How should resource‐rich countries diversify? Estimating forward‐linkage effects of mining on productivity growth

Resource‐rich countries willing to diversify their economies are faced with dual policy options; to either develop resource‐based industries, or diversify their economies as a whole and invest into new activities that are not necessarily resource dependent. Not only does the economic theory fail to provide a consensual guidance on this issue but empirical evidence is also lacking. This paper empirically assesses which of these two patterns of diversification is associated with higher productivity growth outcomes for resource‐rich countries. Using panel data for 50 resource‐abundant countries over the period 1970–2010, I find that stronger downstream linkages to mining and extractives do not lead to productivity enhancements. Broadening and diversifying the production structure as a whole offers potential for productivity growth at higher levels of income.     

The Role of Agricultural Productivity on Structural Change

Many authors have estimated and found that the productivity growth in agriculture is higher than that in non‐agriculture in today's richest countries. Several papers suggested that growth in agricultural productivity was essential for today's richest countries to take off early. However, few articles noticed that growth in agricultural productivity is critical in driving structural change in today's richest countries. This paper studies a two‐sector neoclassical growth model with subsistence agricultural consumption and shows that growth in agricultural productivity plays a more important role than growth in non‐agricultural productivity in governing massive structural change in today's richest countries.     

COSTLY INTERMEDIATION AND THE POVERTY OF NATIONS*

This article has two goals: (i) to reduce the 7‐fold productivity differential required to explain the observed 33‐fold income difference between the richest and poorest countries of the world; and (ii) to explain cross‐country differences in the capital‐output ratio. To achieve the first goal we modify the production function of the standard neoclassical growth model to include public capital whose provision is subject to intermediation costs. For the second goal we distort private investment by introducing credit frictions. The model, quantified using cross‐country data, generates an income gap of 33 with productivity differences of only 3 under the measured variations in public and private capital. The required productivity gap declines even further, to 2.1, when we introduce a home‐production sector. On the second goal, however, credit frictions do a poor job of explaining cross‐country variations in the capital‐output ratio.     

Domestic agricultural value chain development and pro‐poor growth: A computable general equilibrium microsimulation application for the Democratic Republic of Congo

The economy of the Democratic Republic of Congo has gained momentum between 2003 and 2015, with a high annual growth rate of over 6%. However, poverty and employment outcomes were relatively poor, while inequality increased. This study uses a computable general equilibrium (CGE) microsimulation model to study the pro‐poor effect of alternative growth strategy that is likely to strengthen the competitiveness of agro‐food products from the Congo. We experimented with three different scenarios: labor productivity growth, marketing efficiency, and transportation efficiency. The simulations demonstrated that improving the productivity of workers in agro‐food industries has not only produced strong relative pro‐poor effects, but also has the potential to lead to income convergence between rich and poor households. The analysis also revealed the underestimated contribution of agro‐food marketing and transportation efficiency. The major finding is that marketing efficiency favors the middle class. Efficiency gains in the transportation of agro‐food products generate strong pro‐poor effects in absolute and relative terms and are likely to be particularly effective in leading to income convergence. This policy has the potential not only to increase income and employment, but also to provide positive price impacts for both producers and consumers and benefits to all households, particularly low‐income households.     

Taxes,inequality and the size of the informal sector

In this note, we develop a simple heterogeneous-agent model with incomplete markets to explain the prevalence of a large, low-productivity, informal sector in developing countries. In our model, taxes levied on formal sector agents are used to finance the provision of a productive public infrastructure, which creates a productivity premium from formalization. Our model offers endogenous differentiation of rich and poor countries. Complete formalization is an equilibrium only in countries with the appropriate initial conditions. We discuss the existence of this equilibrium and highlight the ambiguous effect of taxes.     

Getting help from abroad: The macroeconomics of foreign direct investment in infrastructure in low‐income countries

Infrastructure financing needs in most low‐income countries are substantial, but funding for such needs is only partly covered by national governments and aid donors. This paper introduces foreign direct investment (FDI) through public–private partnerships as a source of infrastructure financing in low‐income countries. A two‐sector open economy model is developed to assess the macroeconomic performance of FDI in infrastructure. With efficient foreign investment, an increase in revenue‐generating infrastructure investment boosts productivity and spurs private investment while stabilizing domestic prices. A direct comparison between infrastructure financed by domestic versus foreign investment shows that foreign investment creates higher output growth and welfare gains and is preferable to domestically sourced investment, irrespective of the underlying financing instrument the domestic economy is employing. FDI in non‐revenue‐generating infrastructure is also analyzed and discussed.     

Trade integration and regional income disparities in a growth model with the service sector and footloose capital

This paper proposes a North–South growth model of endogenous industry location which is consistent with recent empirical work showing that regional income disparities have increased in many countries with the process of trade integration. The model incorporates a service sector that benefits from intersectoral knowledge spillovers from the manufacturing sector. We find that, when these spillovers are local, trade integration leads to an increase in interregional real income inequality.     

Distributive impact of structural change: Does environmental degradation matter?

