Transcript Slide 1

Trade and Growth:
What can we learn from micro data?
Sargan Lecture
April, 21 2009
Penny Goldberg
Princeton, BREAD,
NBER
This talk draws on work with Amit Khandelwal
(Columbia), Nina Pavcnik (Dartmouth) and Petia
Topalova (IMF), whom I thank for their numerous
insights and feedback.
Motivation
• Protectionists’ demands on the rise
 e.g., Recovery Act: “Buy American” clause forbids spending on public
works unless all of the iron, steel, and manufactured goods used are
produced in the United States.
• Trade important for all countries, but particularly for developing countries
that may have limited access to high quality intermediate products
• Indian policymakers:
“Trade liberalization and tariff reforms have provided increased access
to Indian companies to the best inputs available globally at almost
world prices.”
–Rakesh Mohan, Deputy Governor of Reserve Bank of India (2008)
Trade and Growth: Mechanisms
• Efficiency Gains arising from Specialization and/or Selection
• Benefits of Scale and Competition
• Access to New Technology, Intermediate and Capital Goods.
On the other hand:
• Potentially Adverse Effects (e.g., specialization in less dynamic sectors
that reduces long-run growth rate, infant-industry arguments, imperfect
competition)
Ultimately: Empirical Question
Evidence
Evidence (largely based on cross-country studies) highly contentious
Reasons:
1.
2.
3.
4.
Measurement Problems (particularly regarding “openness”)
Reverse Causality and Omitted Variable Bias
Trade Policies need to be combined with other measures
Most Studies focus on pre-1990 data and ignore recent liberalization
waves in developing countries
Critical Reviews of this Literature by: Rodriguez and Rodrik (2001), Hallak and Levinsohn
(NBER Wo. Paper, 2004), Winters, McCulloch and McCay (JEL, 2004), Estevadeordal and
Taylor (NBER Wo. Paper, 2008), and many others.
Focus
• Micro- instead of macro-based evidence:
• Focus on specific mechanisms and not macro-economic outcomes.
•
Focus on a particular countries/trade liberalization episodes
• Here I focus on one particular channel through which trade may
promote growth:
• Efficiency Gains arising from Specialization and/or Selection
• Benefits of Scale and Competition
• Access to Intermediate and Capital Goods.
Advantages:
• Results hopefully more credible
• Mechanisms  policy-relevant question
Disadvantage: Approach more limited in scope.
Focus (continued)
• Approach philosophically similar to the one used in sectoral studies of
effects of trade liberalization on TFP
• Part of growing literature that exploits micro data in order to understand
the determinants of growth. Examples include:
○ Hsieh and Klenow (2009): Allocative efficiency and growth
○ Bloom and Van Reenen (2007): Importance of managerial practices
○ Bloom and Van Reenen (2008): Impact of trade (Chinese imports) on
innovation and information technology
• Here: Focus on the role of intermediate inputs rather than final goods
trade. The former is arguably more important for the developing world.
Road Map
• Theory
• Difficulties in bringing the theory to the data
• What is different these days?
• More disaggregate data at the plant or firm level
• Trade liberalization episodes in developing countries
• Evidence Based on India
Theory
• Endogenous Growth Models:
○ Many different versions, but common theme: new varieties play an
important role in growth (Rivera-Batiz and Romer, Romer, Grossman
and Helpman)
• Two Effects:
○
○
Level (static) effect: New Intermediate and Capital Goods lead to
increases in measured TFP
Growth (dynamic) effect: Arises from a linkage between new
variety creation and research activity. As productivity increases, the
rate of variety creation will rise  long-run growth rate increases
Level Effect
• Simplest possible model:
 Consider production function:

Under standard assumptions,

Output Growth:
and
Level Effect (continued)
•
•
•
•
Love of Variety: Increase in N (through trade) leads to increase in TFP
Many reasons simple version empirically undesirable
More general models in empirical work  still “variety” effect remains
Effects operates WITHIN firms, not through selection.
