Working Paper: CEPR ID: DP1420
Authors: Richard E. Baldwin; Elena Seghezza
Abstract: This paper presents five theoretical openness-and-growth links that can account for trade-induced investment-led growth. The links are all demonstrated with neoclassical growth models developed in the context of trade models that allow for imperfect competition and scale economies. This sort of old-growth-theory-in-a-new-trade model has not been thoroughly explored in the literature since the profession skipped from old-growth-old-trade models straight to new-growth-new-trade models. Nonetheless, such models are necessary to explain several key aspects of the econometric evidence on trade and growth. For example, cross-country data suggests that openness influences growth only via its effect on investment, and suggests that openness promotes investment in all countries whatever the capital-intensiveness of their exports (contrary to predictions of the old-growth-old-trade models).
Keywords: neoclassical growth; trade-induced investment-led growth; trade and growth
JEL Codes: F12; F43
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Trade liberalization (F13) | investment rates (G31) |
| Postwar liberalization of trade (F13) | demand for capital (E22) |
| demand for capital (E22) | capital accumulation (E22) |
| capital accumulation (E22) | investment-led growth (E22) |
| Reciprocal trade liberalization (F13) | marginal cost of investment goods (E22) |
| marginal cost of investment goods (E22) | steady-state capital stock (E22) |
| steady-state capital stock (E22) | transitional growth (O41) |
| Procompetitive effects of trade liberalization (F13) | prices of capital (G31) |
| prices of capital (G31) | steady-state capital stock (E22) |
| steady-state capital stock (E22) | investment-led growth (E22) |