How to make growth inclusive?

By looking at inclusive growth case studies of Brazil (inclusive growth seems likely to be enduring), Viet Nam (strong progress in achieving MDGs but inequality is undermining poverty efforts), and Ghana (growth reduced poverty but increased inequlaity), Elizabeth Stuart of Oxfam International lists three strategies to make growth inclusive.

• A redistributive agenda: Cash transfers, redistributive public expenditure on health, education, and agricultural services, and a progressive taxation system.
• Macroeconomic prudence: Sustainable, moderate levels of inflation, deficits, and debt; and counter-cyclical policies, protecting pro-poor elements of public spending
• A policy environment conducive to pro-poor private investment: Domestically owned, labour-intensive private sector, especially small and medium-sized enterprises (SMEs).

Stuart argues that growth should be taken as a means not an end itself (criticism pointed at The Growth Report).

Trade Policy, Welfare and MFN

This blog post is adapted from Robert C. Feenstra’s summary of research of the International Trade and Investment (ITI) Program at NBER. It summarizes various papers that explore and explain the causes of the great trade collapse of 2009. Here is a blog post about what economists thought were the reasons for the collapse in trade by about 30 of world GDP in 2009. Here is an earlier blog post adapted from Feenstra’s summary of recent literature on the great trade collapse of 2009.

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In the ITI program an ongoing area of research is the impact of, and explanations for, trade policies. Some studies examine the impact of policies in particular sectors. One important example is the textile and apparel sector, which experienced a large reduction in quotas as the Multifibre Agreement was phased out in January 1, 2005. Many people expected that China would take over in this sector, since it had been the most constrained in its textile and apparel exports. But Harrigan and Geoffrey Barrows show that along with these changes in market shares, there was a massive downgrading in the type of product exported from China.¹ These products at the lower end took sales away from countries such as Mexico or Guatemala, and to some extent served to offset the competitive impact on other Asian countries.

Another sector that has received attention for its ongoing trade policies is steel. Bruce Blonigen and co-authors show that the response of this industry to tariffs versus quotas, which they estimate, is highly sensitive to its market structure.²

Another topic of strong interest is the impact of free trade agreements, particularly on workers. This topic has received renewed interest for the United States in what might be considered "round two" of the debate over the impact of trade on wages and employment. Making use of broad changes in tariffs through trade agreement and detailed datasets on individuals, these studies identify potentially large effects of tariff reductions. A recent example is the work by David Autor, David Dorn, and Hanson, which examines the acceleration in Chinese exports to the United States following its WTO accession in 2001.³ They match the changes in wages and employment in local labor markets defined by "commuting zones" to the Chinese exporters to manufacturing industries in those zones. They link the rise in Chinese exports, and the implied reduction in employment, to changes in federal support payments to individuals for trade adjustment assistant, disability, retirement, and the like. They find that the deadweight loss from the increase in support payments is very similar in magnitude to the welfare gains from the increased imports: both are on the order of $30 - $70 annually per capita. But because the support payments are expected to be temporary while the welfare gains from imports are permanent, there are still gains from trade.

A second example of a study that uses data on individuals (from the decennial census) is the paper by John McLaren and Shushanik Hakobyan which analyzes the impact of NAFTA on local labor markets in the United States.⁴ Drawing on earlier theoretical work by McLaren, they allow for possible wage increases in response to anticipated tariffs cuts (as workers leave industries) and for wage decreases when the tariff cut occurs. They find a significant negative impact of NAFTA on blue-collar workers, with smaller positive or negative effects on college educated workers. Their overall message is that NAFTA has large distributional effects, even if its overall welfare impact is small.

All of these studies find sizable changes in trade flows following the enactment of the tariff changes, despite the fact that U.S. tariffs on Mexico were already low, and that tariffs on China were already at their MFN level before its accession to the WTO. Why can trade change so much in response to small tariff changes? Kyle Handley and Nuno Limao suggest that preferential agreements may reduce the policy uncertainly surrounding tariffs that could change in the future.⁵ They study Portugal, which was already a member of the EFTA and had an agreement with Spain when it joined the EEC in 1986. There was no drop in Portugal's tariffs with members of the EEC who were also in EFTA, but nevertheless there was a sizable increase in exports to EC members. Handley and Limao attribute this to a reduction in policy uncertainty, which they measure by the difference in the zero tariffs within the EEC and the MFN tariffs charged to outside members. Variation in that difference allows the researchers to identify the policy impact across industries and to explain the increase in trade.

