External integration, structural transformation, and economic development: Evidence from Argentina 1870-1914
Pablo Fajgelbaum, Stephen Redding12 July 2014
External integration is often viewed as an important driver of economic development, but most existing studies use aggregate data. This column present evidence from a natural experiment provided by Argentina’s integration into the world markets in the late 19th century. The findings suggest that proximity to trade centres is associated with employment density, high lands rates relative to wages, and structural transformation away from agriculture.
Oleg Itskhoki, Marc Muendler, Stephen Redding, Elhanan Helpman
External economic integration is often argued to be an important driver of economic development, as it raises income through specialisation in comparative-advantage sectors, provides low-cost access to imported goods, and shapes the pattern of structural transformation from agricultural into non-agricultural activities. These relationships are typically examined at the aggregate level, implicitly treating each country as a point in space.
Despite substantial integration, national borders still provide a large obstacle to trade in Europe. This column shows that much of these ‘iceberg costs’ can be attributed to underdeveloped infrastructure, namely roads. Improving international roadways to the level of national ones could substantially raise gains to trade.
Jean-François Arvis, Yann Duval, Ben Shepherd, Chorthip Utoktham
Over the past 60 years, increasing European integration has brought peace and security, besides contributing to large social welfare gains (through lower prices and a larger variety of products). Still, national borders matter a lot within Europe and a vast literature has documented the large negative effect of national borders on trade – also known as the border effect (Nitsch 2000, Head and Mayer 2000, Anderson and van Wincoop 2003, de Serres et al. 2001, Chen 2004).
Jean-François Arvis, Yann Duval, Ben Shepherd, Chorthip Utoktham17 March 2013
The world ain’t flat. Distance has massive effects on all manner of international flows, but measuring its empirical impact has been hindered by poor measurement of bilateral trade costs. This column introduces a new global dataset of bilateral trade costs prepared by UNESCAP and the World Bank. The data stress the importance of supply chains and connectivity constraints in explaining the higher costs and lower levels of trade integration observed in developing countries.
Do falling trade costs benefit all countries equally?
Dennis Novy11 October 2012
Trade barriers such as transportation costs and tariffs reduce international trade. But when these trade barriers come down, do they increase international trade equally among countries? This column presents evidence from OECD countries that trade costs have a differential impact depending on the trade intensity of the countries involved. When they already trade a lot, country pairs hardly benefit. But bilateral trade grows faster when the initial trade relationship was thin.
When the Great Recession hit in 2008, many countries experienced a collapse of their exports and imports. For example, US exports went down by around 25% between 2008 and 2009, and Japanese exports declined by a staggering 40%. This Great Trade Collapse has attracted a lot of attention (see Baldwin 2009). Leading explanations include a sharp drop in demand and a trade-credit crunch.
Trade relationships often last for a surprisingly short period of time. Previously this was explained by failed export efforts. Instead, this column shows that it may be optimal for firms to export a certain product to a country only every once in a while. This requires less investment at the beginning and this strategy is often used by firms which are less productive or face credit constraints; this is especially true for farther and smaller markets.
Empirically, there is a hump-shaped curve relating export diversification and economic development (Cadot et al. 2011). Many countries on the rising part of the curve seek to diversify their exports (in terms of shipped products and destinations) as a way of boosting income or reducing risk.
This paper compares the impact of distance, a standard proxy for trade costs, on eBay and offline international trade flows, finding that the effect of distance to be on average 65% smaller on the eBay online platform than offline, and that online markets can help overcome government and offline market failures.
The 1967-75 Suez Canal closure: Lessons for trade and the trade-income link
James Feyrer23 December 2009
The effects of distance on trade and of trade on income have puzzled economists for centuries. This column presents new evidence from a natural experiment – the 1967-1975 closure of the Suez Canal. Results suggest that a 10% decrease in ocean distance results in a 5% increase in trade. Also, it estimates that every dollar of increased trade raises income by about 25 cents.
Does the removal of trade barriers increase trade? Does trade increase income? These questions are crucial for thinking about the impact of trade liberalisation and yet they are extremely difficult to answer. Ever since Smith and Ricardo, economists have firmly believed that trade increases income. The correlation between trade and income at the country level has been extensively documented (Sachs and Warner 1995, Dollar 1992 and Edwards 1998), but it is hard to know whether trade increases income or income increases trade.
Explaining two trade busts: Output vs. trade costs in the Great Depression and today
Douglas L. Campbell, Christopher M. Meissner, Dennis Novy, David Jacks19 September 2009
Trade has declined massively during the crisis. This column assesses the relative roles of falling demand and rising trade costs in explaining the collapse and compares it to the Great Depression. Surprising, the increase in trade costs today is as large as in 1929, despite the absence of any modern protectionism resembling Smoot-Hawley. It appears that reviving global demand alone will be insufficient to revive world trade.
If the world economy is now in “purgatory,” as Paul Krugman recently suggested on a TV talk show, global trade has gone to hell and not yet returned. Between July of 2008 and February of 2009, nominal world trade plummeted by 42%.
The sensitivity of bilateral trade flows to distance has remained unchanged or increased over the last half century, even in the face of unprecedented levels of global trade. This column shows that the effect of distance dramatically declined during the nineteenth century as trade costs fells, suggesting that trade costs may have not declined nearly as dramatically in recent decades as has been assumed.
Since Cairncross (1997), the notion of the “death of distance” has gained traction, both in the work of academics but more especially in the popular image of globalisation. Citing radical improvements in the cost and efficacy of long-distance communication and transportation, Cairncross depicts a world marked by the free movement of goods, people, and ideas. Unfortunately, this prognosis has been difficult to identify in present-day trade data.
What jobs are headed overseas? This column emphasises that the feasibility of offshoring tasks is heavily influenced by the costs of transferring technology and managing complex tasks. Offshoring may be less about lower factor costs and more about the race between technology transfers and trade costs.
Offshoring is the movement of jobs to other countries. While this may raise overall welfare, it means lower employment opportunities and possibly lower wages domestically. Offshoring is the major cause for the decline in self-reported work life quality in many countries. For example, in the US there are six workers that view offshoring negatively for every one worker that sees it as a positive influence (Pew Center 2006). Such a negative impression makes public policy backlash likely. No less important for the policy debate is offshoring’s prevalence.