Bank of Lithuania
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No 62

An empirical investigation of the relationship between trade and structural change

  • Abstract

    This paper investigates the role of international trade in the increase in the employment share of non-tradable sectors (services and construction). Borrowing insights from the vast theoretical literature on the determinants of structural change, we build an empirical model allowing to distinguish between long-run and short-run effects. We use this model to investigate the relative importance of the main traditional demand-side and supply-side channels of structural change, assessing, in this context, the role of trade variables. To this end, we use an unbalanced panel of countries for the period 1960-2011 from the EU-KLEMS and the GGDC 10-sector databases. Our preliminary results suggest that both Engelian income effects, i.e. the so-called demand-side drivers, and relative productivity, i.e. the supply-side channel, are relevant drivers of structural change. We show that the import and export shares are positively and negatively related, respectively, with the employment shifts to non-tradable sectors in the long run, in particular, for mature and transition economies. In the short run, a positive and significant relationship between the import share and structural shifts towards tradable sectors emerges. 

    JEL Codes: F1, F4, O1, O4.

    The views expressed are those of the author(s) and do not necessarily represent those of the Bank of Lithuania.