• Most compelling empirical evidence so far:
○ Amiti and Konings (AER): Reduced Form
○ Show reductions of INPUT tariffs in Indonesia  TFP increase
○
Halpern, Koren and Szeidl (2008): Data on imported inputs
o Show imports of intermediates associated with higher TFP (no
liberalization)
• Potential Problem: Measurement of TFP
 Is it “efficiency” or “markup”? (De Loecker, 2008)
Growth Effect
Dynamic Gains from Trade
• Trade has two effects in the short- run:
• Lowers prices of imported products price effect
• Brings new products to the domestic country variety effect
• These two effects can by captured through the changes in the exact
import price index. The exact price index has two components:
○ Conventional price index (captures price changes of existing
products)
○ Variety component: captures the price change for NEW products from
their virtual price (0 imports) to the price we observe upon entry
• Import of new intermediate products corresponds to a decrease
in the exact price index of intermediates
Growth Effect (continued)
Implications for Growth:
• Consider a domestic firm facing a fixed cost of introducing a new
product. The decrease in the price index for intermediates implies that
the firm is more likely to introduce new domestic products.
• Feedback Effect: Some of these new products will be used as inputs in
the production of other domestic goods. If new products = final goods,
pos. externalities if fixed costs of production decreasing in N of products
• “Lab-Equipment” Model: Innovation requires capital or intermediate
inputs. Since new imported intermediates lower the exact price index for
intermediates, they lower the cost of doing research. This creates a
DIRECT link between imported intermediates and R&D.
More formally, consider the following production technology:
Production Technology
• Production is CRTS and Cobb-Douglas
• Each input sector is comprised of domestic and foreign inputs that are
combined using a CES aggregator
• The foreign input is also given by the CES aggregator:
Exact Input Price Index
• The exact price index associated with foreign input sector
where
are the Sato-Vartia ideal weights
and ‘ denotes the previous time period
and
is:
Minimum Cost Function
• The exact price index for the input sector is
is the domestic price index
where
are Sato-Vartia ideal weights between foreign and
domestic input varieties
• We can re-write the minimum cost function as
• The import of new varieties lowers the variety component and hence
lower the minimum cost of producing Y.
Mechanism (continued)
• In addition, direct effect on research activity of firms, if research requires
capital and intermediate products.
Summary of Mechanism
• Trade Liberalization leads to lower prices for imported intermediate and
capital goods as well as the import of new varieties of these goods
○ Intensive margin  lower prices
○ Extensive margin  new goods (leads to higher measured TFP)
• As a result, the minimum unit cost associated with the production of a
domestic good falls
• Domestic producers may now find it profitable to start producing products
that were unprofitable prior to the liberalization.
• The introduction of new domestic varieties further contributes to growth
○ Domestic Intermediate Products: Same argument as with imported
feedback effect
○ Domestic Consumer Products: Lead to further growth if:
○ Externalities through fixed costs declining in the number of goods
○ Concave Transformation Curve
Difficulties in Bringing the Theory to the Data
• Lack of Information on Domestic Product Creation and R&D
• Potential reverse causality between imports of new intermediates and
outcomes of interest
What is different now?
1. Better data (at the plant or firm level)
2. Trade Liberalization Episodes in Developing Countries  Provide
plausibly exogenous variation for identifying the effects of interest.
Data
India: Prowess Database
• Center for Monitoring of Indian Economy (CMIE)
○ Covers 60-70% of India’s economic activity in industrial sector.
• Firm-level panel data 1989-2003
○ Spans the period of trade reforms
• Medium and large Indian firms
○ Not well suited to study firm entry and exit
○ Well suited to study product mix changes among mfg firms
• Mfg firms required by law to disclose product-level information in their
annual reports (1956 Companies Act)
○ Product module contains annual product-level information
○ Information on unit values
• Information on R&D
Data: Definition of a Product
• Based on CMIE’s internal product classification and products reported in
companies’ annual reports
• 1,886 products
○ Comparable to BRS (2006a) product definition (~1500 5-digit SIC)
○ Linked to 108 4-digit NIC industries
• Coverage across firms
○ Product info available for vast majority (85%) of mfg firms
○ 85% of manufacturing output
Examples of Products
India’s Trade Liberalization
• Twenty years ago, the infamous “license raj” required firms to obtain
official permission to expand into new product lines and upgrade
capacity.