Vulnerability to reduction of natural capital depends on defensive substitution possibilities that, in turn, are affected by the availability of other productive factors. However in several developing countries asset distribution tends to be highly skewed. Taking into account these elements, this paper proposes a model considering an economy polarized into two classes (the rich and the poor) and characterized by the following stylized facts: income and productivity of the rural poor is highly dependent on natural resources; labour remuneration in rural sector represents the opportunity cost for wage labour; the rich can partially substitute natural capital with physical capital and wage labour. In this context, agents differ for feed back mechanisms and interactions between their choices of production and environmental dynamics. Moreover environmental depletion may trigger economic transition, but the structural change is likely to result regressive.     

Informality,innovation, and aggregate productivity growth

This paper investigates how the costs of innovation in the formal sector temper or magnify the impacts of traditional policy levers such as taxation on sectoral choice. I embed a decision whether to operate formally or informally into a richer, general equilibrium model. Formal firms are subject to taxation, but they can improve their productivity through process innovation. Informal firms can potentially avoid taxation, and their productivity is determined by productivity growth in the formal sector. I find that changing tax rates from 50% to 60% decreases formal‐sector participation by 20.9%; however, this percentage falls by 10% when the cost of innovation is lower in the formal sector. The model also illustrates how changes in tax policy affect total factor productivity growth by limiting both the number of formal‐sector firms and the intensity of innovation. These results indicate a potential mechanism to induce firms to operate formally or mitigate harmful impacts of necessary tax changes.     

Nontraded Goods and Real Exchange Rates in a Multi‐Good Ricardian Model

The two‐country Ricardian trade model with discrete goods and uniform transport costs for tradable goods is applied to the decomposition of the real exchange rate into traded and nontraded components. The real exchange rate is driven almost entirely by changes in the productivity differentials in nontraded goods and also explains the Balassa–Samuelson effect of a lower cost of living in poor countries, but extraordinary transport costs for some nontraded goods are necessary to easily explain the Balassa–Samuelson effect.     

Natural Resource Booms and Inequality: Theory and Evidence*

We develop a theory, in the context of a two‐sector growth model in which learning‐by‐doing drives growth, to explain the time path of income inequality following natural resource booms in resource‐rich countries. Under the condition of a relatively unskilled labor intensive non‐traded sector, inequality falls immediately after a boom, and then increases steadily over time until the initial impact of the boom disappears. Using data for 90 countries between 1965 and 1999, we find evidence in support of the theory, especially for oil and mineral booms. We also find that uncertainty about future commodity prices increases long‐run inequality.     

Product and process innovation and total factor productivity: Evidence for manufacturing in four Latin American countries

The literature on firm productivity recognizes the important role played by firm innovation activities on firm productivity in developed countries. However, the literature for developing and emerging economies is scarce and far from conclusive. The aim of this paper is to study the innovation–productivity link (distinguishing between process and product innovations) for manufacturing at the firm level for four Latin American countries (two classified as upper‐middle income countries by the World Bank—Argentina and Mexico—and two as lower‐middle income—Colombia and Peru). We aim testing whether the level of development is a mediating factor in the innovation–productivity link. The data used have been drawn from the World Bank panel enterprise surveys, for 2006 and 2010. First, we estimate total factor productivity (TFP) and, second, we use the estimated TFP as a regressor or as dependent variable, in two models for testing self‐selection of the most productive firms into innovation or the existence of returns to innovation in terms of productivity. Our results confirm the mediating role of the level of development in the innovation–productivity link: both the self‐selection and the returns‐to‐innovation hypotheses work only for the upper‐middle income countries.     

STRUCTURAL CHANGE IN A SMALL OPEN ECONOMY: AN APPLICATION TO SOUTH KOREA

This paper develops a dynamic general equilibrium model and studies structural change in a small open economy with two tradable sectors, agriculture and manufacturing, and a non‐tradable sector, services. In addition to obtaining results for a falling employment share of agriculture and a rising share of services, we demonstrate analytically the hump‐shaped share of manufacturing by identifying two countervailing effects: the productivity effect and the Balassa–Samuelson effect. The first effect, arising from differential rates of productivity growth among sectors, increases the share of manufacturing; the second effect, together with low rates of substitution between products, enhances the service sector and eventually draws labour from the manufacturing sector. At the aggregate level, however, the economy maintains a constant rate of growth. We calibrate the model with data from South Korea and find that the calibration fits the country's historical path of structural change.     

Empirical investigation of the agriculture–malnutrition nexus in Africa: Spatial clustering and spillover effects

Many studies have been conducted to examine the direct effect of agriculture on the prevalence of malnutrition; however, there is little solid evidence on spatial spillover effects and much less on the heterogeneous effects stemming from spatial differences in nutritional conditions. We make up this gap by using a dynamic spatial Durbin model to characterize the impact of agricultural productivity on malnutrition in Africa. Our results show that countries in Eastern Africa are more likely to suffer from severe malnutrition than other regions. We find evidence for convergence in agricultural productivity across countries with moderate and high prevalence of malnutrition as disparities in their agricultural productivity narrow down over the sample period. It appears that the negative effect of agriculture on malnutrition is more evident in countries where the prevalence of malnutrition is lower. This implies that agricultural development does not play a substantial role in reducing malnutrition in the worst affected areas. We also report that poor agricultural development can deteriorate the nutritional status among neighboring countries in the short term, consistent with the spatial-locking effect of agriculture.     

