International Trade, Resource Abundance, Development and Production Structures

The main objective of this research proposal consists in studying the channels through which international trade and resource abundance affect the development and industrialization paths of countries. In particular, we aim to produce a research agenda in each of the following topics: Topic 1: The relative importance of comparative advantage and proximity to the core of world demand as determinants of industrialization. We look into the role of international trade and geographical position in the determination of the production structures of countries, in particular the relative weight of manufacturing to agriculture. For this purpose, a many-country model encompassing non-homotheticities, transport costs, comparative advantage, and "New Trade Theory" features will be used to allow for demand effects, specialization, and distance to interact in the determination of the equilibrium production structures of countries. Topic 2: The role of international trade in determining both specialization patterns and degrees of specialization. According to various measures of sectoral concentration across a wide variety of data sources, middle-income countries diversify their production structures more than poor and rich countries. We provide a trade-based explanation of this fact in the spirit of the Heckscher-Ohlin model: other things equal, countries abundant in capital (that is, countries with high income per capita) and in labor (that is, low income per capita countries) are likely to have symmetric distributions of sectoral employment (biased respectively towards capital-intensive and labor- intensive sectors). If extremely capital intensive or labor-intensive intensities are less frequent, then middle-income countries (that is, countries with neither too low nor too high capital-labor ratios), will be able to specialize is a wider range of goods than poor and rich countries. Topic 3: The effects of factor accumulation on the allocation of production factors to different economic sectors. The main goal of this project is to design and exploit an analytical framework for measuring changes in the sectoral allocation pattern of production factors. For this purpose we decompose the contribution of aggregate capital accumulation per worker to an economy`s growth rate of GDP per worker into two terms. One of them represents the extent to which production factors are shifted across sectors with different capital-labor intensities; the other measures the extent to which sectoral capital-labor intensities change. We plan to present evidence on factor reallocation across all sectors of the economy for as many countries as possible over the period 1971-2000, for which data availability is substantial. We will then map the predictions of several growth models onto our factor reallocation measure and then compare them with the evidence. Careful attention will be paid to the typical "econometric traps" (e.g. endogeneity) present in the literature. Topic 4: The role of natural resources in determining institutional and thus economic development. Economists and political scientists have amassed a body of evidence lending support to the "resource curse hypothesis", which claims that abundance of natural resources is associated with (a) slow growth, (b) an enhanced risk of civil war, and (c) worse institutional quality. We revisit this empirical evidence paying special attention to measures of resource abundance and institutional quality, as well as the endogeneity issues that may arise in this context.

Our project has uncovered a number of findings that contribute to the understanding of the relationship between economic development and some of its fundamental or deep determinants: geography, international trade, and institutions. Below we highlight some of our most important results, which have been published or accepted for publication in peer-reviewed academic journals.On the geography side, we have produced an analytical framework that sheds light on how a country's geographical position relative to other countries interacts with international trade in the determination of its specialization patterns and production structures. Much against conventional knowledge, the effects of productivity growth in particular sectors of the economy (agriculture, manufacturing) on a country's industrialization path are very sensitive to the proximity or distance of different kinds of trading partners (poor versus rich countries). A rather immediate implication of this result is that the industrialization (or deindustrialization) effects of trade liberalizations must be re-thought in the light of where liberalizing countries are located.Regarding international trade, we have looked into the specific mechanisms through with trade liberalizations contribute to productivity growth. An important result here is the fact that productivity increases seem to arise primarily at the firm level rather than at the industry level (through reallocations of resources from low-productivity to high-productivity firms). This research has also contributed to the development of a methodology that enables us to assess the empirical performance of theoretical trade models, thus helping us improve in the predicting the effects of future trade liberalization agreements.Finally, our research has also made important contributions that enhance our understanding of the link between institutions and development. First, we have managed to understand why so-called "institutional transplants" (the introduction of laws and norms typical of one country into another) have been far from successful at promoting development in many instances (for example, in former African colonies). Our results indicate that the persistence of traditional norms plays a key role in explaining the failure of these transplants. This research, published in the Journal of Institutional Economics, has been shortlisted for the 2015 Elinor Ostrom Award. Second, at a more microeconomic level, we have shown that shareholder agreements, which limit the independence of the boards of directors, reduce the value of Brazilian companies listed at the Novo Mercado, an institutional transplant of Germanys Neuer Markt.