Trade and growth in the post-2008/2009 crisis world

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The nexus between trade and growth is the holy grail for many development planners. A country’s trade linkages influence its long-term growth in a number of ways, including by opening up channels of communication that could facilitate the transmission of technical information; exposing the country’s producers to competition, thus inducing them to generate new ideas and technologies in order to stay competitive (thus also alleviating duplication of research effort); enlarging the size of the market for firms, enabling them to benefit from scale; and triggering the reallocation of resources in a way that frees more resources for the innovating sector (Grossman & Helpman 1991; Hausmann et al. 2007; Rodrik 2007; Goldberg et al. 2008; Harrison & Rodriguez Claire 2009). The search for the magic formula of successful trade and industrial policy has preoccupied policymakers and academia for some time now, particularly given the important focus on policies around economic openness. The track record on openness is clearly mixed, with some developing countries seeing their manufactured exports contract after opening (as predicted by early endogenous growth theories), while others’ exports surge (Figure 1). In other words, the link between trade and growth is a conditional one. But what precisely are the conditions for success?