Economic Development through Export Promotion

If economic development is essentially about an economy’s transition from agricultural to industrial production, then the attainment of a comparative advantage in industrial products is widely regarded to be the hallmark of successful development.  Against this backdrop, governments aiming to promote development often seek to do so partly through the promotion of industrial exports.  In light of this, a literature has developed in economics recently to understand whether and under what circumstances policy to promote exports has been successful.

This recent literature focuses on two different types of market imperfection that could motivate government intervention to promote exports.  The first involves hysteresis in exporting.  This is driven by firm heterogeneity in productivity and a sunk cost to foreign market entry, whereby the return to becoming an exporter today includes the option value of continuing to exporting in future without incurring start-up costs.  The second type of market imperfection involves a cost of self-discovery both of new products and of new markets based on learning about the specific products in which a country has a comparative advantage.  In both cases an across-the-board policy to promote exports is found to address the market imperfection: export subsidy and a real exchange rate depreciation respectively.  The main policy conclusion is that an appropriate government policy can help to circumvent the externalities that firms face and hence promote industrial development.  But to be successful these policies must allow the market, as opposed to the government, to determine which firms and products prevail.  While these policy conclusions are promising for economic development in and of themselves, they risk imposing mercantilist or begger-thy-neighbour externalities of their own on other countries.  Indeed, such are the risks associated with export subsidies that there is an initiative at the WTO to phase them out altogether.  Therefore, future research could usefully evaluate whether and how policies can address domestic market imperfections associated with underdevelopment without imposing adverse effects on other nations.

Bernard, A.B., J. Eaton, J.B. Jensen and S. Kortum, (2003); “Plants and Productivity in International Trade.American Economic Review, 93(4): 1268-1290. [Working paper version]

Das, S., M.J. Roberts and J.R. Tybout (2007); “Market Entry Costs, Producer Heterogeneity, and Export Dynamics.” Econometrica, 75(3): 837-873. [Working paper version]

Dixit, A., (1989); “Hysteresis, Import Penetration, and Exchange Rate Pass-Through.” Quarterly Journal of Economics, 104(2): 205-228.

Fernandes, A., and H. Tang, (2014); “Learning to Export from Neighbors.Journal of International Economics, 94(1): 67-84. [Working paper version]

Freund, C., and M.D. Pierola, (2012); “Export Surges.Journal of Development Economics 97: 387-395.

Hausmann, R., and D. Rodrik, (2003); “Economic Development as Self Discovery.Journal of Development Economics, 72(2): 603-633. [Working paper version]

How Applicable is An Economic Theory of the GATT to Developing Countries?

According to “An Economic Theory of the GATT” by Bagwell and Staiger (1999), the main purpose of a trade agreement is to escape from a terms-of-trade driven prisoner’s dilemma. This is where all countries have a collective incentive to liberalise trade but an individual incentive to adopt protectionist measures such as tariffs. Recent econometric evidence suggests that even relatively small countries set tariffs to leverage their power on world markets, broadening the applicability of the theory. Subsequent developments of the theory argue that in an uncertain world it is efficient to write a trade agreement as an incomplete contract that does not specify the exact levels of tariffs but instead imposes tariff ceilings that allow a degree of flexibility. Recent research uncovers an intriguing empirical regularity. On average small countries, which tend to be developing nations, set their applied tariff rates further below their tariff bindings than large countries, which tend to be developed, do. The explanation proposed is that larger countries, having more power on world markets than small countries do, have a greater incentive to behave opportunistically by raising their tariffs and hence must be bound more tightly by any agreement that is reached.

Bagwell K. and R. Staiger, (1999); “An Economic Theory of GATT.American Economic Review 89 (1), 215-248. [Working paper version]

Bagwell K. and R. Staiger, (2011); “What Do Trade Negotiators Negotiate About? Empirical Evidence From The World Trade Organization.American Economic Review, 101(4): 1238-73. [Working paper version]

Beshkar M. (2010); “Optimal Remedies in International Trade Agreements.” European Economic Review 54(3), 455-466.

