Trade openness, export structure, and labor productivity in developing countries: Evidence from panel VAR approach

Abstract

This paper investigates the relationship between trade openness and labor productivity by accounting for the level of openness and the structure of exports in 61 developing countries over 1999–2018. Using panel vector autoregressive and Granger causality tests, we provide new evidence on the trade-productivity literature. We show that the trade-led productivity hypothesis does not hold for all countries, and only countries with higher levels of openness display essential productivity gains. We provide evidence for both export-led productivity and productivity-driven export hypotheses in our analysis. It is also evidenced that productivity gains can make domestic market production more efficient by reducing imports and improving the structure of exports. Following the prediction of the Dutch Disease phenomenon, we demonstrate that dependence on primary commodity exports is associated with lower labor productivity. Finally, we find that commodity-based economies should improve the overall labor productivity of their economies to accelerate economic diversification.