Essays on international trade and economic development: market access, demand leakages and capital formation in developed and developing countries

My goal in this dissertation is to study the effects of international trade on countries development by investigating the dynamics of accessing foreign markets and demand leakages and their effects on capital formation and structural change during the period of trade globalization. My overarching research question is “How do demand leakages and access to foreign markets have shaped the relationship between trade and development and trade and investment in different regions and countries between 2000 and 2018?”. To accomplish this, the thesis followed four key steps: First, it developed an original indicator called “Market Access” that measures local producers’ capacity to capture industries’ domestic, foreign, and regional demand, in terms of value added. It represents countries’ market share of value added embodied in industries’ Final Demand. Multiple decompositions of the indicator were developed to strengthen the analysis of different aspects of international trade under globalization, such as the role of regional markets, South-South trade, industry heterogeneity, sources of structural change, etc. The indicators were estimated using recent input-output methodologies of trade in value added by manipulating the Inter-Country InputOutput matrixes of OECD which allowed the construction of a database for 69 countries, and 16 industries (+ the modern services) from 2000 to 2018. Second, it used the indicators to analyze which regions captured the gains from globalization, which strategy they have used in terms of accessing different markets, and how their engagement in international trade contributed as sources of structural change. Thirdly, an investment function is proposed merging elements of the Post-Keynesian and the New Developmentalism Theory, and the dynamic GMM econometric methodology was used to investigate the effect of the Market Access (a proxy for ND variable of Access to Demand) on investment decisions and to investigate how this variable has different implications depending on the development stage of the countries and the time horizon of the analysis. Fourthly, we manipulate the indicator of Market Access to build an indicator that explicitly accounts for Demand Leakages and investigate how demand leakages were a crucial factor in explaining the broken link between demand and production in Brazil – which was key for the development strategy implemented under the PT government. Finally, it uses dynamic panel data methodology to investigate the role of the exchange rate and investments in determining demand leakages in Brazil. The thesis strengthens various arguments of the New Developmentalism and Structuralist. Market Access (be it domestic, foreign, or regional) is crucial for fostering investment and economic development. Active trade policy and strategy is essential, as trade openness is beneficial as long as the loss in domestic market share is more than compensated by improving local producers’ capacity to capture foreign demand. If strategic trade, technological, and macroeconomic policies are not coordinated and do not prioritize competitiveness, structural change, and access to global markets, engaging in international trade will most probably subdue and constrain their development and promote regressive specialization, which, in turn, considerably reduces the potential for sustainable and inclusive development.