In addition to these empirical studies, several members of the program, using game-theoretic techniques, have theoretically analyzed the question of why countries pursue preferential agreements. For example, Philippe Aghion, Antras, and Helpman model this as a question of sequential bargaining, whereby a country makes deals with a series of other countries, but the bargains negotiated must be consistent with the deals that potentially will be made in the future.⁶ The researchers show that this model generates both "building bloc" and "stumbling bloc" effects of preferential trade agreements, to use the terminology of Jagdish Bhagwati. In particular, they find conditions under which global free trade is attained when preferential trade agreements are permitted to form (a building bloc effect), and other conditions where global free trade is attained only when preferential trade agreements are forbidden (a stumbling bloc effect).

In a series of papers, Kyle Bagwell and Robert Staiger analyze games in which countries are constrained by the WTO rules and show that these rules can lead to welfare improvements.⁷ One example is the most-favored nation rule, which states that all WTO members must be treated equally. This rule means that a reduced trade barrier given to a current negotiating partner must be automatically extended to later partners. Bagwell and Staiger argue that the MFN principle makes it less likely for countries to be willing to offer concessions at early stages of the sequential bargaining process, but that this potential source of conflict can be offset by two other WTO principles: first, by renegotiation at later stages; second, by reciprocity in the concessions made by each country. Incorporating these principles into the bargaining game allows for an efficient outcome even under the MFN rule. This line of research enables Bagwell and Staiger to rationalize various provisions of the WTO.

There are other approaches, too, that can be used to rationalize the provisions to the WTO. Ralph Ossa uses a monopolistic competition model with a "home market" effect, whereby tariffs attract firms to enter the protected market.⁸ That framework can generate political economy considerations for trade policies and WTO rules that are similar to what arises from the terms-of-trade model. Using a different approach, Giovanni Maggi and his co-authors argue that WTO-type rules can be understood as arising from the inevitable incompleteness of trade agreements.⁹

The analysis of trade policy naturally leads to the question of the gains from international trade, and we conclude with this classic question. Analysis of the monopolistic competition model has shown that it gives rise to a remarkably simple formula for the gains from opening trade: those gains are equal to one minus the import share of the economy, raised to a negative power that depends on the specific details of the model. In the Krugman monopolistic competition model with homogeneous firms, that power depends on the elasticity of substitution in consumption. In the Melitz model with heterogeneous firms that have a Pareto distribution for productivities, the same formula for the gains from trade holds, but the power depends on the Pareto parameter.¹⁰ I argue that this result obtains in the Melitz model because import competition drives out a number of domestic varieties that just cancel out in welfare terms, so that the only remaining source of gains from trade is productivity improvements.¹¹ Remarkably, Arkolakis, Costinot, and Andres Rodriguez-Clare have recently argued that a similar result holds in a broader class of models. The fact that such a simple formula for the gains from trade arises in models that can be quite complex in their market structure leads them to pose the question: "new trade models, same old gains?"¹²

This view has been challenged in other recent work. Weinstein and I estimate a monopolistic competition model with heterogeneous firms, where the aggregate consumer has translog preferences.¹³ In that case, the markups charged by firms are endogenous, and we do not expect that the gains from trade depend only on the import share. We estimate the gains from rising imports over 1992-2005 for the U.S. economy, and find that the gains from reduced markups are on the same order of magnitude as the gains attributable to increased import variety.

Ina Simonovska also obtains variable markups, as discussed above, as do Beatriz de Blas and Katheryn Russ in the context of the model by Bernard, Eaton, Jensen, and Kortum.¹⁴ In that model, Bertrand competition leads to markups that equal the difference between the productivity of the most efficient and second-most efficient firms. But with entry by a finite number of potential rivals, de Blas and Russ show that these markups are not fixed by the productivity distribution of firms, but depend on the number of rivals. If opening to trade alters the number of potential rivals, then markups will also change. In that case, we can conjecture that the gains from trade will not depend on only the import share and a parameter. Understanding the class of models in which this conjecture holds true is an important direction for further research.