• India’s pre-reform trade regime was very restrictive
• During the 1980s, India initiated a process of liberalization
○ Import and industrial licensing eased, but tariffs remained very high
• In August 1991, India faces a BOP crisis and calls the IMF
○ Tariff changes 1992 - 97 largely set as part of IMF conditions in 1991
• Avg nominal tariffs fall from 90% in 1987 to 30% in 1997
○ Unanticipated & unlikely to be foreseen in pre-reform industry
decisions Topalova (2007), Gang and Pandey (1996)
India’s Trade Liberalization
Source: Topalova (2007)
India’s Liberalization
Trade Data
• India’s import data (1987-2000) at the HS8-country level of
disaggregation
• Tariff data is reported at the HS6-level
• Generate input tariffs using India’s input-output matrix
○ Average input tariffs fall from 36% in 1987 to 12% in 1997
• Nourez (2001) classifies India’s products as intermediates (intermediates,
basic & capital goods) or final goods
○ Note: will use this classification for descriptive tables & rely on IO
matrix for empirical analysis
Examples of Consumer & Intermediate Products
(Import Data, Nouroz, 2001)
HS 8504
HS 8505
HS 8508
HS 8608
HS 8456
HS 7002
HS 7017
HS 7019
HS 7104
HS 2901
HS 2903
HS 28xx
HS 7113
HS 8415
HS 8521
HS 8524
HS 62xx
HS 64xx
Examples of Intermediate Products
Electrical transformers, static converters ( eg rectifiers ) & inductors
Electro-magnets; permanent magnets, etc; electric-magnetic or permanent magnet chucks & similar holding
devices, etc
Electro-mechanical tools for working in the hand, with self-contained electric motor
Railway or tramway track fixtures & fittings; mechanical signalling, safety or traffic control equipment
Machine-tools for working any material by removal of material, by laser or other light
Glass in balls, rods or tubes, unworked
Laboratory, hygienic or pharmaceutical glassware, whether or not graduated or calibrated
Glass fibres ( incl glass wool ) and articles thereof ( eg yarn, woven fabrics )
Synthetic or reconstructed precious or semi-precious stones, not strung or temporarily strung, not mounted or set
Acyclic hydrocarbons
Halogenated derivatives of hydrocarbons
Inorganic and Organic chemicals and their compounds of precious metals.
Examples of Consumer Products
Articles of jewellery & parts thereof, of precious metal or of metal clad with precious metal
Air conditioning machines, comprising a motor-driven fan & elements for changing the temperature &
Video recording or reproducing apparatus, whether or not incorporating a video tuner
Records, tapes & other recorded media for sound or other similarly recorded phenommena, excl
Clothing
Footwear
Evidence
Arguments has three main parts:
A. Descriptive Part
1) Indian firms add products after its large-scale trade reform GKPT (2008).

Net product additions account for 25 percent of growth in India’s
manufacturing growth in 1990s
2) Tariff liberalization is “real” surge in imports, particularly of
intermediate products.

2/3 of the growth in intermediate imports accounted for by new
varieties
B. Reduced Form Evidence
Input tariff reductions lead to an expansion of domestic products and R&D
C. Semi-Structural Part:
Impose more structure in order to identify channels: Lower prices versus
increased variety.
A. Domestic Product Growth
• Extensive Margin important for growth  new products account for one
quarter of growth in manufacturing
• Net = Gross  No product dropping
• Stark contrast to the U.S. and also other developing countries  no
evidence of “creative destruction”
• Explanations:
○ Remnants of license-raj: High sunk costs associated with earlier
regulation
○ Large developing country with huge income disparities  always
demand for “older” products (consistent with the fact that there are
few product categories that are “shrinking”)
• No concern that higher imports are displacing domestic products
A. Tariff Declines and Import Growth
• India’s liberalization had “real” impacts on India’s imports
• Within HS6 products, lower tariffs implied
○ Higher import volumes
○ Lower unit values
○ More import varieties (particularly for intermediate goods)
• The importance of variety growth is seen in the following decomposition
table
Decomposition of India’s Imports
Table 1: Decomposition of Import Growth, 1987-2000
Product Type
Import
Growth
Extensive Margin
Product Product
Net
Entry
Exit
Intensive Margin
Net
Shrinking
Growing
Growing
Shinking
All Products
130
84
84
0
45
-39
84
Intermediate Products
227
153
153
0
74
-42
116
Final Products
90
33
33
0
57
-29
86
• Messages of table:
○ India experienced a surge in overall imports
○ Intermediate imports increased by more than 200% during the 1990s
○ New products account for 2/3 of intermediate import growth
• Intermediate extensive margin growth driven by imports from OECD + E.
