INTERNATIONAL TRADE, HUMAN CAPITAL, AND ECONOMIC GROWTH: A CROSS COUNTRY ANALYSIS

Abstract

This study is designed to test the hypothesis “international trade contributes to economic growth through its effects on human capital accumulation and technological diffusion.” To assess the hypothesis empirically we employed the Neo-Classical growth model. The model also reflects some features of the endogenous growth models. We thus ended up with a model in which the change in human capital is sensitive to change in trade policies. Unlike conventional approaches, the model serves to assess and determine the accumulation effects of international trade on human capital and imported capital. The extent to which a country can benefit from international trade is also believed to be sensitive to the country’s capacity to absorb international knowledge and technology in its production process. To evaluate the role of the absorption capacity, domestic R&D capital stock has been incorporated into the model. The empirical analysis estimates growth equations by using a panel data approach for a set of 23 developing countries, over the period 1970-2008. The countries considered for the study have been split into four groups. The trade variables exhibit relatively stronger growth elasticities in more open economies (East Asia, and Latin America) compared to less open economies (South Asia, and Africa). However, the overall evidence substantiates the fact that international trade enhances the accumulation of human capital and contributes to economic growth positively through technology diffusion. No convincing evidence, however, has been found in favor of the income convergence in any group of countries.