Correlates of economic growth in developing countries: a panel cointegration approach

The inflow of foreign direct investment (FDI) has been found to play a crucial role in the economic growth of receiving countries. Using panel cointegration techniques, this perception was found to be mitigated by an empirical approach that yields different results from previous studies. While the growth in real FDI has an influence on real GDP growth across developing countries in the short-run, year-to-year periods, it does not explain real GDP in the long-run. Rather, it appears to be the economic factors internal to a country that have the most influence on real GDP over time: human capital (measured by literacy rates), export trade, and monetary and fiscal policy.     

Growth of developing countries and world interest rates

On the basis of aggregate data covering the period 1973–1982, this note argues that the rate of growth of non-oil developing countries is influenced significantly by the growth performance of industrial countries and by the level of the real rate of interest on world markets. At the same time, no evidence was found to support the hypothesis that the nominal rate of interest has an effect on growth in non-oil developing countries.     

Export surges

How can developing countries stimulate and sustain strong export growth? To answer this question, we examine 92 episodes of export surges, defined as significant increases in manufacturing export growth that are sustained for at least 7 years. We find that export surges in developing countries tend to be preceded by a large real depreciation, which leaves the exchange rate significantly undervalued. In contrast, in developed countries, the role of the exchange rate is less pronounced. We examine why the exchange rate is important in developing countries and find that the depreciation is associated with a significant reallocation of resources in the export sector. In particular, depreciation stimulates entry into new export products and new markets. These new exports are important, accounting for over 40% of export growth on average during the surge in developing countries. We argue that a large real depreciation induces firms to expand the product and market space for exports.     

The Lost Decades: Developing Countries' Stagnation in Spite of Policy Reform 1980–1998

I document in this paper a puzzle thathas not received previous attention in the literature. In 1980–98,median per capita income growth in developing countries was 0.0percent, as compared to 2.5 percent in 1960–79. Yet I documentin this paper that variables that are standard in growth regressions—policieslike financial depth and real overvaluation, and initial conditionslike health, education, fertility, and infrastructure generallyimproved from 1960–79 to 1980–98. Developing countrygrowth should have increased instead of decreased according tothe standard growth regression determinants of growth. The stagnationseems to represent a disappointing outcome to the movement towardsthe ``Washington Consensus' by developing countries. I speculatethat worldwide factors like the increase in world interest rates,the increased debt burden of developing countries, the growthslowdown in the industrial world, and skill-biased technicalchange may have contributed to the developing countries' stagnation,although I am not able to establish decisive evidence for thesehypotheses. I also document that many growth regressions aremis-specified in a way similar to the Jones (1995) critique thata stationary variable (growth) is being regressed on non-stationaryvariables like policies and initial conditions. It may be thatthe 1960–1979 period was the unusual period for LDC growth,and the 1980–98 stagnation of poor countries representsa return to the historical pattern of divergence between richand poor countries.     

The economic case for international labour standards

This paper explores the economic case for international labourstandards. Granting workers rights of free association and collectivebargaining confers both static and dynamic economic efficiencies.Static efficiencies refer to one-time gains from improvementsin economic practice. Dynamic efficiencies refer to gains fromimprovements to the growth path resulting from a shift awayfrom a ‘low road’ development path to a ‘highroad’ path. These efficiencies raise wages, employmentand output in developing countries, and they can also benefitworkers in developed countries. Labour standards are an institutionalmechanism for raising the quality of growth in both developingand developed countries. In this sense, they are a ‘win–win’institution.     

International Integration and Growth: A Further Investigation on Developing Countries

The paper examines empirically the linkages between international integration and economic growth in a panel of 47 developing countries and 18 trade blocs over the period 1970–1989. Specifically, it attempts to identify through which channel(s) – notably, specialization according to comparative advantage and increased efficiency, exploitation of increasing returns from larger market, and technology spillovers through investment and trade–trade blocs can affect the economic growth of their member countries. The results suggest that (1) intra-bloc trade does not affect growth significantly; (2) income diversion among member countries contributes positively and significantly to growth; and (3) the size of the trade bloc does matter in the sense that the bigger is not always the better for the welfare of the member countries.     

How to design and use the clean development mechanism under the Kyoto Protocol? A developing country perspective

Under the Kyoto Protocol, industrialized countries committed to emission reductions may fullfil part of their obligations by implementing emission reduction projects in developing countries. In doing so, they make use of the so-called Clean Development Mechanism (CDM). Two important issues surround the implementation of the CDM. First, if the cheapest abatement measures are implemented for CDM projects, developing countries may be left with only more expensive measures when they have to meet their own commitments in the future (the so-called low-hanging fruits (LHF) issue). Second, a choice must be made on the type of baseline against which emission reductions are measured: an absolute baseline or a relative (to output) one (the baseline issue). The purpose of this paper is to study the interactions between these two issues from the point of view of the developing country. Two major results are obtained. First, when possible future commitments for developing countries and irreversibility of abatement measures are taken into account, we show that the industry where CDM projects are implemented enjoys larger profits under an absolute baseline than under a relative one. Second, concerning the LHF problem, the financial compensation required by the developing country for implementing ‘too many’ CDM projects is larger under the relative baseline.     

