Trade and Development

Trade is not a silver bullet for achieving development. It is, however, a powerful driver of economic growth, which is indispensable to reduce poverty and foster development. Trade is believed to impact growth through several channels. First, trade encourages reallocation of resources into the sectors with comparative advantage and creates a highly competitive environment in which only the best agents survive, thereby increasing the economy’s efficiency. Second, trade promotes the exchange of knowledge and provides access to technological know-how, giving poor countries a chance to reduce the development gap at a faster rate. Third, trade fosters external discipline, reduces distortion in domestic markets and narrows the scope for wrong and/or unbalanced economic policies. Yet, the gains from trade are typically not equally distributed among economic agents and there can be substantial (social) adjustment costs. In the short- to medium run there may well be losers from an increased exposure to international trade. It is our objective to identify and quantify those benefits and costs. We therefore pursue the following projects:

• Distribution of gains from trade at the household level

Employment in the sectors that are either booming or being displaced due to exposure to foreign competition is the most direct way in which trade can affect individuals and households. This project hence studies the impact of trade liberalization on the distribution of income and poverty and analyses the transmission channels at work.

• Distribution of gains from trade at the firm-level

Trade contributes to growth directly through increased efficiency of the firms engaged in international trade and indirectly through the spillovers from exporters to non-exporters. This research deals with the impact of trade on firm-level productivity, determinants of involvement in international trade, reallocation of resources within an industry due to increased exposure to trade in developing economies.

• Trade policy in developing countries

This project looks at the way trade policy is shaped in developing countries. More specifically, we examine export promotion programs in developing countries, the allocation of subsidies, and the efficiency of measures to promote exports.

Project partners: World Bank, University of Oxford