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GDP based on annual data from the World Development Indicators database over the period 1960–2008.6 Overall, the primary source of variation in import demand seems to be variation in trend GDP, rather than variation in business cycle fluctuations. While growth in bilateral trade is strongly positively correlated with changes in trend GDP, it is weakly correlated with changes in the cyclical component of GDP, suggesting that the recent growth in trade derives from structural economic growth in importing nations. At the country level, more specific trends emerge in the 2000s. Income growth was associated almost entirely with the GDP trend in the BRICs and many Asian nations7 (for example, Indonesia, Malaysia, and Thailand), but other middle-income countries had a more varied experience: in Latin American nations (for example, Argentina, Mexico, and the República Bolivariana de Venezuela) the cyclical variation seemed to be a more important component of growth. Moreover, the GDP trend in large high-income nations is considerably smaller in comparison to middle-income countries (and to smaller high-income nations, such as Australia, Canada, and Spain). Finally, the gravity estimation reveals that changes in trend GDP are strongly positively associated with trade growth, while cyclical variation in GDP positively affects trade in just one industry, metals. These results are silent on whether the flexible trend GDP growth estimated over the 1960–2008 period will continue. What they do show is that the trend component of GDP is what matters for trade growth. To the extent that GDP trends in middle-income nations continue, there is every reason to believe they will continue to be an important source of demand for growth in imports. Conclusion In this chapter, we examine the contribution of changes in export competitiveness and importer GDP growth to growth in exports by developing countries over the 2000–07 period. One of the main findings is that developing countries have enjoyed significant improvements in their export competitiveness since 2000. East Asia and the Pacific exhibited the strongest performance, with improvement in export competitiveness in all sectors (with or without China); Europe and Central Asia, Latin America and the Caribbean, and South Asia show improvements in export competitiveness in most sectors; the Middle East and North Africa shows improvements in export competitiveness in a few sectors; and Sub-Saharan
Africa shows improvements in export competitiveness in no sectors. We also find that changes in relative exporter capabilities can account for approximately 11 percent of the variation in bilateral export growth over 2000–07. Thus, important sources of trade growth are improvements in exporter technology and reductions in exporter production costs (part of which may be related to global production networks). Moreover, it seems that GDP growth plays only a modest role in changes in countries’ export competitiveness. That countries vary in their sectoral rankings of improvements in export competitiveness is initial evidence this is not the case. Thus, other factors must also be at work, presumably related to technological advancement in exporter technology and reductions in exporter production costs. Eaton and Kortum (2002) demonstrate that countries that are more integrated into global production networks may have lower production costs, which would show up in a higher exporter fixed effect (or in time differences in larger increases in exporter fixed effects). However, given the concentration of these networks in just two of the eight sectors (apparel and textiles; machinery, electronics, and transportation), cross-border trade in inputs is unlikely to be an important factor in changes in export competitiveness in the other sectors (agriculture, food processing, extractive industries, chemicals, and metals). Finally, we find that the recent growth in trade was driven by trend growth, as opposed to cyclical growth, in importing nations. What does this mean for future growth in trade among developing countries? If GDP trends in middle-income countries persist, we have a strong basis for predicting that developing nations will be a significant source of growth in demand for imports in the coming decade. This possibility is especially important for growth in trade, given the likelihood that the European Union, Japan, and the United States may have anemic growth in the medium run. Notes 1. It should be emphasized that these figures understate the importance of low- and middle-income destinations, owing to the sample restrictions placed on the data. See the working paper version of this chapter for further details. 2. The list of importers is presented in the working paper version of this chapter. To remove zero trade associated with small samples, the sample excludes very small exporters (countries with a population in 2000 of less than 1 million inhabitants) and small importers (countries with less than 0.1 percent share of world GDP in 2000). Due to missing GDP data in the World Development Indicators our sample also excludes Taiwan, China; several Gulf States (Bahrain, Kuwait, Oman, Qatar, and the United Arab Emirates); war-torn countries (Afghanistan, Iraq, and Somalia, and