# **Trade and economic growth**

Despite the recent crisis in the global economy there remains a consensus on the positive relationship between trade and long‐run economic growth. Many empirical studies show a strong correlation between a country’s trade share and its economic growth performance (c.f. Edwards, 1992; Sachs & Warner, 1995; Frankel & Romer, 1999; Dollar & Kraay, 2004; Romalis, 2007). This relationship runs in both directions: the richer countries become the more they tend to trade; but more importantly, countries that engage in more trade grow richer more quickly. The East Asian experience of export‐led growth over the past three decades provides powerful real‐world evidence of the potential for trade to be an engine of growth and poverty reduction. Indeed, despite the steep declines in exports in highly open, export‐oriented East Asian economies during the recent crisis, growth appears to have rebounded more quickly and robustly than in less globally‐integrated regions.

The economic benefits of exporting have a long‐established theoretical basis. Specifically these include static efficiency gains derived from exploiting comparative advantage and improved allocation of scarce resources, as well as dynamic gains in the more productive export sector engineered by higher competition, greater economies of scale, better capacity utilization, the dissemination of knowledge, and technological progress. For developing countries, exports are also a main source of hard currency necessary to finance import of capital goods, which are an important source of knowledge spillovers. The literature on heterogeneous firms also emphasizes that exporters on average are more productive, capital‐intensive, larger, and pay higher wages than non‐exporters (Bernard et al, 2007).Finally openness to imports also acts as a disciplining force on domestic markets, leading to lower cost, higher quality inputs for producers.

But not all trade contributes to sustainable, equitable growth to the same degree or in the same way. Overdependence on commodity exports, for example, can contribute to lower long‐run growth. And in the manufacturing sector, the phenomenon of “jobless growth” has been a particular concern: for instance, export‐driven manufacturing output in East Asia increased by almost 180 percent in the 1990s, but the associated employment increased by only 3 percent (UNDP, 2005).Further, trade openness is in many countries associated with growing inter‐regional inequalities (Rodriguez‐Pose, 2010). This suggests that leveraging trade for broad‐based economic growth is no simple matter – some paths may be better than others and some countries more capable than others in achieving this.

What are the constraints that prevent countries from exploiting trade potential for long‐term economic gain? Traditionally, the focus has been on reducing barriers to market access – through trade policy measures such as reducing tariffs and quotas, granting preferences, and broader liberalization efforts. But while these measures are necessary, they are likely to be insufficient. As Harrison and Rodríguez‐ Clare (2009) point out, the large body of trade research fails to find a significant correlation between tariffs on final goods and growth performance<sup>2</sup> . This may help to explain why much of the effort to catalyze exports in developing countries through trade policy has failed to deliver successful, sustainable export and economic growth. Even with the benefit of preferential market access, many developing

> 2 The only exception being for intermediate or capital goods, where a higher tariff is associated with lower growth.

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