Economic growth takeoffs and the extensive and intensive margins of trade

Abstract

AbstractIn this study, we use a gravity model to investigate the relationship between exports and sudden, prolonged increases in economic growth. Our main contribution is we decompose exports into the extensive and intensive margins when considering this relationship. Using the definition of takeoffs in a country's growth process from Aizenman & Spiegel, we identify 142 economic growth takeoffs. We find that the extensive margin is an important mechanism for export growth and, ultimately, economic growth. We also find evidence that exports increase significantly immediately before, and during, a growth episode, with the extensive margin being entirely responsible for the observed increase in exports. Finally, we find that developing countries see a larger percentage point increase in the extensive margin and decrease in the intensive margin during a takeoff. These results suggest that takeoffs may spur a reduction in the fixed costs to exporting, which propel an increase in the extensive margin. Therefore, export diversification appears to be a potential policy option for those seeking to increase the chances of a growth takeoff in their country, and takeoffs seem to present an opportunity for further export diversification.