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%.
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Notes
The service sector growth is considered to contribute more to poverty reduction than the growth in agriculture or manufacturing sector (Noland et al. 2012).
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.
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.
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.
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.
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.
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).
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.
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.
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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.
1.3 A3: Additional explanatory tables
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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
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DOI: https://doi.org/10.1007/s00181-019-01680-x