Beshkar M. and E. Bond, (2013); “Cap and Escape in Trade Agreements.” University of New Hampshire and Vanderbilt University typescript. [Working paper version]

Beshkar M., E. Bond and Y.-W. Rho, (2012); “Tariff Binding and Overhang: Theory and Evidence.” University of New Hampshire and Vanderbilt University typescript. [Working paper version]

Broda C., N. Limão and D. Weinstein, (2008); “Optimal Tariffs and Market Power: The Evidence.American Economic Review 98(5), 2032-2065. [Working paper version]

Horn H., G. Maggi, and R. Staiger (2010); “Trade Agreements as Endogenously Incomplete Contracts.American Economic Review, 100(1), 394-419. [Working paper version]

Syropoulos C., (2002); “Optimal Tariffs and Retaliation Revisited: How Country Size Matters.The Review of Economic Studies, 69 (3): 707-727.

The TRIPS Agreement and Industrial Development

The Trade Related Aspects of Intellectual Property (TRIPS) agreement is an undertaking by members of the World Trade Organisation (WTO) to respect each others’ property rights.  At its inception, its main purpose was to protect the intellectual property rights (IPRs) of Northern firms, who have historically tended to be the main innovators, in Southern markets where imitation was prevalent.  In the Uruguay Round where the WTO was formed, the terms of TRIPS were agreed to as a quid pro quo for easier entry of Southern products into Northern markets.  One of the main concerns that has arisen as a result of TRIPS is the effect on Southern industrial development of tighter intellectual property protection, since imitation by firms in the South that is widely seen as a precursor to innovation has been curtailed by TRIPS. On the other hand, TRIPS proponents argue that stronger IPRs world-wide will not only increase incentives for innovation but also foster industrial development in developing countries by encouraging multinationals to move production there. A key point established in this literature is that the effects of increased IPR protection in the South on the Northern rate of innovation depend critically on whether production shifts to the South via imitation of Northern firms or via North–South FDI. Recent research has produced a unified framework in which Northern innovation, Southern imitation and the North–South flow of FDI respond endogenously to changes in the degree of Southern IPR protection available to Northern firms, wherein the South’s share of the global basket of goods can actually increase with a strengthening of Southern IPR protection. Econometric testing finds some supportive evidence in the data.

Branstetter L., R. Fisman and F. Foley, (2006); “Do stronger intellectual property rights increase international technology transfer? Empirical evidence from U.S. firm-level data.Quarterly Journal of Economics, 121(1): 321–349. [Working paper version]

Branstetter L., R. Fisman, F. Foley and K. Saggi, (2011); “Does intellectual property rights reform spur industrial development?Journal of International Economics, 83(1): 27–36. [Working paper version]

Branstetter L., and K. Saggi, (2011); “Intellectual Property Rights, Foreign Direct Investment and Industrial Development.” Economic Journal, 121(555): 1161–1191. [Working paper version]

Chaudhuri, S., P .Goldberg and P. Jia, (2006); “Estimating the effects of global patent protection in pharmaceuticals: a case study of quinolones in India.” American Economic Review, 96(5): 1477–514. [Working paper version]

Chen, Y. and T. Puttitanun, (2005); “Intellectual Property Rights and Innovation in Developing Countries.” Journal of Development Economics, 78(2): 474–93.

Goldberg P.K., (2010); “Intellectual property rights protection in developing countries: the case of pharmaceuticals.Journal of the European Economic Association, 8(2-3): 326-353. [Working paper version]

Grossman, G.M. and E. Helpman, (1991a); Innovation and Growth in the Global Economy, Cambridge: MIT press.

Grossman, G.M. and E. Helpman, (1991b); “Endogenous product cycles.Economic Journal, vol. 101(3): 1214–29.[Working paper version]

Grossman, G.M. and E. Lai (2004); “International Protection of Intellectual Property.American Economic Review, 94 (5): 1635-53.[Working paper version]

Helpman, E., (1993); “Innovation, imitation, and intellectual property rights.Econometrica, 61(6): 1247–80.[Working paper version]

Ivus, O., (2010); “Do stronger patent rights raise high-tech exports to the developing world? ” Journal of International Economics, 81(1): 38–47. [Working paper version]

