An Adding-up Problem & Wage-productivity dynamics in exports & economic growth of developing countries facing the middle-income trap

Sustaining economic growth is an important issue for developing countries; some countries show growth spurts and collapse in a short time, and many are trapped by a so-called middle income trap and are suffering from what is called an adding-up problem. This study is motivated by these issues, and assesses the factors responsible for these problems by conducting econometric analysis of export growth and wage-productivity dynamics for developing countries, in compared with the developed countries. This study uses the three steps and three equations to discuss the idea: determinants of economic growth, determinants of export growth and reduced form of growth equations. First this study focuses on determinants of economic growth. Regarding economic integration variable as a factor for economic growth trade openness has been discussed, while some research has found that trade openness is not robust. Likewise, export diversification is explained as another determinant of economic growth and is identified as the leading and fastest growing factor. And also FDI introduced as another variable which cause for growth; though some found it is doubtable factor for growth. This study finds an alternative variable to represent economic integration variables, and introduces export growth as an alternative variable to represent economic integration. Therefore this study is testing four integration variables together in a single framework (export growth, trade openness, export diversification and FDI). Although there is much literature showing the importance of exports on growth, there are several missing factors regarding the topic (such as using different variables on exports and growth, sample combinations with all income levels without dividing by income levels, omitted variables, endogeneity, and small numbers of countries, etc). Therefore, this research considers these gaps. After showing the importance of export growth then we discuss the determinants of export growth. Regarding the determinants of export growth this study deals with several factors together. Undervaluation is used to represent exchange rate effects, the top 5 trading partners' weighted GDP growth rate is used to represent the market demand effect (related to the adding-up problem and fallacy of composition problem), and each country's wage rate-productivity growth ratio relative to the world average represents the price-cost effect (in view of the middle income-trap). This study finds that not only undervaluation, but also wage-productivity dynamics are important for export growth for both developing and developed countries. This research introduces new variables of wage-productivity dynamics as a factor responsible for sustaining export growth under different stages of economic development. This study finds different causes for the adding-up problem, it happens not because of the limited size of import demand from developed countries, but because of wage-productivity dynamics such that productivity tends to not grow as fast as the wage rate in typical developing countries. Using data from 1979-2009, five years average panel estimation, controlling endogeneity by using-system-GMM; using cross-country analysis for fifteen years, and testing quadratic relations for international integration variables, this study has found that export growth matters for long-run economic growth in both developing countries and developed countries, and both estimations find that export growth is more robust than trade openness and equally robust as exports diversification. At the same time we found FDI is important for developing countries growth. Finally, we estimate the reduced form of the economic growth equation by replacing export growth with wages, productivity and changes of undervaluation. We find labor productivity growth and wage growth are positive and significant on growth in developing and developed countries. Moreover, this result indicates undervaluation is not