Skip to main content
Log in

An empirical analysis of the causal nexus between service trade and income

  • Published:
Empirical Economics Aims and scope Submit manuscript

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%.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

Notes

  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).

  2. Over the past few decades, the service trade has been growing at a higher rate than trade in goods and the service sector has demonstrated relative resilience in the aftermath of the Global Financial Crisis (UNCTAD 2010, 2012).

  3. The service sector growth is considered to contribute more to poverty reduction than the growth in agriculture or manufacturing sector (Noland et al. 2012).

  4. Services are not only traded across borders but also via foreign affiliates. As a result, the dataset might not include all forms of service trade.

  5. The index captures the following contents: ease of starting a business, dealing with construction permits, access to electricity, registering property, access to credit, protecting minority investors, paying taxes, trading across borders, enforcing contracts and resolving insolvency.

  6. Specifically, Kimura and Lee (2006) relied on the gravity equation to investigate what determines bilateral services, trade and goods among 10 OECD member countries and other economies for the years 1999 and 2000, while Anderson et al. (2014) estimated the geographical barriers to trade in nine service categories for Canada’s provinces from 1997 to 2007.

  7. The instrument is constructed using information on all country pairs including those for which bilateral trade is not available. This approach is justified to avoid the mechanical correlation between the instrument and GDP per capita resulting from more developed statistical accounting in developed countries.

  8. The values of the t-statistic and the F statistic of the coefficient estimates of constructed trade share in Frankel and Romer (1999) are only 3.63 and 13.1, respectively.

  9. The use of measures of labour quality and broadband internet access as controls is justified by the fact that service sector performance critically depends on human capital, the quality of the telecommunications network, and the quality of institutions (Shingal 2010). Finally, the ethnic fraction dummy is included since ethnic divisions have been the major reason for persistent underdevelopment, especially in Africa (Easterly and Levine 1997).

  10. Note that the results are only presented for the years 2005 and 2010 because the WB’s data on the ease of doing business are only available from 2004. As a result, regression estimates for the year 2000 are not presented in Table 5.

  11. I have pooled the cross section data for the years 2000, 2005 and 2010 together to construct the panel dataset. The process increased the number of observation in the panel is 113 as compared to 101 in cross-sectional data showing some years contain countries that are not included in others.

References

  • Anderson JE, Milot CA, Yotov YV (2014) How much does geography deflect services trade? Canadian answers. Int Econ Rev 55(3):791–818

    Article  Google Scholar 

  • Arnold JM, Mattoo A, Narciso G (2006) Services inputs and firm productivity in Sub-Saharan Africa: evidence from firm-level data. World Bank Policy Research Working Paper, 4048. Washington DC: World Bank

  • Arnold JM, Javorcik BS, Mattoo A (2011) Does services liberalization benefit manufacturing firms? Evidence from the Czech Republic. J Int Econ 85(1):136–146

    Article  Google Scholar 

  • Arnold JM, Javorcik B, Lipscomb M, Mattoo A (2015) Services reform and manufacturing performance: evidence from India. Econ J 126(590):1–39

    Article  Google Scholar 

  • Berthelemy JC, Varoudakis A (1996) Economic growth, convergence clubs, and the role of financial development. Oxf Econ Pap 48(2):300–328

    Article  Google Scholar 

  • Borrmann A, Busse M, Neuhaus S (2006) Institutional quality and the gains from trade. Kyklos 59(3):345–368

    Article  Google Scholar 

  • Chandavarkar A (1992) Of finance and development: neglected and unsettled questions. World Dev 20(1):133–142

    Article  Google Scholar 

  • Easterly W, Levine R (1997) Africa’s growth tragedy: policies and ethnic divisions. Q J Econ 112(4):1203–1250

    Article  Google Scholar 

  • Engerman SL, Sokoloff KL (2000) History lessons: institutions, factors endowments, and paths of development in the new world. J Econ Perspect 14(3):217–232

    Article  Google Scholar 

  • Eschenbach F, Hoekman B (2006) Services policy reform and economic growth in transition economies. Rev World Econ 142(4):746–764

    Article  Google Scholar 

  • Frankel JA, Romer D (1999) Does trade cause growth? Am Econ Rev 89(3):379–399

    Article  Google Scholar 

  • Gallup JL, Sachs JD, Mellinger A (1998) Geography and economic development. Int Reg Sci Rev 22(2):179–232

    Article  Google Scholar 

  • Guiso L, Sapienza P, Zingales L (2004) Does local financial development matter? Q J Econ 119(3):929–969

    Article  Google Scholar 

  • Hall RE, Jones CI (1999) Why do some countries produce so much more output per worker than others? Q J Econ 114(1):83–116

    Article  Google Scholar 

  • Hoekman B, Mattoo A (2008) Services trade and growth. World Bank Policy Research Working Paper. https://doi.org/10.1596/1813-9450-4461

  • Irwin DA, Terviö M (2002) Does trade raise income? Evidence from the twentieth century. J Int Econ 58(1):1–18

