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?