Trade partner diversification and growth: how trade links matter

We use network centrality measures to capture the trade partner diversification (TPD) of countries as revealed by their position in the international trade network. These measures are shown to enter long-run growth regressions positively and significantly, on top of trade openness and other control variables. Historical evidence based on threshold analyses shows that countries can use their trade networks to compensate for their low levels of financial depth, high levels of inflation, and low levels of human capital. This result is important especially for developing economies where, on average, financial depth is low, inflation is high, and human capital is low. Therefore, globalization of international trade is important as far as gaining access into better trade networks through multilateral free trade agreements is rather essential for developing countries.