Convergence and Innovation in Export Quality and the World Income Distribution

Previous research has documented a strong correlation between countries’ income levels and the quality of their export goods. Given the evidence of fast unconditional convergence in export quality, this raises the question how to reconcile these stylized facts with a stable world income distribution.This paper is the first to document why cross-country export quality convergence within products does not entail aggregate export quality convergence across countries. In fact, the latter is absent because the country-product-specific residual after accounting for export quality convergence is biased in favor of high-income countries’ exports. To document this pattern of export quality dynamics and assess its aggregate implications, we construct bilateral export quality estimates for 122 countries and 2,700 manufacturing goods.Furthermore, we show that the key explanation for this country-product-specific ‘quality innovation residual’ is the fact that high-income countries are more capital abundant and financially developed and export goods that are better aligned to their human capital endowments, all of which are correlated with export quality innovation