Withstanding financial crises: would trade partners help or hurt?

This article provides new empirical evidence on the losses of real activity caused by various financial shocks. Spillover effects due to foreign trade linkages deserve special attention. To this end, we estimate a modify auto-regressive process and a Seemingly Unrelated Regression Equations estimator is used to account for the dependency of one’s country growth on its trade-weighted partners growth. We run estimations on a set of currency collapses, banking crises and sovereign defaults in 49 advanced and developing countries from 1978 to 2011. The trade-weighted foreign demand effect mitigated the economic downturn following a banking or a sovereign debt crisis in all countries, while only the advanced ones benefited from it after a currency collapse. Trade-based spillover effects make banking crises more costly in the developing countries, in those that liberalize their financial account. It contrasts with what is observed during currency or sovereign debt crises.     

The underdevelopment of service industry in china: An empirical study of cities in Yangtze River Delta

The service industry in China is underdeveloped, in comparison with not only the past experience of developed countries at the similar level of GDP per capita, but also other similar developing countries at present. We define this deviation of China’s service industry from the development trend in other countries as the “development deviation puzzle,” and propose a conceptual framework based on the “manufacturing cost disease” hypothesis to understand the reasons behind this puzzle. We test our hypothesis using the data from the urban cluster in Yangtze River Delta. The results indicate that labor productivity growth in service industry is driven by capital investment and the “development deviation puzzle” is indeed rooted in the “manufacturing cost disease.” Our analysis suggests that, to correct the underdevelopment of service industry, the strategy of investment-driven industrialization and urbanization must be changed. Expansion of producer services is important in increasing the intensities of human capital and foreign investment.     

Catching up to the technology frontier: the dichotomy between innovation and imitation

Abstract Using data for 55 developing and developed countries, this research examines the roles of technology transfer, research intensity, educational attainment, and the ability to absorb foreign technology in explaining cross‐country differences in productivity growth. The results show that innovation is an important factor for growth in OECD countries, whereas growth in developing countries is driven by imitation. Furthermore, the interaction between educational attainment and the distance to the frontier is a significant determinant of growth in the overall sample.     

How Does Foreign Direct Investment Really Affect Developing Countries' Growth?

Two main contributions to literature on foreign direct investment (FDI) and economic growth are made in this paper. First, the paper examines the effect of FDI on economic growth for 44 developing countries using heterogeneous panel cointegration techniques that are robust to omitted variables and endogenous regressors. The main result is that FDI has, on average, a negative effect on growth in developing countries, but there are large differences in the effect across countries. Second, a general‐to‐specific model‐selection approach is used to systematically search for country‐specific factors explaining the cross‐country differences in the growth effects of FDI. The results suggest that the cross‐country heterogeneity in the growth effect of FDI can be explained mainly by cross‐country differences in freedom from government intervention, business freedom, FDI volatility, and primary export dependence.     

In search of FDI-led growth in developing countries: The way forward

This paper challenges the widespread belief that FDI generally has a positive impact on economic growth in developing countries. It addresses the limitations of the existing literature and re-examines the FDI-led growth hypothesis for 28 developing countries using cointegration techniques on a country-by-country basis. The paper finds that in the vast majority of countries, there exists neither a long-term nor a short-term effect of FDI on growth; in fact, there is not a single country where a positive unidirectional long-term effect from FDI to GDP is found. Furthermore, our results indicate that there is no clear association between the growth impact of FDI and the level of per capita income, the level of education, the degree of openness and the level of financial market development in developing countries.     

Do all countries follow the same growth process?

We estimate finite-mixture models in which countries are sorted into groups based on the similarity of the conditional distributions of their growth rates. We observe countries growth experiences over the 1970–2000 period and find evidence for a model in which there are two classes of countries, each with its own distinct growth regime. Group membership does not conform to the usual categories used to address parameter heterogeneity such as region or income. We find strong evidence that the quality of institutions and specifically, the degree of law and order, helps to sort countries into different regimes. Once we control for institutional features of the economy, we find no evidence that geographic features such as latitude and being landlocked play a role in determining the country groupings.     

