Essays on Trade and Development

Abstract

The thesis consists of four core essays which focus on important issues relating to international trade, growth and inequality. The first essay examines the determinants of trade based on global production sharing (network trade) by building a theoretical framework and empirically testing it using a panel dataset covering 44 countries over the period 1996 to 2013. Over the past four decades, network trade has grown at a much faster rate than total world manufacturing trade. Identification of the determinants of this emerging trade pattern is, therefore, important for informing trade policy debates. The model used in the empirical analysis captures a number of important explanatory variables ignored in the previous literature. A range of panel data estimation techniques are used in the model. The results suggest that technology, institutions and macroeconomic stability all play a significant role in determining inter-country differences in network trade. The paper concludes with a discussion on the challenges for policy makers in their attempt to reap gains from global production sharing. The second essay studies the transmission of exchange rate changes into import prices (exchange rate pass-through) in the presence of global production sharing. The chapter builds and simulates a model, which postulates that exchange rate pass-through is lower for network trade compared to final goods trade. It is hypothesised that trade in parts and components, within network trade, is relatively sheltered from exchange rate movements because network trade is largely ‘relationship-specific,' including intra-firm trade. Empirically, exchange rate pass-through is examined using a new dataset of manufacturing import prices compiled from the trade price database of the US Bureau of Labour Statistics. The findings indicate that the degree of exchange rate pass-through into the import prices of parts and components is considerably lower than that for import prices of final goods. These results are robust to a number of sensitivity tests. The third essay examines patterns and determinants of global production sharing with an emphasis on how Australian manufacturing fits into global production sharing. Though Australia is a minor player in global production sharing, there is evidence that Australian manufacturing has a distinct competitive edge in specialised, skill-intensive tasks in several industries including aircraft, medical devices, machine tools, measuring and scientific equipment and photographic equipment. Specialisation within global production sharing in high value-to-weight components and final goods, which are suitable for air transport, helps Australian manufacturing to overcome the ‘tyranny of distance’ in world trade. Being predominantly ‘relationship-specific’, Australian network trade exports are not significantly susceptible to real exchange rate appreciation. Institutions and technological base also give Australia a competitive edge within global production sharing. The last essay examines the impact of inequality and poverty on economic growth. Recent research has highlighted a negative impact of inequality on economic growth. The paper re-evaluates this hypothesis, focusing on both inequality and poverty and their interaction. The econometric model controls for standard growth covariates including education, investment, trade, population growth and redistribution. The paper initially replicates previous results, showing that inequality has a negative impact on growth. However, it is shown that after taking into account both inequality and poverty, the negative effect of inequality on growth appears to be concentrated amongst countries with high poverty. This finding makes a case for policies targeted towards alleviating poverty, rather than policies that redistribute without addressing absolute poverty. Show more