Openness in growth models

1. Openness in growth models • Introduction trade gains, conceptualize trade, trade policy example • Openness and growth what is openness (how to define it)what’s the linkexamples of modelstrade, growth and property • Concluding remarks

2. introduction • Trade; Conceptualizedtheory of comparative advantages (Ohlin) revisitedcomp. Ad.: factors drive a cone of diversification openness would intensify the effect ≠empirical observations’new’ trade models; utility of variety (armington assumption) ≠empirical observations 3th class of models(1&2): differentiation by quality (sophistication) • gains from trade (which will lead to growth?)°Knowledge spillover°comparative advantage, producing for larger scale, °incentives for local R&D,contact with foreign marktes and agents ,,, (grossman & Helpman)

3. Example; implication of tariff imposition small country perspective Effect of tariff= welfare decrease

4. What is openness? How do we find a proxy? HystoryKrugman’94 & Rodrik’95: theoretical models unable to link trade policy and faster equilibrium growth. ( data problems) Romer, Grossman and helpman, Sala-i-Martin: argued openness gives greather ability to absorb technological advances of leading nations.(if imitation cost < innovation cost convergence )knowledge spillovers is the link between growth and openness,,,but assumption: knowledge(knowhow,,) is a public good ? How do we measure openness? (tariffs, quota’s, licenses,exange controls,,) what is openness? Combination of restrictions, contracts between agents,,

5. Measurement of trade orientatieon and openness • Degree of distortion: • collective tariff ration (ctr), avarge converage of quantitivive restriction (qrs), black market, indecators,,, levels, binary classifications, percentages,,, how do we find an appropriate comparative openness index? concentrade whether econometric resolts are robust.

6. theory: growth with the spillover effect mechanics of Total Productivity Growth (TPF)β stock of knowledge y=βƒ(K,L) Domestic (depending on innovation) international(imitation in leading nation; catching up therm)

7. Countries with lower stock of knowledge will imitate faster  convergence • Growth of β= ξ+θ(W- β)/ β World stock (growth g) Domestic rate of innovation Speed of catching upassumed to depend on openness This model implies that nations with a more open economy will have a higher steady state stock of knowledgeopenness possitive for TFP growth

8. Does data like this model??Mr.Edwards’98 will check robustness of 9 alternative openness indexes • Results;focus on TPF growth determinats (initial level of gdp/cap, openness (open) and Human Capital (HC) Initial level of HC(+innovation/ +absorbe)always pos. Intitial gdp/cap.Neg. (controlling HC&open)convergence but smallpos. (not contr.)  no convergence Pos. And often significant!!Although they studied different proxies for openness.

9. Trade, Growth and Poverty • Openness to international trade accelerates development: - Srinivasan and Bhagwati (1999) • Trade/GDP (%) • Trade – Weighted Average Tariffs (%) • Real per capita GDP Gtowth (%)

13. Rodriguez and Rodrik (2000) Trade openness is associated with more rapid growth - (Dollar, 1992; Sachs and Warner, 1995; Edwards, 1992) • measures of trade barriers are often correlated with other growth-inhibiting factors • the ‘trade policy’ indicators that have been used in the empirical literature are not particularly good.

14. Empirical work of Dollar and Kraay • decade-over-decade changes in the volume of tradeas an imperfect proxy for changes in trade policy „By focusing on decadal changes in growth andchanges in trade volumes we can at least be sure that our results are not driven bygeography, nor by any other unobserved country characteristic that drives bothgrowth and trade but varies little over time, such as institutional quality.”

15. Empirical work of Dollar and Kraay „Byincluding period dummies we are also able to control for shocks that are commonto all countries, such as global demand shocks or reductions in transport costs.”

16. Relationship between trade liberalization and inequality • one-to-one relationship between the growth rateof income of the poor and the growth rate of per capita income.

17. What can we expect tohappen when developing countries liberalize trade and participate more in the global trading system? • We can make some qualitative predictions.Based on the experiences of individual cases of post-1980 liberalisers and thegeneral patterns detected in cross-country regressions. • Based on other countries’ experiences, there is no reason to expect any large change in household income inequality. • We can expect that greater openness would improve the material lives of the poor. • We know that there will be some individual losersamong the poor in the short run and that effective socialprotection can easethe transition to a more open economy.

18. Growth of the Post-1980 Globalisers • The objective is to identify developing countries that have significantlyopened up to foreign trade in the past 20 years and tocompare their growth to that ofother developing countries that have remainedmore closed.

22. Cross-country statistical analysis oftrade and growth using regression analysis • ‘standard’ growth regression: yct=β0+β1yc,t-k+β’2xct+ᵑ c+ᵞ t+ ᵛct

23. Regression of growth on lagged growth and onchanges in the set of explanatory variables Yct – Yc,t-k=β1(yc,t-k - yc,t-2k)+β’2(xct –xct-k)+(ᵞ t -ᵞt-k)+ (ᵛc,t -ᵛc,t – k )

24. Results

25. Inequality and Poverty in the Post-1980 Globalisers There is no systematic tendency for trade to be associated withrising inequality that might undermine its benefits for growth and poverty reduction.