Thursday, April 19, 2012

Trade and growth in Sub-Saharan Africa

Bruckner and Lederman argue that within-country variations in trade openness cause economic growth. Specifically, a 1 percentage point increase in the ratio of trade over GDP is associated with a short-run increase in growth of approximately 0.5 percent per year; the long-run effect is larger, reaching about 0.8 percent after ten years.

But, there are not only gains from open trade. While some gain, others lose. In 2010, a joint report (Benefits of Trade for Employment and Growth) by the OECD, the ILO, the WTO and the WB, stated that while open trade is always good, it must be complemented by properly designed domestic policies, including employment and social protection policies to ensure that benefits from trade are widely shared. While the crisis has limited growth in many countries, this should not be a reason to go for trade protectionist policies. Instead, trade should be kept open and it should be backed up by social security policies.

Meanwhile, there is also a growing body of literature that focuses on the level of sophistication of export products and its (positive) impact on per capita income. Anand, Mishra and Spatafora argue that “an educated workforce, external liberalization, and good information flows are important prerequisites for developing sophisticated goods and services”. Sophistication comes from either increasing the quality of currently produced goods or from a move into new and more sophisticated products. It induces structural transformation. The study finds that a one standard deviation increase in the sophistication of goods or services is associated with a, respectively, 0.6 or 0.4 percentage points increase in the average annual growth rate. See this blog post for more on the paper.