub-Saharan Africa increased from about 40 percent in 1983 to 69 percent in 2008 (an increase in real terms of 6 and 3.3 percent per year in trade and economic activity, respectively).
This trend is partly attributed to countries’ efforts to liberalize trade unilaterally and engage in free trade and regional integration agreements. This process of globalization widened the set of shocks faced by economic agents and increased the connectivity across countries in the world.
After the 2008-09 global financial crisis, trade grew at a slower pace than economic activity — especially, in Sub-Saharan Africa. For instance, real economic activity in the region grew at an average annual rate of 3.7 percent while the amount of trade only grew at 0.3 percent per year. This implies that trade openness in Sub-Saharan Africa declined from 69 percent of GDP in 2008 to 51 percent of GDP in 2017.
The sharp deceleration of trade was attributed to the sluggish recovery of high-income countries (which account for two-thirds of global imports), shifts in the structure of value chains with lower cross- border trade in intermediate goods, and a slowdown in global investment (World Bank 2015, Aslam et al. 2017).
The main goal of this paper is two-fold: first, it jointly examines the growth effects of different dimensions of integrational trade integration; that is, the extent of trade openness (i.e. how much the country trades with the rest of the world), the diversification of the country’s export basket (i.e. what we export to the rest of the world), and the diversification of the country’s export destinations (i.e. to whom we export).
Our analysis also includes the impact of the composition of trade volumes by product (i.e. estimating the growth effects of commodities vis-à-vis manufacturing goods’ trade) and that of the composition of trade volumes by destination (inter- vis-à-vis intra-regional trade). Figure 1 illustrates: (a) the small size of intra-regional trade in Africa compared with other regions, and (b) the lower trade linkages of Africa with the rest of the world —when compared with other regions.
Second, it systematically examines the impact of the different dimensions of international trade integration on economic growth as well as on the sources of growth. That is, it evaluates the impact of trade openness, diversification across products and diversification across markets on the growth rate of physical capital per worker and total factor productivity (TFP) growth. Our empirical analysis hopes to provide a more comprehensive picture of the relationship between trade integration and growth compared to existing empirical studies.
In order to accomplish this task, we estimate growth (as well as sources of growth) regressions on the different dimensions of trade (volumes, diversification, and natural resource dependence) on a non- overlapping 5-year-period panel data set of 174 countries (of which 45 countries are in Sub-Saharan Africa) from 1970 to 2014. Our empirical analysis points to a causal relationship between the different dimensions of international trade integration and economic growth.
This implies that economic growth is enhanced by higher trade volumes, greater export product diversification, and lower natural resource export dependence. The growth effects of international trade integration are transmitted significantly through faster accumulation of physical capital (per worker) and enhanced TFP growth. The impact of greater trade volumes and lower natural resource dependence is driven primarily by an enhanced TFP growth while that of export product diversification is transmitted through faster capital accumulation.
These findings imply that: (a) greater trade openness affects growth primarily through the diffusion of technology and managerial know-how as well as enhanced allocative efficiency, (b) greater natural resource dependence hinders growth through greater resource misallocation and lower productivity of non-resource-based sectors, and (c) greater export product diversification may affect growth through greater investment across sectors of economic activity.
Zooming in on the volume of trade, this paper also examines the composition of trade volumes by product and by destination. More specifically, we estimate the growth effects of trade volume by product (primary goods vs. manufacturing goods) and that of trade volume by destination (inter-regional vs. intra- regional trade). In the case of the product composition of trade volume, we find that manufacturing trade promotes economic growth while trade in primary goods hampers it.
Our econometric estimates suggest that doubling the manufacturing trade share in GDP would increase economic growth by 1.9 percentage points pear year while an analogous increase in the primary goods trade share in GDP would lower economic growth by 1 percentage point per year. The negative impact of trade in primary goods is transmitted through both slower capital accumulation and sluggish TFP growth, although the impact appears to be larger in the former channel.
This effect implies that mostly trading in primary goods would hinder investment in non-resource-based sectors of economic activity. On the other hand, the analysis of trade volumes by destination reveals that both inter- and intra-regional trade have a positive, significant and causal impact on growth. The regression estimates suggest that doubling the inter-regional trade share in GDP would increase economic growth by 1.9 percentage points per year while a similar increase in the intra-regional share in GDP enhances growth by 0.6 percentage point per year.
The growth effects of inter- regional trade are transmitted significantly through faster accumulation of capital and enhanced TFP growth although the largest impact materializes through the former channel. In the case of intra-regional trade, the growth effects are primarily transmitted through enhanced TFP growth. These findings suggest that the growth impact of intra-regional trade is mainly transmitted through the diffusion of technology, managerial know-how, and competitive practices as well as the operation of economies of scale and scope.
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