Technological Adaptation, Trade, and Growth (Electronic book text)

This paper takes a fresh look at the relationship between trade flows and economic growth. In fact, the bulk of the existing literature on the subject was developed between the late eighties and the mid-nineties, the debate on some key issues are far from being settled. On the one hand, there are still lingering empirical issues related with the existing evidence supporting a positive relationship between trade flows and economic growth. Endogeneity is still a problem (Rodrik, 1999; Frankel and Razin, 1999). On the other hand, establishing a direct link between trade and economic growth has remained somewhat weak. While the development of the literature on endogenous growth has helped in this regard, a typical outcome of the existing models is that a countries relatively better endowed in human capital tend to enjoy positive long run rates of growth.2 This occurs because, according to Heckscher-Ohlin theory, the technology sector, typically the one that drives growth, may be able to increase its share in total production in the country that is relatively more abundant in human capital. The other country may specialize in the production of its traditional good, which may cause its technological sector to shrink. Since the traditional sector is usually assumed not to enjoy endogenous increases in productivity, the overall rate of growth in this second country may be lower than in the country with more abundant human capital.