Asian countries GKPT (2009)
○ Within HS6-Year pairs, higher unit values for new varieties
Decomposition of India’s Imports, by Source
Product (HS6) Intensive Margin
All Products
Capital, Basic, Intermtds
Final Products
Basic Products
Capital Products
Intermediate Products
Product (HS6) Extensive Margin
Import
Gross,
Gross,
Growth
Net
OECD
ROW
130
84
59
25
227
153
115
38
90
33
21
11
260
154
124
30
125
37
27
10
297
278
200
78
Net
45
74
57
106
88
19
Variety (HS6-Country)
Extensive Margin
Gross,
Gross,
Net
OECD
ROW
22
9
13
42
15
26
25
9
16
62
31
31
33
23
10
28
-12
39
Variety
Intensive
Margin
Net
23
32
32
45
55
-9
Notes: OECD includes Hong Kong, Singapore and Taiwan
• Extensive margin growth driven new products/varieties from OECD (plus
HK, Singapore, Taiwan)
• HS6 intensive margin driven by new varieties (HS6-country)
• We also observe higher unit values for added varieties within HS6-year
New HS6 Codes
HS Code
720890
847192
847191
851740
847120
854800
854280
854220
382390
854030
720990
Examples of New HS Goods
Hot rolled iron or non-alloy steel, width >600mm, nes
Computer input or output units
Digital computer cpu with some of storage/input/output
Apparatus, for carrier-current line systems, nes
Digital computers with cpu and input-output units
Electrical parts of machinery and apparatus, nes
Electronic integrated circuits/microassemblies, nes
Hybrid integrated circuits
Chemical industry products, preparations, mixtures ne
Cathode-ray tubes, except for television
Cold rolled iron or non-alloy steel, flat, width >600mm, nes
310540
Monoammonium phosphate & mix with diammonium, <=10 kg
B. Reduced Form Relationship
• Why might declines in trade costs lead to expansion of firm product
scope?
• Firms face a fixed cost of manufacturing a product.
Lower variable costs due to the liberalization enable firms to cover the
fixed costs of entering new product lines
• Reduced-form specification relates firm scope to the input tariff faced by
firms in sector s
○
○
○
○
Input tariff of industry line m
Year fixed effects (t), firm fixed effects (f)
Standard errors clustered at the industry level
Restrict sample to 1989-1997
Expansion of Product Scope and Input Tariffs
Input Tariff
Product Scope and Input Tariffs
(1)
(2)
-0.323 **
-0.327 **
0.139
0.140
(3)
-0.309 **
0.138
(4)
-0.278 **
0.117
-0.037
0.035
-0.032
0.023
-0.033
0.039
-0.035
0.032
-0.027
0.021
0.035
0.024
yes
yes
yes
yes
yes
0.875
14,872
yes
0.871
13,435
yes
0.875
14,854
yes
0.877
11,135
Output Tariff
Delicense
FDI
Year Effects
Firm FEs
Adjusted R2
Observations
• Avg input tariffs fell 24 pp  7.7 % increase in firms’ product scope
○ Accounts for about 31% of overall firms’ product scope expansion
• From GKPT (2008), new products account for 25% of India’s mfg growth
○ This particular channel accounts for ~8% of overall mfg growth
Input Tariffs and Other Firm Outcomes
Log Firm Sales
Lagged Input Tariff
-0.987 **
0.414
Log TFP
-0.454 *
0.233
R&D Indicator
R&D Indicator
-0.293
0.268
0.194
0.271
-0.629 ***
0.111
Lagged Input Tariff
x Firm Size Indicator
R-squared
Observations
0.93
0.81
0.52
0.59
14,204
13,714
14,233
14233
• Lower input tariffs associated with higher
• Output
• Productivity (note: TFP taken from Topalova (2007))
• Probability of conducting R&D among the (initially) large firms
C. Mechanism
• So far: Strong and robust relationship between input tariffs and product
scope expansion, R&D, sales and TFP.
