International trade and income convergence: Sorting out the nature of bilateral trade

Abstract

Abstract The paper argues that the dynamics of trade induced income convergence depend on the nature of bilateral trade between nations. To justify this argument, the paper presents a comprehensive approach that explicitly accounts for trade among OECD countries (north–north trade), trade between OECD and SSA countries (north–south trade) and trade among SSA countries (south–south trade). The approach also allows for the identification of the direct and indirect effects of bilateral trade on income convergence. The results show that bilateral trade among OECD countries accelerates income convergence both directly and indirectly. This result appears to be consistent with the new trade theories by Krugman, Journal of International Economics, 1979, 9, 469–479; Krugman, American Economic Review, 1980, 70, 950–959. and the intuitions of Heckscher, The effect of foreign trade on the distribution of income 1919, 1950, 1–32 and Ohlin, Interregional and international trade, 1933. The trade‐convergence relationship for OECD to SSA trade is the strongest both directly and indirectly. This is the empirical evidence that the nature of this bilateral trade, promotes one directional knowledge spillover from developed to developing countries, which enables developing countries to adopt new technologies and grow faster than their rich counterparts. However, bilateral trade among SSA countries does not have any significant effect on income convergence.

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