Growth and Global Imbalances: The Role of Learning-by-Exporting

Rapidly growing developing economies have exported heavily and run current account surpluses. Empirical studies suggest that "learning-by-exporting" may be quantitatively large in developing countries and behind some of this dramatic growth. This paper explores if learning-by-exporting helps explain the key macroeconomic behavior of fast growing developing countries. It builds up a two country general equilibrium growth model in which a developing economy benefits from learning-by-exporting as it trades with a developed economy. As the benchmark, I consider a setup in which the policies are restricted to non-trade related ones by the World Trade Organization (WTO) and compare it to a model with "No-WTO restrictions". The optimal policies in the presence of WTO restrictions rationalize the observed current account surpluses of rapidly growing developing economies. However, if there were no WTO restrictions, the developing countries would manipulate their terms of trade rather than their current account, which improves the welfare of both developing and developed countries. This highlights the fact that terms of trade manipulation can be "win-win" in the presence of learning-by-exporting. This paper also considers a "Coordinated Policy" problem to obtain the first-best outcomes for the world. In this setup, the developing country's terms of trade deteriorate even more and it runs a greater current account deficit relative to the "No-WTO Restrictions" case.