• Impose additional structure to assess the relative contribution of lower
existing input prices and firms’ access to new imported input varieties
• Rely on production technology described above to decompose exact
import price index into a price and variety channel
Minimum Cost Function
• Explicit assumptions on the structure
• The Cobb-Douglas weights are the coefficients from India’s input-output
matrix
• Impose proportionality in the input-output coefficients between domestic
inputs and foreign inputs
Next Steps
1. Compute the exact price index, conventional price index and variety
component for each sector.
2. Run those through Input-Output tables to create input price indices.
3. Relate changes in firm product scope to the changes in the exact price
index as well as its components
Variety Index
Mean Variety Index
Overall Variety Index
All Products
.899
.688
Intermediates
.881
.624
Final Goods
.904
.850
•
Mean variety index for intermediates is 0.881 between 1989-1997 (A
•
Right column reports the aggregate variety component of the import
price index from 1989-1997
•
Aggregate exact import price index for intermediates is about 4.7%
lower per year due to new varieties
•
These variety gains are substantially larger than those reported for U.S.
and Costa Rica Broda & Weinstein (2004), Arkolakis et al (2008)
lower variety index implies larger gains from variety)
Input Indexes
• Using the IO tables, construct input indexes for each sector
• Relate firm product scope to changes in each index
Input Tariffs and Imported Input Price Index
Log Exact Price
Index
Input Tariff
R-squared
Observations
0.28 ***
0.051
0.18
136
Long difference regression: 1989 and 1997.
Log Conventional
Price Index
0.132 ***
0.05
0.05
136
Log Variety Index
0.148 ***
0.014
0.47
136
Decomposing Channels
(OLS Regressions)
Log (Number of Products)
Log Exact Price Input Index
-0.491
0.343
Log Conventional Input Price Index
-0.009
0.485
-2.615 **
1.186
Log Variety Input Index
R-squared
Observations
Long difference regression: 1989 and 1997.
0.00
696
0.01
696
Identification Assumptions
• Explicit assumptions on the structure
• Error term certainly correlated with right-hand side variables.
• Identification assumption:
○ Input tariffs affect domestic prices and final sector TFP only through
the import channel
Instruments
• Tariffs: plausibly exogenous in this setting and highly correlated with
variables on the right hand side (see above, tariffs affect unit values and
range of imported intermediates).
• Country–specific fixed costs of entry into the Indian market
(variables suggested by gravity-type models, such as language)
interacted with measures of sector-specific comparative advantage
 Idea:
• Conditional on changes in tariffs, sectors in which potential
exporters face a lower fixed cost of exporting to India will
experience differential changes in the new varieties imported
• Preliminary results stronger than OLS results  Domestic product scope
expansion due to firms’ access to new intermediate inputs. Same is true
for R&D.
Conclusions
• New products account for 25% of India’s mfg growth in 1990s
• Imports of intermediates surge with 2/3 of growth due to new products
• Connect these two facts 
o Firms’ access to new inputs from abroad leads to product scope
expansion
o New inputs associated with R&D
• Empirical support for the microeconomic mechanism of domestic variety
expansion in endogenous growth models
Final Remarks
• Mechanism not unique to India.
○ Anecdotal Evidence from Coca-Cola Factory in Shanghai
• Reminder: Trade is about imports, not just exports.
○ Paul Krugman: “Moreover, the purpose of international trade -- the
reason it is useful -- is to import, not to export. That is, what a
country really gains from trade is the ability to import things it
wants. Exports are not an objective in and of themselves; the need
to export is a burden that a country must bear because its import
suppliers are crass enough to demand payment.”
THANK YOU!