Sources of Export Growth in Developing Countries

Abstract

In this paper, we examine the contribution of changes in export competitiveness and importer GDP growth to growth in exports for developing countries. Using the Eaton and Kortum (2002) model of trade as a basis for specifying a gravity model, we estimate bilateral export growth by sector as a function of exporter fixed effects, which capture changes in national export capability, importer fixed effects, which capture changes in national demand conditions, and changes in trade costs. Estimates of exporter fixed effects reveal the contribution of changes in supply conditions to export growth and how these conditions vary across exporting countries. In the 2000s, developing countries experienced pronounced improvements in export competitiveness relative to developed economies, with the strongest performance occurring in middle income nations in East Asia and the Pacific. Europe and Central Asia and Latin America and the Caribbean also performed well, though Sub-Saharan Africa suffered declines in competitiveness across the board. Changes in export competitiveness can account for over 10 percent of variation in bilateral export growth over the 2000 to 2007 period. GDP growth in exporting countries explains a small fraction of changes in export competitiveness, suggesting that changes in export capabilities are not simply a byproduct of overall economic expansion. As a second exercise, we replace importer fixed effects in the gravity model with importer GDP broken down into two components, one associated with trend GDP and a second associated with cyclical variation in GDP, where we use the Hodrick Prescott filter to decompose GDP. In the BRICs, income growth in the 2000s was associated almost entirely with the GDP trend. Other middle income countries have a more varied experience, with Asian nations (Indonesia, Malaysia, Thailand) showing high trend growth and dampened volatility (outside of the Asian financial crisis in 1997-1998) and Latin American nations (Argentina, Mexico, Venezuela) showing more modest trend growth and higher volatility. The GDP trend in large high income nations is flat in comparison to middle income countries. Estimating a gravity model of trade using trend and cyclical GDP as separate regressors allows one to gauge how much of growth in trade is associated with trend growth in expenditure versus its cyclical variation. While growth in bilateral trade is strongly positively correlated with changes in trend GDP it is weakly correlated with changes in the cyclical component of GDP, suggesting that the recent growth in trade derives from structural economic growth in importing nations. If GDP trends in middle income countries persist, there would appear to be a strong basis for developing nations to be a significant source of import demand growth in the coming decade. This possibility is especially important for growth in trade, given the likelihood that the European Union, Japan, and the United States may have anemic growth in the medium run.