Hendrik Van den Berg

How Large Is International Trade’s Effect on Economic Growth?

The estimated static welfare gains from international trade are very small, on the order of one percent of GDP. The case for free trade is therefore increasingly linked to trades apparent positive effects on economic growth. But how large are these growth effectsq The vast empirical literature has emphasized the statistical significance, not the economic significance, of the trade-growth relationship. This surveys re-examination of the empirical literature focuses on the size of the relationship between trade and growth. Our survey reveals that the many empirical studies are surprisingly consistent in terms of the size of the relationship: A one percentage point increase in the growth of exports is associated with a one-fifth percentage point increase in economic growth. Given the power of compounding, the effect of trade on growth is very important for human welfare. Copyright Blackwell Publishing Ltd, 2003.

Foreign trade and economic growth: time series evidence from Latin America

This paper extends our understanding of the relationship between trade and growth by emphasizing time series evidence rather than the more traditional aggregate cross-section evidence from past studies. Cross-section studies obscure intercountry differences and sacrifice revealing information about dynamic behaviors within countries. Also, the nonstationary nature of many time series makes the use of period averages inappropriate. The use of time series data introduces other difficulties, however, and our analysis pays close attention to the possibility of spurious regressions, nonstationarity and cointegrating relationships among variables. Seventeen Latin American economies are examined, and a mixture of model forms must be applied to deal with the variety of temporal behaviors. The results confirm a positive relationship between export growth and aggregate economic growth over time for the majority of the seventeen countries.

Foreign Direct Investment and Economic Growth: A Time-Series Approach

Research has often focused on how foreign direct investment (FDI) transfers technology from developed economies to less developed economies. Most FDI occurs between developed economies, however, and the country receiving the greatest inflow of FDI is the United States. This paper examines whether such FDI inflows have stimulated growth of the U.S. economy. We apply time-series data to a simultaneous-equation model (SEM) that explicitly captures the bi-directional relationship between FDI and U.S. economic growth. FDI is found to have a significant, positive, and economically important impact on U.S. growth. Also, our SEM estimates reveal that FDI growth is income inelastic. These results imply that: (1) even a technologically advanced country such as the U.S. benefits from FDI, (2) the gains from FDI are very substantial in the long run, and (3) the sustainability of the U.S. current account deficit is enhanced by FDIs positive effect on productivity but undermined by the income inelasticity of FDI. Overall, the results suggest that U.S. policies should focus on keeping the country attractive to foreign direct investors.Research has often focused on how foreign direct investment (FDI) transfers technology from developed economies to less developed economies. Most FDI occurs between developed economies, however, and the country receiving the greatest inflow of FDI is the United States. This paper examines whether such FDI inflows have stimulated growth of the U.S. economy. We apply time-series data to a simultaneous-equation model (SEM) that explicitly captures the bi-directional relationship between FDI and U.S. economic growth. FDI is found to have a significant, positive, and economically important impact on U.S. growth. Also, our SEM estimates reveal that FDI growth is income inelastic. These results imply that: (1) even a technologically advanced country such as the U.S. benefits from FDI, (2) the gains from FDI are very substantial in the long run, and (3) the sustainability of the U.S. current account deficit is enhanced by FDIs positive effect on productivity but undermined by the income inelasticity of FDI. Overall, the results suggest that U.S. policies should focus on keeping the country attractive to foreign direct investors.

Fiscal Decentralization and Government Size: An International Test for Leviathan Accounting for Unmeasured Economic Activity

Tests for the presence of Leviathan, evidenced by a positive relationship between the size of government measured as a percentage of GDP, and the degree of fiscal centralization, have provided mixed results. We derive alternative measures of the size of government taking into account household and informal market activity. Traditional Leviathan models are then re-estimated for an international sample of forty-five countries. Controlling for income, population, intergovernmental grants, and urbanization we test whether fiscal centralization is responsible for the relative size of government. We find no evidence of a relationship between fiscal centralization and government size.

Does Immigration Stimulate International Trade? Measuring the Channels of Influence

This article examines the relationship between immigration and international trade. It applies panel data in a simultaneous equation regression model to test six channels through which immigration is hypothesized to influence international trade. The results indicate that immigration stimulates bi-lateral trade between 16 OECD countries and a large set of immigrant source countries for the years 1991–2000 primarily by 1. increasing foreign direct investment flows back to the source countries, 2. creating trade networks between immigrants in destination and native countries, and 3. raising income in immigrant destination countries.

A novel test of the monetary approach using black market exchange rates and the Johansen-Juselius cointegration method

Abstract Cointegration is appropriate for testing long-run exchange rate theories such as the monetary approach, but the post-1973 floating exchange rate period may be too short. We confirm the monetary model using longer black market exchange rate series and the Johansen—Juselius cointegration method.

Does trade composition influence economic growth? Time series evidence for 28 OECD and developing countries

This paper is an empirical test of the hypothesis suggested by Mazumdar (1996), namely, that the composition of trade determines the strength of the ‘engine of growth’. Mazumdar suggested that, within the framework of the Solow model, the composition of trade affects the medium-run transition to the steady state. The composition of trade matters because the price of capital is affected by whether a country exports or imports capital goods. Using unpublished SITC data, we create two international trade composition variables to test this hypothesis for 28 developed and developing countries. We test single-equation, simultaneous-equations, and panel data models with time-series data. All modern time-series procedures are rigorously applied. The results are supportive of the hypothesis; countries that import mostly capital goods and export consumer goods tend to grow faster than countries that export capital goods. There are important implications for developing countries. By focusing on their comparative advantage in producing labour-intensive consumer goods, developing countries will enhance their economic growth more than conventional models suggest. In addition, ceteris paribus, developing labour-abundant and consumer goods-exporting economies will grow faster than developed capital good exporters.

The relationship between international trade and economic growth in Mexico

Abstract The available empirical evidence on the relationship between international trade and economic growth in Mexico is not conclusive. This article first identifies the contributions and shortcomings of previous empirical work. Then several new econometric approaches are pursued using data for 1960–1991. Modern time-series methods and improved data are used to replicate previous Granger causality tests and single-equation regressions. Then, a simultaneous equation time-series regression model is used to confirm hypothesis that trade and growth are directly related. A direct test of the relationship between trade and total factor productivity is also carried out using a simultaneous-equations model. A positive relationship is again confirmed. The Lucas critique reminds us, however, that we cannot use econometric results, based on data from the past, to justify Mexicos new “outward-oriented” economic policies. Nevertheless, the results appear supportive when we consider that the sample period includes two decades of import substitution policies; the econometric results are likely to understate the actual strength of the trade-growth relationship under Mexicos current open trade regime.

The impact of transactions activities on U.S. productivity growth

Abstract This study modifies a standard growth model to control for transactions activities. For 1950–1989, we estimate productivity growth for GNP and for GNP excluding transactions. The results show that failure to control for transactions can cause systematic overestimates of productivity growth.

Does simultaneity exaggerate empirical tests of the trade-growth relationship?

Simultaneity between the volume of trade and national output may have biased past empirical tests of the export-growth relationship. To judge the extent of such bias, this paper compares results of single- and simultaneous- equation regression models of trade and growth that closely resemble the specifications of previous studies. In order to enhance the analysis, a number of other alleged shortcomings of previous statistical studies of trade and growth are addressed: omitted variable bias and non-stationarity are dealt with by using modern time-series regression procedures, measurement error is reduced by using more accurate measures of capital and labour available for six Latin American countries over the period 1960-1990, and both imports and exports are used to proxy trade. The results shown that simultaneity bias causes single equation results to understate, not over state, the trade-growth relationship.