Being Close to Grow Faster: A network-based empirical analysis of economic globalization

Abstract

Globalization features one of the major global trends which shape economic outcomes in developing and developed countries. Standard results from the empirical growth literature suggest that participation in worldwide trade is an important determinant of economic growth. In contrast to previous findings, this paper argues that not only the level of openness matters (trade intensity), but the degree of integration of an economy into the global trade network is even more important for the growth performance of an economy. The new measure of integration captures the network position of an economy and takes into consideration higher order links between economies in the global trade network. First, the theoretical framework of this paper makes use of social network theory to characterize a measure of economic integration. We employ the well-established concept of centrality and construct alternative measures to describe patterns of economic globalization. Second, we make use of a unique data set constructed from the UN Comtrade database and exploit a wide set of bilateral import and export flows to characterize the country’s participation in worldwide trade. Third, the identification strategy takes into account the dynamic panel structure of our data to disentangle the impact of economic integration on economic growth. Our results build on the difference and system generalized method of moments and the limited information maximum likelihood method. We take into consideration possible problems of endogeneity and lagged variables in the dynamic panel framework. The empirical analysis highlights the importance of openness and especially integration to fully understand the economic growth performance in a between and within country perspective. Controlling for the standard set of independent variables in the empirical growth literature and using different robustness checks, we find a significantly positive effect of integration on economic growth.