¹J. Harrigan and G. Barrows, "Testing the Theory of Trade Policy: Evidence from the Abrupt End of the Multifibre Arrangement," NBER Working Paper No. 12579, October 2006, and in The Review of Economics and Statistics, vol. 91(2) (November 2009), pp. 282-94.

²B. Blonigen, B. H. Liebman, J. R. Pierce, and W. W. Wilson, "Are All Trade Protection Policies Created Equal? Empirical Evidence for Nonequivalent Market Power Effects of Tariffs and Quotas," NBER Working Paper No. 16391, September 2010.

³D. H. Autor, D. Dorn, and G. Hanson, "The China Syndrome: Local Labor Market Effects of Import Competition in the U.S.," presented at the International Trade and Investment Program Meeting, March 25-26, 2011.

⁴J. McLaren and S. Hakobyan, "Looking for Local Labor-Market Effects of the NAFTA," NBER Working Paper No. 16353, November 2010.

⁵K. Handley and N. Limao, "Trade and Investment under Policy Uncertainty: Theory and Firm Evidence," presented at the International Trade and Investment Program Meeting, March 25-26, 2011.

⁶P. Aghion, P. Antras, and E. Helpman, "Negotiating Free Trade," NBER Working Paper No. 10721 September 2004, and in Journal of International Economics, vol. 73(1) (September 2007), pp. 1-30.

⁷K. Bagwell and R. W. Staiger, "What Do Trade Negotiators Negotiate About? Empirical Evidence from the World Trade Organization," NBER Working Paper No. 12727, December 2006; P. Antras and R. W. Staiger, Offshoring and the Role of Trade Agreements," NBER Working Paper No. 14285, August 2008; K. Bagwell and R. W. Staiger, "Profit Shifting and Trade Agreements in Imperfectly Competitive Markets," NBER Working Paper No. 14803, March 2009; K. Bagwell, "Self-Enforcing Trade Agreements and Private Information," NBER Working Paper No. 14812, March 2009; K. Bagwell and R. W. Staiger,"Delocation and Trade Agreements in Imperfectly Competitive Markets," NBER Working Paper No. 15444, October 2009; K. Bagwell and R. W. Staiger, "The WTO: Theory and Practice," NBER Working Paper No. 15445, October 2009; K. Bagwell and R. W. Staiger, "The Economics of Trade Agreements in the Linear Cournot Delocation Model," NBER Working Paper No. 15492, November 2009; R. W. Staiger and A. O. Sykes, "International Trade and Domestic Regulation," NBER Working Paper No. 15541, November 2009.

⁸R. Ossa, "A 'New Trade' Theory of GATT/WTO Negotiation," NBER Working Paper No. 16388, September 2010.

⁹H. Horn, G. Maggi, and R. W. Staiger, "Trade Agreements as Endogenously Incomplete Contracts," NBER Working Paper No. 12745, December 2006, and in American Economic Review, vol. 100(1) (March 2010), pp. 394-419; G. Maggi and R. W. Staiger, "On the Role and Design of Dispute Settlement Procedures in International Trade Agreements," NBER Working Paper No. 14067, June 2008; G. Maggi and R. W. Staiger, "Breach, Remedies and Dispute Settlement in Trade Agreements," NBER Working Paper No. 15460, October 2009.

¹⁰C. Arkolakis, S. Demidova, P. J. Klenow, and A. Rodriguez-Clare, "Endogenous Variety and the Gains from Trade" NBER Working Paper No. 13933, April 2008, and in American Economic Review, vol. 98(2) (May 2008), pp. 444-50.

¹¹R. C. Feenstra, "Measuring the Gains from Trade under Monopolistic Competition," NBER Working Paper No. 15593, December 2009, and Canadian Journal of Economics, 43(1), (February 2010), pp. 1-28.

¹²C. Arkolakis, A. Costinot, and A. Rodriguez-Clare, "New Trade Models, Same Old Gains?" NBER Working Paper No. 15628, December 2009, and forthcoming, American Economic Review.