适宜技术、技术选择和发展中国家的经济增长

在本文中,我们认为一个国家最适宜(优)的技术结构内生决定于这个国家的要素禀赋结构。如果一个发展中国家选择与其要素禀赋结构相一致的技术结构,那么这个发展中国家和发达国家之间在全要素生产率以及每个劳动力的人均产出上的差异就会变得最小。进一步地,如果发展中国家选择最适宜的技术,那么由于发展中国家在技术变迁的成本上比发达国家低,因此,发展中国家的经济增长速度可以超过发达国家的经济增长速度,从而,我们可以得出发展中国家可以收敛到发达国家的结论。     

The sensitivity of poverty rates to macro-level changes in the European Union

The authors use the European Union-wide tax–benefit model,EUROMOD, to establish baseline rates of relative poverty in1998 for each of the Member States and then explore their sensitivityto (a) an increase in unemployment, (b) real income growth and(c) an increase in earnings inequality. They find that povertyrates are sensitive to such ‘macro-level’ changesbut that the size—and in some cases the direction—ofthe effect varies across countries. If such indicators are tobe used in judging the effectiveness of social policies, itis important that differences in responsiveness are fully understood.     

Net foreign assets,productivity and real exchange rates in constrained economies

Empirical evidence suggests that real exchange rates (RER) behave differently in developed and developing countries. We develop an overlapping generations two-sector exogenous growth model in which RER determination may depend on the country's capacity to borrow from international capital markets. The country faces a constraint on capital inflows. With high domestic savings, the RER only depends on the productivity spread between sectors (Balassa–Samuelson effect). If the constraint is too tight and/or domestic savings too low, the RER depends on both net foreign assets (transfer effect) and productivity. We then analyze the empirical implications of the model and find that, in accordance with the theory, the RER is mainly driven by productivity and net foreign assets in constrained countries and by productivity in unconstrained countries.     

A simple model of three economies with two currencies: the eurozone and the USA

This paper presents a Keynesian model which describes threecountries trading merchandise and financial assets with oneanother. It is initially assumed that all three countries haveindependent fiscal policies but that two of the countries sharea currency, hence the model can be used to make a preliminaryanalysis of the conduct of economic policy in ‘the eurozone’vis-à-vis the rest of the world—‘the USA’.The main conclusion will be that, if all three countries doindeed operate independent fiscal policies, the system willwork under a floating currency regime, but only so long as theEuropean central bank is prepared to modify the structure ofits assets by accumulating an ever rising proportion of billsissued by any ‘weak’ euro country.     

The real exchange rate and economic growth: are developing countries different?

Recent research has found a positive relationship between real exchange rate (RER) undervaluation and economic growth. Different rationales for this association have been offered, but they all imply that the mechanisms involved should be stronger in developing countries. Rodrik (2008 Rodrik, D. 2008. The real exchange rate and economic growth. Brookings Papers on Economic Activity, 2: 365–412.  [Google Scholar]) explicitly analyzed and found evidence that the RER–growth relationship is more prevalent in developing countries. We show that his finding is sensitive to the criterion used to divide the sample between developed and developing countries. Using alternative classification criteria and empirical strategies to evaluate the existence of asymmetries between groups of countries, we find that the effect of currency undervaluation on growth is indeed larger and more robust for developing economies. However, the relationship between RER undervaluation and per capita GDP is non-monotonic, and is limited largely to the least developed and richest countries. This discontinuity constitutes a puzzle that calls for closer analysis.     

A Sectoral Approach Balancing Global Efficiency and Equity

This paper explores the idea that a properly designed sectoral approach could be the answer to two sets of constraints that hinder international agreements on climate change, namely a genuine concern from developing countries for economic growth and competitiveness issues from industrialized countries. Our sectoral approach builds on three premises: (i) cap-and-trade systems are established in industrialized countries and intensity targets in developing countries, (ii) sectors subject to international trade abide by the rules of the countries in which they trade and (iii) a fraction of the revenues from permits in industrialized countries go towards carbon mitigation in developing countries. We design an economic model that features interactions in three carbon-intensive sectors (two of which are internationally traded) and two countries (an industrialized country and a developing country). Two scenarios are constructed: an Enhanced Sectoral Approach, which refers to our proposal, and a Global Cap, which implements a uniform CO₂ price. We compare the two scenarios in terms of total welfare and equity. It is shown that, for a minor global welfare loss, the Enhanced Sectoral Approach ranks high in terms of equity for emerging countries. This approach also eliminates competitiveness and leakage issues.     

Postwar slowdowns and long-run growth: a Bayesian analysis of structural break models

Using Bayesian methods, we re-examine the empirical evidence from Ben-David, Lumsdaine, and Papell (Empir Econ 28:303–319, 2003) regarding structural breaks in the long-run growth path of real output series for a number of OECD countries. Our Bayesian framework allows the number and pattern of structural changes in trend and variance to be endogenously determined. We find little evidence of postwar growth slowdowns across countries, and smaller output volatility for most of the developed countries after the end of World War II. Our empirical findings are consistent with neoclassical growth models, which predict increasing growth over the long run. The majority of the countries we analyze have grown faster in the postwar era as opposed to the period before the first break.