    Article  Google Scholar 

  • Kimura F, Lee HH (2006) The gravity equation in international trade in services. Rev World Econ 142(1):92–121

    Article  Google Scholar 

  • King RG, Levine R (1993) Finance and growth: Schumpeter might be right. Q J Econ 108(3):717–737

    Article  Google Scholar 

  • Mattoo A, Rathindran R, Subramanian A (2006) Measuring services trade liberalization and its impact on economic growth: an illustration. J Econ Integr 21(1):64–98

    Article  Google Scholar 

  • McArthur JW, Sachs JD (2001) Institutions and geography: comment on Acemoglu, Johnson and Robinson (2000). NBER Working Paper, 8114. https://doi.org/10.3386/w8114

  • Noguer M, Siscart M (2005) Trade raises income: a precise and robust result. J Int Econ 65(2):447–460

    Article  Google Scholar 

  • Noland M, Park D, Estrada GB (2012) Developing the service sector as engine of growth for Asia: an overview. ADB Economics Working Paper Series, 320. https://www.adb.org/sites/default/files/publication/30080/economics-wp320.pdf. Accessed 21 May 2017

  • Pagano M (1993) Financial markets and growth: an overview. Eur Econ Rev 37(2):613–622

    Article  Google Scholar 

  • Rodriguez F, Rodrik D (2000) Trade policy and economic growth: a skeptic’s guide to the cross-national evidence. NBER Macroecon Annu 15:261–325

    Article  Google Scholar 

  • Sachs JD, Warner A, Åslund A, Fischer S (1995) Economic reform and the process of global integration. Brook Pap Econ Act 26(1):1–118

    Article  Google Scholar 

  • Shingal A (2010) Services growth and convergence: getting India’s States together. https://ssrn.com/abstract=1690162. Accessed 16 May 2017

  • Staiger D, Stock JH (1997) Instrumental variables regression with weak instruments. Econometrica 65:557–586

    Article  Google Scholar 

  • Stock J, Yogo M (2005) Testing for weak instruments in linear IV regression. In: Andrews DWK identification and inference for econometric models. Cambridge University Press, New York

  • UNCTAD (2010) Evolution of the international trading system and of international trade from a development perspective: the impact of the crisis-mitigation measures and prospects for recovery. United Nations Publishing, UNCTAD, Geneva

    Google Scholar 

  • UNCTAD (2012) UNCTAD handbook of statistics 2012. United Nations Publishing, UNCTAD, Geneva

    Google Scholar 

Download references

Author information

Authors and Affiliations

Authors

Corresponding author

Correspondence to Samuel Admassu.

Additional information

Publisher’s Note

Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations

Appendix

Appendix

1.1 A1: List of countries in the sample

Afghanistan, Albania, Algeria, Argentina, Azerbaijan, Australia, Austria, Bahamas, Bangladesh, Belarus, Belgium, Bhutan, Bolivia, Botswana, Brazil, Bulgaria, Burundi, Cameroon, Cambodia, Canada, Chile, China, Cote d’Ivoire, Congo Republic, Colombia, Costa Rica, Croatia, Czech Republic, Cyprus, Denmark, Dominican Republic, Ecuador, Egypt, El Salvador, Estonia, Ethiopia, Finland, Fiji, France, Germany, Guinea, Georgia, Ghana, Guatemala, Guyana, Honduras, Hungary, Indonesia, India, Ireland, Iceland, Iran, Italy, Jamaica, Jordan, Japan, Kenya, Korea Republic, Lebanon, Lithuania, Luxembourg, Latvia, Madagascar, Maldives, Malaysia, Malawi, Mali, Malta, Mauritania, Mauritius, Morocco, Moldova, Mexico, Mongolia, Mozambique, Namibia, Nigeria, Nicaragua, Netherlands, Norway, Nepal, New Zealand, Pakistan, Panama, Papua New Guinea, Peru, Philippines, Poland, Portugal, Paraguay, Romania, Russian Federation, Rwanda, Senegal, Singapore, Slovak Republic, Saudi Arabia, Spain, Slovenia, Sri Lanka, Sudan, Sweden, Switzerland, Swaziland, Syria, Togo, Thailand, Tunisia, Turkey, Tanzania, Uganda, Ukraine, Uruguay, United Arab Emirates, United Kingdom, United States, Venezuela, Vietnam, South Africa, Zambia and Zimbabwe.

1.2 A2: Quality of the instrument constructed

See Fig. 1.

Fig. 1
figure 1

Relation between the actual trade share and the constructed trade share after controlling for size measures for the years 2000, 2005 and 2010

1.3 A3: Additional explanatory tables

See Tables 7, 8.

Table 7 Correlation matrix of variables used in the first-stage regression
Table 8 Correlation matrix of variables used in the first-stage regression

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Admassu, S. An empirical analysis of the causal nexus between service trade and income. Empir Econ 59, 799–816 (2020). https://doi.org/10.1007/s00181-019-01680-x

Download citation

  • Received:

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s00181-019-01680-x

Keywords

JEL Classification

Navigation