¹³R. C. Feenstra and D. E. Weinstein, "Globalization, Markups, and the U.S. Price Level," NBER Working Paper No. 15749, February 2010.

¹⁴B. de Blas and K. Russ, "Teams of Rivals: Endogenous Markups in a Ricardian World" NBER Working Paper No. 16587, December 2010; A. B. Bernard, J. Eaton, J. B. Jensen, and S. Kortum, "Plants and Productivity in International Trade," NBER Working Paper No. 7688, May 2000, and American Economic Review, vol. 93(4) (September 2003), pp.1268-90.

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21st century regionalism and the WTO

Richard Baldwin argues that:

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• today regionalism is qualitatively different to that of the 1990s;
• the traditional building-stumbling-block approach and Vinerian economics on which it is premised are not up to the job of analysing this new regionalism; and
• 21st century regionalism has quite different ramifications for the world trading system than 20th century regionalism did.

In a nutshell, 21st century regionalism is not primarily about preferential market access as was the case for 20th century regionalism; it is about disciplines that underpin the trade-investment-service nexus. This means that 21st century regionalism is driven by a different set of political economy forces; the basic bargain is “foreign factories for domestic reforms” – not “exchange of market access”. As 21st century regionalism is largely about regulation rather than tariffs, regulatory economics is needed rather than Vinerian tax economics. Finally, 21st century regionalism is a serious threat to the WTO’s centrality in global trade governance, but not for the reason suggested by the old building-stumbling-block thinking. 21st century regionalism is a threat to the WTO’s role as a rule writer, not as a tariff cutter.

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Here is a link to Baldwin’s paper 21st Century Regionalism: Filling the gap between 21st century trade and 20th century trade rules

Food deficit districts in Terai region of Nepal

The Terai region is considered as the ‘bread basket’ of Nepal. However, it too is facing deficit food production this year. Even the ten major food surplus districts in the Terai region have insufficient production right now. A total of 43 out of 75 districts are facing food deficit in Nepal.

Since the major food producing region itself is facing food deficit, it will impact food availability and food security throughout the country. Also, food import bills will rise, further increasing total trade deficit. The table below shows that Mountain and Hill regions have deficit food production. Apart from the production in Terai region, a large amount is imported to meet total food demand. [Note that one ton= 1000 kg and 1mt = 10^6 tons].

Cereal production (mega tons) in FY 2009/10
Region	Total edible production	Total requirement	Balance	% balance of total requirement
Mountain	279765	376982	-97217	-26
Hill	2040441	2451345	-410904	-17
Terai	2647263	2469117	178149	7
TOTAL	4967469	5297444	-329972	-6.23

Food insufficient districts in Terai region: Sunsari, Saptari, Siraha, Dhanusa, Mahottari, Sarlahi, Rautahat, Chitwan, Dang and Kailali

Districts with decreasing food surplus in Terai region: Jhapa, Morang, Bara, Parsa, Nawalparasi, Banke, Bardia, Kapilvastu, Rupandehi and Kanchanpur

Reason for deficit production: uncontrolled urbanization and plotting of agriculture land for real estate

Nepal imported 350,000 tons of food grains during fiscal year 2009/10. Nepal´s average food grains import for the past five years before 2009/10 was 250,000 tons a year. The government had estimated food deficit of 316,000 tons across the country in 2009/10.

Good prospect in FY 2010/11 (adapted from Republica)

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Buoyed by 11 percent rise in cereal crop production in 2009/10, the government expects food surplus of 10,000 to 15,000 tons in 2010/11. The government has put paddy, maize, wheat, millet, barley and buckwheat under cereal crop category.The MoCA has projected rise in production of all crops except jute, tobacco and black cardamom.

According to MoCA´s projections, total cereal production increased to 8.61 million tons during 2010/11, up from 7.76 million tons recorded in the last fiscal year. Maize and paddy production increased by 10.85 percent and 11.45 percent respectively to 4.46 million tons and 2.06 million tons respectively compared to the figures of last year.