Nonstationarity and Stochastic Stability of Relative Income Clubs

The recent literature on “convergence” of cross‐country per capita incomes has been dominated by the two hypotheses of “global convergence” and “club‐convergence,” pertaining to limits of estimated income distribution dynamics. Utilizing a new measure of “stochastic stability,” we establish two stylized facts regarding short‐ and medium‐term distribution dynamics. The first is non‐stationarity of transition dynamics, in the sense of changing transition kernels, and the second is emergence, disappearance, and re‐emergence of a “stochastically stable” middle income group. This middle income group emerges as the gap between rich and poor clubs gets larger, and it changes the dynamics of transition to and from the rich and poor clubs, eventually narrowing the gap between the poor and rich as the middle club vanishes. Analyzing the stochastic stability of middle‐income groups is thus a first step toward understanding higher‐order dynamics of narrowing or widening of the gap between rich and poor countries.     

Cross‐country evidence on the determinants of inclusive growth episodes

Widening income disparities and slow productivity growth in most advanced and several emerging‐market economies have rekindled interest in the empirical analysis of the determinants of inclusive growth, defined in this paper as episodes of increases in GDP per capita without a concomitant deterioration in the distribution of household disposable income. The empirical analysis is based on a chronology of inclusive growth episodes between 1980 and 2013 for a sample of 78 countries. Logit and multinomial probit estimations show that human capital accumulation, the redistributive potential of tax‐benefit systems, increases in multifactor productivity and labor force participation, as well as trade openness and a range of institutional factors, including political system durability and electoral regimes, are important determinants of the probability of occurrence of inclusive growth. This empirical evidence contributes to the policy debate about how countries can deal with efficiency–equity tradeoffs.     

Misallocation and aggregate productivity across time and space

Productivity is at the core of the large differences in income per capita across countries. What accounts for international productivity differences? I discuss cross‐country differences in the allocation of inputs across heterogeneous production units—misallocation—as a potential factor in accounting for aggregate productivity. Policies and institutions generating misallocation are prevalent in poor and developing countries and may also be responsible for differences in the selection of operating producers and technology used, contributing substantially to aggregate productivity differences across countries.     

EMPLOYMENT PROTECTION,TECHNOLOGY CHOICE,AND WORKER ALLOCATION

We show empirically that high‐risk sectors, which contribute strongly to aggregate productivity growth, are relatively small and have relatively low productivity growth in countries with strict employment protection legislation (EPL). To understand these findings, we develop a two‐sector matching model where firms endogenously choose between a safe technology and a risky technology. For firms that have chosen the risky technology, EPL raises the costs of shedding workers in case they receive a low productivity draw. According to our calibrated model, high‐EPL countries benefit less from the arrival of new risky technologies than low‐EPL countries. Parameters estimated through reduced‐form regressions of employment and productivity on exit costs, riskiness, and in particular their interaction are qualitatively similar for actual cross‐country data and simulated model data. Our model is consistent with the slowdown in productivity in the European Union relative to the United States since the mid‐1990s.     

MODELING INVESTMENT‐SECTOR EFFICIENCY SHOCKS: WHEN DOES DISAGGREGATION MATTER?

The most straightforward way to analyze investment‐sector productivity developments is to construct a two‐sector model with a sector‐specific productivity shock. An often used modeling shortcut accounts for such developments using a one‐sector model with shocks to the efficiency of investment in a capital accumulation equation. This shortcut is theoretically justified when some stringent conditions are satisfied. Using a two‐sector model, we consider the implications of relaxing several of the conditions that are at odds with the U.S. Input–Output Tables, including equal factor shares across sectors. The effects of productivity shocks to an investment‐producing sector of our two‐sector model differ from those of efficiency shocks to investment in a one‐sector model. Notably, expansionary productivity shocks boost consumption in every period, whereas expansionary efficiency shocks cause consumption to fall substantially for many periods.     

Long-run effects of low-wage countries’ growing competitiveness and exports of manufactures

Previous work on this topic brought to light the possibility of a loss in income for the high-wage countries. Our two-country multicommodity Ricardo–Mill model extends this result to the n-good case but also shows the possibility of an offsetting income benefit, accruing to the high-wage country, if the low-wage country's productivity increases go beyond what is strictly necessary to reduce to zero the production of a good previously produced by the high-wage country. Alternative setups are also explored, in which in the low-wage country, along with a modern sector, a traditional sector exists, where workers’ income is at subsistence level. If the reaction of wages of the former sector to permanent shifts of workers from the traditional subsistence sector to the modern one is sufficiently small, high-wage countries, instead of losing, will gain.