An empirical analysis of the causal nexus between service trade and income
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An empirical analysis of the causal nexus between service trade and income Samuel Admassu1 Received: 6 July 2017 / Accepted: 19 February 2019 © Springer-Verlag GmbH Germany, part of Springer Nature 2019
Abstract Service trade has been growing at a higher rate than merchandise trade since the early 1980s. Using an instrument for service trade constructed from trading pair geographical information for 101 countries over the period from 2000 to 2010, this paper estimates the causal effect of service trade on income. The results reveal that a one percentage point increase in service trade increases per capita income by at least 0.1%. Keywords Service trade · Income · Growth · Cross-country analysis · Gravity equation JEL Classification F43 · O40
1 Introduction The relationship between trade and income is both empirically and theoretically complicated due to endogeneity. As such, studies on the relationship between trade and income have been criticised for the reverse causality between trade and income (Rodriguez and Rodrik 2000; Mattoo et al. 2006). Frankel and Romer (1999) and Irwin and Terviö’s (2002) studies have addressed this concern by constructing an instrument for trade from the geographical information of trading pairs, which has shown that trade causes growth, albeit with low, instead of robust, precision. However, Frankel and Romer (1999) and Irwin and Terviö’s (2002) results were criticised by Rodriguez and Rodrik (2000) on the grounds that geography is also an important determinant of income.1 This critique was later addressed by Noguer and Siscart (2005) by including additional geographical controls for diseases, resource endowment, agricultural 1 Geography impacts income via its effect on a country’s public health and consequently its human capital, agricultural productivity and institutional quality (Rodriguez and Rodrik 2000; Hall and Jones 1999; Gallup et al. 1998; Sachs et al. 1995; Engerman and Sokoloff 2000).
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Samuel Admassu [email protected] Deakin University, Geelong, VIC, Australia
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S. Admassu
productivity and institutions, which provides a robust and precise result affirming that trade indeed raises income. A similar study on the effect of service trade on income is interesting, given the rapidly growing importance of the service sector as well as service trade in all economies.2 Unlike this paper, the method followed by the previous studies that have analysed the causal nexus between service trade and income are either firmlevel or country-specific. For example, some studies apply cross-country regressions using openness of telecommunications or financial services and have found that openness in services influences long-run growth performance (Mattoo et al. 2006; Pagano 1993; King and Levine 1993; Guiso et al. 2004; Eschenbach and Hoekman 2006; Berthelemy and Varoudakis 1996; Chandavarkar 1992). These findings are persuasive given services such as telecommunications help the dissemination and diffusion of knowledge at a much lower cost. A number of similar studies also use countr
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