Production of wheat increased by 12 percent to 1.74 million tons, while barley production rose by 10 percent to 30,000 tons. Production of millet and buckwheat increased to 303,000 tons and 8,841 tons respectively.

Reason for good harvest: favorable monsoon, increasing use of improved seeds, easy availability of chemical fertilizers and lower rates of crop damage due to natural disasters.

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16 Things You Didn't Know About Africa

1. The largest population in Sub-Saharan Africa (SSA) is 151.3 million in NIGERIA. The smallest is 0.1 million (100,000) in Seychelles.
2. Total trade as a percentage of gross domestic product (GDP) is the highest in Seychelles: 283.4 percent and lowest in Central Africa Republic: 37.5 percent.
3. In two thirds of SSA countries, only one or two products are responsible for 75 percent or more of the country’s total exports.
4. Cape Verde receives the highest net official development assistance (ODA ) per capita: $438.20. Nigeria receives the lowest: $9.50.
5. The percentage of parliamentary seats held by women is highest in Rwanda with 56.3 percent, and lowest in São Tomé and Príncipe with 1.8 percent.
6. Only 5.7 percent of births in Ethiopia are attended by skilled personnel compared to 98.4 percent in Mauritius.
7. Youth literacy (ages 15-24) is highest in Gabon at 97 percent and lowest inBurkina Faso at 39.3 percent.
8. The highest connection charge for a business phone is $366.60 in Benin. The lowest is in Ghana at $0.70.
9. In South Africa there are 924 mobile phones per 1000 people. In Eritrea there are 22 per 1000 people.
10. In Côte d’Ivoire it takes 16.6 days on average to clear customs on direct exports, compared with 3.8 days in Gabon. Imports, on the other hand, take 31.4 days to clear customs in the Republic of Congo, compared to 4.4 days in Lesotho.
11. The percentage of firms that identify corruption as a major constraint to doing business was highest in Côte d’Ivoire at 75.0 percent, while the lowest is in Ghana with 9.9 percent.
12. In Chad, 37 percent of children who start first grade make it to the fifth grade, versus 99 percent in Mauritius.
13. In Sierra Leone 272 out of every 1,000 children die before the age of five. In Seychelles, the number is 13 per 1,000.
14. In Somalia, 29 percent of the population has access to a safe source of water. In Mauritius, access is 100 percent.
15. In Sierra Leone, 3 persons per 1,000 are Internet users. In Seychelles, where there were 212 computers per 1,000 people for the period 2005-2007, 371 in every 1,000 people are Internet users.
16. South Africa has the highest carbon dioxide emissions: 414,649 metric tons, while Comoros has the lowest: 88 metric tons.

Adapted from Development Outreach

Inter-sectoral productivity gaps and structural change

Structural change happens when an economy shifts its sources of growth and employment from agriculture to non-agriculture activities. As factors of production (labor and capital) move away from agriculture into modern economic activities overall productivity rises and incomes expand. The rate at which overall productivity rises in different non-agriculture activities (inter-industry productivity gaps) plays a vital role in bringing about and sustaining this change. [Productivity is defined as the ratio of each sector’s value added to employment in that sector.]

When compared to developed countries, developing countries are characterized more by large productivity gaps among firms and plants within same industry. This is indicative of allocative inefficiencies that reduce overall labor productivity. The inter-sectoral productivity gaps (the differences in average labor productivity) are a feature of underdevelopment.

But, productivity gaps among firms in the same or different industry can be an important source of growth, argues Rodrik and McMillan (2011) in the latest working paper (Globalization, Structural Change, and Productivity Growth). The reason is that when factors of production (mostly labor and capital) move from less productive to more productive activities, the economy grows even if there is no productivity growth within sectors. The movement of labor from low-productivity to high-productivity activities raises economy-wide labor productivity. This is growth-enhancing structural change, which the high-income countries have. The main messages of their paper are:

• In many Latin American and Sub-Saharan African countries broad patterns of structural change have served to reduce rather than increase economic growth since 1990. Factors of production (labor) are moving into less productive sectors (informal and agriculture) from more productive ones in these regions. The opposite happened and is happening in Asia. This is especially true after trade liberalization as competition forced firms to exit the market, forcing them to lay off workers who ended up in the informal sector and low paying services job. [This is happening in Nepal as well. A number of garment workers that were laid off beginning 2000 have gone into the informal sector where wages are low.] The average manufactures-agriculture productivity ratio is 2.3 in Africa, 2.8 in Latin America, and 3.9 in Asia.
  
