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

Rapidly growing developing economies are characterized by heavy exportation and current account surpluses. Empirical studies suggest that "learning-by-exporting" may be quantitatively important in developing countries and behind some of this dramatic growth. This paper explores if learning-by-exporting helps to explain key macroeconomic behavior of fast growing developing countries. To accomplish this, I build 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 policies are restricted by the World Trade Organization (WTO) to non-trade related policies and compare the outcome 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, 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 outcome for the world. In this setup, the developing country's terms of trade deteriorate even further and it runs a greater current account deficit compared to the "No-WTO Restrictions" case.