Does trade composition influence economic growth? Time series evidence for 28 OECD and developing countries

This paper is an empirical test of the hypothesis suggested by Mazumdar (1996), namely, that the composition of trade determines the strength of the 'engine of growth'. Mazumdar suggested that, within the framework of the Solow model, the composition of trade affects the medium-run transition to the steady state. The composition of trade matters because the price of capital is affected by whether a country exports or imports capital goods. Using unpublished SITC data, we create two international trade composition variables to test this hypothesis for 28 developed and developing countries. We test single-equation, simultaneous-equations, and panel data models with time-series data. All modern time-series procedures are rigorously applied. The results are supportive of the hypothesis; countries that import mostly capital goods and export consumer goods tend to grow faster than countries that export capital goods. There are important implications for developing countries. By focusing on their comparative advantage in producing labour-intensive consumer goods, developing countries will enhance their economic growth more than conventional models suggest. In addition, ceteris paribus, developing labour-abundant and consumer goods-exporting economies will grow faster than developed capital good exporters.