• Factors that help determine if structural change is going in the right direction (and policy intervention might help): (i) Economies with relative comparative advantage (RCA) in primary products are at a disadvantage as their large share of natural resource exports means that the scope of productivity-enhancing structural change is narrow. These sectors cannot absorb much surplus labor form agriculture. (ii) Countries that maintain competitive or undervalued currencies tend to experience more growth-enhancing structural change as there is positive effect of undervaluation on modern, tradable industries. (iii) Countries with more flexible labor markets have greater growth-enhancing structural change as rapid structural change occurs when labor mobility across firms and sectors is high. [(ii) and (iii) is true in the case of Nepal; (i) may be true if we starting producing hydroelectricity and export it to India like Bhutan is doing.]
  
• Agriculture is the sector with the lowest productivity in poorest economies.
• During economic growth the productivity gap between agricultural and non-agricultural sectors first increases and then falls, exhibiting a U-shaped pattern (ratio of agricultural to non-agricultural productivity with respect to economy-wide labor productivity). The turning point comes at an economy-wide productivity level of around $9000—a development level somewhere between that of India and China. Initially, there is no large productivity gap between agricultural and non-agricultural sectors in poor countries. As economy grows, labor begins to move from traditional to modern sectors, thus leading to convergence of productivity levels across sectors in the economy [First, labor moves from agri to non-agri sector, increasing productivity in non-agri sector and also in agri sector (due to less labor). Then, diminishing marginal returns kicks in in the non-agri sector. Eventually, productivity level converges within sectors and also within countries with same income levels.]

• Differential pattern of structural change account for a bulk of the difference in regional growth rates.
• Domestic convergence, just like convergence with rich countries, is not an unconditional process. Starting out with a high share of labor force in agriculture may increase the potential for structural-change induced growth (not applicable to those having strong comparative advantage in primary products), but the mechanism is clearly not automatic.

This paper contributes Hausmann’s and his work on structural change induced by “jumping monkeys”, where production is moved from one product to another having similar features and using pretty much similar (or upgraded) factors of production. It involves (structural change) moving from the production of peripheral goods to core goods in product space.

Causes of the Great Trade Collapse of 2009

This blog post is adapted from Robert C. Feenstra’s¹ summary of research of the International Trade and Investment (ITI) Program at NBER. It summarizes various papers that explore and explain the causes of the great trade collapse of 2009. Here is a blog post about what economists thought were the reasons for the collapse in trade by about 30 of world GDP in 2009.

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The financial crisis and great recession of 2008-9 brought with it a "great trade collapse": world trade relative to GDP fell by nearly 30 percent between these two years, exceeding the experience of other post-war recessions. Why did trade fall so much, and why did it recover relatively quickly? The leading explanations stress, in varying degrees, the roles of: inventory adjustment for imports; demand for durable versus non-durable goods; the use of intermediate inputs in trade, which might magnify the impact on trade as "supply chains" are temporarily disrupted; and the role of trade credit, which appears to have dried up temporarily during the crisis.

Beginning with the last of these explanations, Kalina Manova and her co-authors provide the strongest evidence supporting the role of credit constraints on exports. These constraints limit the extensive margin of exports in sectors that are most vulnerable to financial stress.² Furthermore, she argues that such sectors faced greater reductions in their exports to the U.S. market during the financial crisis. ³ That idea is confirmed for Japan by Mary Amiti and David Weinstein.⁴ They find that Japanese exporters faced greater reductions in their sales abroad if they were affiliated with main banks that performed poorly. Focusing on China, my co-authors and I find that firms faced tighter credit constraints on their exports than on their domestic sales, and that exports experienced a significant slowdown because of the 2008 crisis.⁵ Ann E. Harrison and her co-authors find that, for the United States, import prices often rose during the crisis, which is inconsistent with falling demand but can arise from a supply constraint, such as a lack of export credit.⁶

