Infrastructure and International Trade Theory:Multiple Equilibria, Trade Patterns, and Nonlinear Dynamics

Abstract

There is no doubt that various types of public infrastructure play a key role in economic development and social well-being. Over the last two decades, a number of empirical studies have analyzed the relationship between the levels or quality of physical or institutional infrastructure and international trade. While there is enough evidence for the positive effects of infrastructure on trade volumes, the effects on comparative advantage and trade patterns are yet to be elaborated. There is also little evidence on how infrastructure levels can be affected by trade openness or country-specific characteristics through trade channels. The lack of clear empirical evidence on these aspects suggests that the interactions between infrastructure and trade can be complex. A possible explanation of such complexity is the nonconvexity of production technology or increasing returns in the presence of infrastructure. It is well known that nonconvexities and increasing returns may cause multiple equilibria. This paper focuses on the possibility of such multiple equilibria in the context of infrastructure and trade. In particular, this paper presents recent theoretical studies demonstrating the existence of multiple equilibria, irregular patterns of trade, and history-dependent dynamic paths.