Trade and Convergence: A Dynamic Panel Data Approach.

• Author: Ulusoy, Veysel

Veysel Ulusoy [*]

The objective of this paper is to provide, theoretically and empirically, an interpretation of comovement between the scale of an economy and its growth rate. I paid special attention to human capital accumulation and international trade environment and emphasized their spillover effects on growth and convergence among countries. I employed a technique using a cross-sectional and time series panel. The estimations in my empirical models were done using the nonlinear least-squares method in which I applied a dynamic procedure for an economy along its balanced growth path. I arrived at mixed results. The empirical results show that international spillover effects of human capital accumulation and intermediate goods production have positive and significant effects on the growth process of a nation. The national level of human capital, however, has negative and insignificant effects on this process.

1. Introduction

   In recent years, international trade and technological development have taken central stage in the economic research environment. The purpose of this study is to investigate the relationship between growth and economies of scale that are related to technological progress. Looking at the per capita income in a period of time provides some information about different growth rates but does not say anything about why some countries grow faster than others. The same numbers, however, show that small countries grow somewhat as fast as larger ones. This research tries to identify the main factors behind this result. In particular, the role of two-way international trade and technological spillover will be emphasized. Although the effects of a two-way trade had long been observed, there has been a lack of empirical research of its consequences on a technological level. This research tries to fill this gap and goes one more step to see if trade and national scale of production indeed affect the growth process of an e conomy. That scale will be divided into two parts: (1) human capital specialized inputs in the production of final goods and (2) specialized inputs into production.

   Arrow (1962) indicates that technological knowledge and long-term growth arise from learning by doing and knowledge spillover. The learning-by-doing approach postulates that the growth of knowledge (productivity) is a by-product of the production process and physical capital investment. The labor force grouped at different levels of skills, with skills being higher in countries that invest more in education and training, is also the core of technological progress. Therefore, it is plausible to say that knowledge accumulation can explain the intracountry differences in the growth rates of income or productivity. On the other hand, the nature of the intraindustry trade and gains from specialization are tightly connected to economies of scale. Attention here is focused on the effect of two-way trade on technological knowledge and production technologies. Ideas improve the technology of production. New knowledge and production technologies here are assumed to be nonrivals, spilling over to the firm via internati onal trade.

   The growth effects of the variety of manufactured goods follow Dixit and Stiglitz (1977), Ethier (1982), and Romer (1990). In the latter model of growth, technological progress takes the form of expansion in the number of specialized products available worldwide. For a given number of intermediate goods, the production model exhibits constant returns to scale in the total quantity of these inputs. For given quantities of labor force and intermediate goods, however, the model indicates that production increases with the number of specialized inputs leaving the constant returns assumption aside. These production features give an economy the benefits from importing intermediaries and specializing in producing those intermediaries in a trade environment.

   In an endogenously determined growth model, I try to relate increases in market size to growth. Increases in market size due to trade may permit firms to build plants turning out fewer product lines and to create specialized inputs. My motivation stems from the theoretical approaches to the concept of gains from trade through specialization in production. I intend to expand Backus, Kehoe, and Kehoe's (BKK; 1992) theoretical and empirical approaches to the issue in which technology is determined by the increase in the market size. I tried to make three contributions to the literature of growth. First, I emphasized the role of the international scale factor in technological advances. Second, I used panel data for a large number of countries. Finally, I analyzed the behavior of the model's dynamics as it approached the balanced growth path over time.

   The remainder of the paper proceeds as follows: In section 2, the empirical use of human capital accumulation is given. In the same section, I develop a nonlinear dynamic model of growth as the economies approach their balanced growth path. Section 3 reveals the same approach for the international trade environment by employing the effects of specialization in production for intermediate goods. In section 4, I explore the data sources and empirical results. Section 5 is the conclusion.

2. Investment in Human Resources

   The tight connection between knowledge and technology is one of the basic emphases of the new view of economic growth theory. It is certainly plausible to indicate that technological progress is one of the reasons that more products are turned out today from a given quantity of capital and labor than could be manufactured a century or two ago.

   In the long run, the fraction of time that individuals spend accumulating skills and their readiness to be open to international trade are very closely related. This relationship of human capital and spillover of knowledge has been investigated by a number of economists. Grossman and Helpman (1991) have theoretically studied the growth performance of a small country when scientific and technological knowledge flows from abroad are related to its foreign trade diversity. In this broad range of activity, trade generates spillovers that coexist with that of domestic innovation.

   The present research takes this idea and applies BKK's model of human capital to the growth performances of countries in their dynamic growth paths. The BKK model introduces a certain externality to their model by incorporating the human capital accumulation factor into technology. In doing so, they tried to control the average fraction of time spent accumulating human capital that generates spillovers, which enter the production process indirectly at the national level.

   My growth model assumes that technology is determined endogenously by the total human capital as well as by the total national scale of production. The model uses the following Cobb-Douglas production function:

   [Y.sub.it] = [A.sub.it][[K.sup.[alpha]].sub.it][[L.sup.1-[alpha]].sub.it], (1)

   where i denotes country i, [Y.sub.it] is real output at time t, [K.sub.it] is the physical capital stock at time t, [L.sub.t] is labor, and [A.sub.i] reflects the level of technology. The variable [A.sub.i] measures the external effects that are considered to affect the economy in two ways: national-based externalities among the industries and international spillovers in a trade environment. Specifically, a technology level evolves according to the following function:

   [A.sub.t] = [[Y.sup.[[delta].sub.1]].sub.t][([n.sub.2t][[N.sup.[psi]].sub.2t]).su p.[[delta].sub.2]][[A.sup.[eta]].sub.t] - [gamma][A.sub.t], (2)

   where [Y.sub.t] is the scale of production in a country (or industry), [n.sub.2t] is the average fraction of time spent in accumulating human capital (intensity variable), and [N.sub.2t] is the total amount of time spent on human capital accumulation or the size of the human capital sector. [1] Technology depreciates at a rate of [gamma]. This functional form is close to the one used by Romer (1996). Equation 2 implies that there are positive external effects in the process of accumulating human capital, and this externality occurs as a result of communicating, trading, etc.

   The specification of human capital is the original theoretical contribution of this research. Here we would like to get a more comprehensive measure of the...