Other work casts some doubt on the importance of export credit. George Alessandria and co-authors instead stress the role of inventory adjustment, which can lead to a rapid fall in imports as stocks are adjusted downwards.⁷ Andrei Levchenko, Logan Lewis, and Linda Tesar also find a limited role for trade credit in their regression analysis of U.S. trade, but they use an accounting definition of "trade credit" that applies equally well to exports or domestic sales.⁸ As an alternative explanation, they find that sectors which are more reliant on imported intermediate inputs suffered more during the crisis, because these supply chains were temporarily disrupted. Fabio Ghironi and his co-authors also stress the importance of imported inputs. They model the different components of aggregate demand (consumption, investment, government spending, and exports) as having different import intensities.⁹ They then construct a weighted average of those factors with the weights reflecting their import intensities. Using the resulting variable as an income term, and including an import price, they are able to construct a model that predicts the fluctuations in import demand during the current crisis and earlier episodes much more accurately than do conventional methods that rely on GDP and aggregate prices.

Of course, in the end it will be a combination of factors that explain the great trade collapse: even if inventories or imported intermediates are more important quantitatively, that finding need not detract from the significance of trade credit. Amiti and Weinstein, for example, argue that trade credit can account for about 20 percent of the fall in exports for Japan, so it was not the most important factor, but it was still economically significant. That point is also made for Peruvian exports by Veronica Rappoport and co-authors, who argue that the reduction in loans from banks performing poorly reduced aggregate exports by 15 percent during the crisis.¹⁰ Perhaps the most comprehensive evaluation of the different factors contributing to the great collapse in trade was written by Jonathan Eaton, Sam Kortum, Brent Neiman, and John Romalis.¹¹ They argue that the relative decline in demand for manufactures was the most important driver of the decline in manufacturing trade, and especially the decline in demand for durable manufactures. These factors account for more than 80 percent of the global decline in trade/GDP. While they find that trade frictions increased and played an important role in reducing trade in some countries, notably China and Japan, these frictions only had a small impact on global trade.

¹ Feenstra directs the NBER's Program on International Trade and Investment and is a Distinguished Professor of Economics at the University of California, Davis.

² K. Manova, "Credit Constraints, Heterogeneous Firms, and International Trade," NBER Working Paper No. 14531, December 2008.

³ D. Chor and K. Manova, "Off the Cliff and Back? Credit Conditions and International Trade during the Global Financial Crisis," NBER Working Paper No. 16174, July 2010.

⁴ M. Amiti and D. E. Weinstein, "Exports and Financial Shocks," NBER Working Paper No. 15556, December 2009.

⁵ R. C. Feenstra, Z. Li, and M. Yu, "Exports and Credit Constraints under Incomplete Information: Theory and Evidence from China," NBER Working Paper No. 16940, April 2010.

⁶ M. Haddad, A. E. Harrison, and C. Hausman, "Decomposing the Great Trade Collapse: Products, Prices, and Quantities in the 2008-2009 Crisis," NBER Working Paper No. 16253, August 2010.

⁷ G. Alessandria, J. P. Kaboski, and V. Midrigan, "The Great Trade Collapse of 2008-09: An Inventory Adjustment?" NBER Working Paper No. 16059, June 2010.

⁸ A. A. Levchenko, L.T. Lewis, and L. L. Tesar, "The Collapse of International Trade During the 2008-2009 Crisis: In Search of the Smoking Gun," NBER Working Paper No. 16006, May 2010.

⁹ M. Bussiere, G. Callegari, F. Ghironi, G. Sestieri, and N. Yamano, "Estimating Trade Elasticities: Demand Composition and the Trade Collapse of 2008-09," presented at the International Trade and Investment Program Meeting, March 25-26, 2011.

¹⁰ D. Paravisini, V. Rappoport, P. Schnabl, and D. Wolfenzon, "Dissecting the Effect of Credit Supply on Trade: Evidence from Matched Credit-Export Data," NBER Working Paper No. 16975, April 2011.

¹¹J. Eaton, S. Kortum, B. Neiman, and J. Romalis, "Trade and the Global Recession," NBER Working Paper No. 16666, January 2011.

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