Javorcik B., (2004); The composition of foreign direct investment and protection of intellectual property rights in transition economies, European Economic Review, 48(1):39–62. [Working paper version]

Lai, E., (1998); “International intellectual property rights protection and the rate of product innovation.” Journal of Development Economics, 55(1): 133–53.[Working paper version]

Reforming the World Trading System to Better Integrate Developing Countries

Ever since the conclusion of the Uruguay Round of the General Agreement on Tariffs and Trade (GATT) in 1994, there has been a growing sense that the GATT, and the World Trade Organisation (WTO) that has superseded it, favours the interests of developed countries.  In response to this, a line of research has developed to investigate possible reforms to the world trading system (the set of rules that forms the basis of the GATT/WTO) so that it better represents the interests of developing countries as well.

Bagwell K., Mavroidis, P. and R. Staiger (2007); “Auctioning Countermeasures in the WTO.Journal of International Economics, 73(2), 309-332. [Working paper version]

Bronckers M. and N. Van Den Broek (2005); “Financial Compensation in the WTO: Improving the Remedies of WTO Dispute Settlement.Journal of International Economic Law, 8, 101-126.

Limão N. and K. Saggi (2008); “Tariff Retaliation versus Financial Compensation in the Enforcement of International Trade Agreements.Journal of International Economics 76(1), 48-60. [Working paper version]

Limão N. and K. Saggi (2013); “Size Inequality, Coordination Externalities and International Trade Agreements.” 63: 10-27. [Working paper version]

Schott J. (2009); “America, Europe, and the New Trade Order.Business and Politics, 11(3), 1-22.

Srinivasan T. N. (1999); “Developing Countries in the World Trading System: From GATT, 1947, to the Third Ministerial Meeting of WTO.The World Economy, 22 (8), 1047 – 1064. [Working paper version]

Zissimos B. (2009); “Optimum tariffs and retaliation: How country numbers matter.” Journal of International Economics, 78(2), 276-286. [Working paper version]

Do we know that the WTO increases trade?

The stated mission of the World Trade Organisation (WTO) and the General Agreement on Tariffs and Trade (GATT) that preceded it is ‘to open trade for the benefit of all’.  Rose (2004) questions whether the GATT/WTO is actually accomplishing its mission by showing that, surprisingly, member countries’ trade patterns are little different from those of non-members.  The subsequent debate has focused on differences in trade patterns of developed versus developing country members, arguing that while the GATT failed to promote trade among developing countries, it was successful at promoting trade between countries that are developed. This in turn raises the question of whether the WTO should promote trade among developed and developing countries alike, or whether equity implications of the MFN rule imply that developing countries should be exempted.

Bagwell K. and R. Staiger, (2011); “Can the Doha Round be a Development Round? Setting a Place at the Table” NBER Working Paper No. 17650.

Kennett M., S. J. Evenett and J. Gage , (2005); “Evaluating WTO accessions: legal and economic perspectives.” Geneva: Ideas Centre.

Lawrence R. (2003) Crimes and Punishments? Retaliation under the WTO. Institute of International Economics, Washington, D.C. [Earlier version]

Ludema R. & A. M. Mayda (2009) “Do Countries Free Ride on MFN?Journal of International Economics, 77(2), 137-150. [Earlier version]

Rose A. K., (2004); “Do we really know that the WTO increases trade?” American Economic Review, 94(1): 98-114. [Earlier version]

Rose A. K., (2004): “Response to Subramanian and Wei.”

Rose A. K. (2007); “Do We Really Know That the WTO Increases Trade? Reply.” American Economic Review, 97(5): 2019-2025. [Earlier version]

Saggi K. and F. Sengul , (2009); “On the emergence of an MFN club: equal treatment in an unequal world. Canadian Journal of Economics, 42(1): 267-299. [Earlier Version]

Subramanian A. and S.-J. Wei, (2007); “The WTO Promotes Trade, Strongly But Unevenly.”  Journal of International Economics, 72(1): 151-175. [Earlier version]

Tomz M., J.Goldstein and D. Rivers, (2007); “Do We Really Know That the WTO Increases Trade? Comment.”  American Economic Review, 97(5): 2005–18. [Earlier version]