Ossa, Ralph
(2007)
International trade and economic development.
PhD thesis, London School of Economics and Political Science.
Abstract
In this thesis, I theoretically investigate three related aspects of international trade and economic development. First, I present a model of social learning about the suitability of local conditions for new business ventures and explore its implications for the microeconomic patterns of economic development. I show that: i) firms tend to 'rush' into business ventures with which other firms have had surprising success thus causing development to be 'lumpy'; ii) sufficient business confidence is crucial for fostering economic growth; iii) development may involve wavelike patterns of growth where successive business ventures are first pursued and then given up; iv) there is, nevertheless, no guarantee that firms pursue the best venture even in the long-run. Second, I offer a new explanation for the empirical finding that trade liberalization increases firm productivity. In particular, I develop a simple general equilibrium model of trade in which trade liberalization leads to outsourcing as firms focus on their core competencies in response to tougher competition. Since firms are better at performing tasks the closer they are to their core competencies, this outsourcing increases firm productivity. Third, I propose a novel theory of GATT/WTO negotiations which solves two important problems of the standard terms-of-trade theory. First, it is consistent with the fact that GATT/WTO regulations do not constrain export taxes. Second, it does not rely on the terms-of-trade argument but instead emphasizes market access considerations. To achieve this, I consider trade policy in a 'new trade' environment. I first argue that tariffs are inefficiently high in the non-cooperative equilibrium because countries attempt to improve their relative market access at the expense of other countries. I then show how GATT/WTO negotiations can help countries overcome this inefficiency by providing new rationales for the GATT/WTO principles of reciprocity and nondiscrimination.
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