preliminary–donotquote.docVIP

Preliminary – Do not quote Comments welcome Shuo.jan.dave The Link between Trade and Income: Export Effect, Import Effect, or Both? Shuo Zhang Jan Ondrich J. David Richardson Department of Economics Syracuse University March 2003 Abstract A new framework is developed to evaluate how cross-country differences in export openness and import openness in 1990 affected the level of real per capita income. Familiar and novel instruments are used to extract the exogenous components of total trade (exports plus imports) and of net exports (exports minus imports), which in turn imply distinct export and import effects. We build on an existing literature (Frankel-Romer and others) that uses aspects of a country’s geography as instrumental variables for total trade openness. We build on a country’s demography and net wealth abroad to develop a novel instrument for net export openness. Our new estimates reveal that export openness alone correlates with income cross-sectionally, not import openness. I. Introduction The doctrine of mercantilism views trade, at least in part, as a zero-sum game. Trade is considered favorable if exports bring in more money than what is paid out for imports. Adam Smith and David Ricardo challenged the mercantilism theory by arguing that overall openness is what matters – nations grow more prosperous through the process of specialization and trade through imports as well as exports. Many developing countries have replaced their strategy of government-protected import substitution industrialization with a market-focused export oriented strategy. They seek to promote economic growth by exporting more and more of their products; this has the feel of neo-mercantilism. This paper re-poses the question whether trade “raises” a country’s income per person (or per worker); and if it does, what are the channels through which trade affects income, exports or imports? Numerous theoretical and empirical studies have attempted to answer these q