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One of the most enduring questions in economics involves how a nation could accelerate the pace of its economic development. One of the most enduring answers to this question is to promote exports -either because doing so directly influences development via encouraging production of goods for export, or because export promotion permits accumulation of foreign exchange which permits importation of high-quality goods and services, which can in turn be used to expand the nation's production possibilities. In either case, growth is said to be export-led; the latter case is the so-called "two-gap" hypothesis (McKinnon, 1964; Findlay, 1973). The early work on export-led growth consisted of static cross-country com­ parisons (Michaely, 1977; Balassa, 1978; Tyler, 1981; Kormendi and Meguire, 1985). These studies generally concluded that there is strong evidence in favour of export-led growth because export growth and income growth are highly correlated. However, Kravis pointed out in 1970 that the question is an essen­ tially dynamic one: as he put it, are exports the handmaiden or the engine of growth? To make this determination one needs to look at time series to see whether or not exports are driving income. This approach has been taken in a number of papers (Jung and Marshall, 1985; Chow, 1987; Serletis, 1992; Kunst and Marin, 1989; Marin, 1992; Afxentiou and Serletis, 1991), designed to assess whether or not individual countries exhibit statistically significant evidence of export-led growth using Granger causality tests.



Long-Run Economic Growth

Long-Run Economic Growth

One of the primary goals of most national governments is to achieve sustainable growth of real income per person (hereafter economic growth), in the belief that it can help raise the economic well-being of the population as a whole. This widespread concern has been paralleled with the explosion of research on growth in the last decade. The macroeconomics of growth is concerned with questions such as: Why do growth rates differ over time in a given country? Do countries then become more similar in terms of income and productivity growth? Can growth rates be improved by designing economic policies? Answers to such questions are of obvious importance. We have put together a set of papers by distinguished growth researchers in order to survey the state of empirical work in this area.
Steven Durlauf, John F. Helliwell, Baldev Raj

Testable Implications of Various Growth Theories and Modelling and Identification of Common Shocks


The Observational Implications of Schumpeterian Growth Theory

This paper obtains and discusses alternative testable implications of the Schumpeterian theory of creative destruction for economic growth.
Philippe Aghion, Peter Howitt

Dynamic Common Factors in Large Cross-Sections

This paper develops a method to analyze large cross-sections with non-trivial time dimension. The method (i) identifies the number of common shocks in a factor analytic model; (ii) estimates the unobserved common dynamic component; (iii) shows how to test for fundamentalness of the common shocks; (iv) quantifies positive and negative comovements at each frequency. We illustrate how the proposed techniques can be used for analyzing features of the business cycle and economic growth.
Mario Forni, Lucrezia Reichlin

International Trade and Growth Linkages


Human Capital and Measurable Dynamic Gains from Economic Integration

An Application to the Economic Integration of North and South America
The paper looks at the source of dynamic gains to trade liberalization using a two-country model with both physical and human capital accumulation. The model is calibrated and used to examine the effect of the economic integration of Canada and the United States with Latin America. The analysis assumes that differences in productivity levels between regions are due entirely to differences in human and physical capital endowments. Key assumptions are that capital is internationally mobile and human capital formation is income constrained. The simulated impact of moving to a hemispheric free trade area is significant. The long-run impacts are also different from the short-run efficiency effect predicted by conventional static triangle-rectangle analysis. The long-run multiplier effect on static output gains are on the order of 2.0 to 2.5 for the South — that is long-run output gains are 2.0 to 2.5 times predicted short-run static gains. In the case of the North, static predictions of gain are ambiguous in sign over the longer run; in some cases there are small dynamic gains — in others. small losses. Investment diversion toward Latin America is a prominent characteristic of the results.
Richard G. Harris

The Engine of Growth or its Handmaiden?

A Time-Series Assessment of Export-Led Growth
This paper presents an analysis of time-series data for the countries in the Summers-Heston (1991) data set, in an attempt to ascertain the evidence for or against the export-led growth hypothesis. We find that standard methods of detecting export-led growth using Granger-causality tests may give misleading results if imports are not included in the system being analyzed. For this reason, our main statistical tool is the measure of conditional linear feedback developed by Geweke (1984), which allows us to examine the relationship between export growth and income growth while controlling for the growth of imports. These measures have two additional features which make them attractive for our work. First, they go beyond mere detection of evidence for export-led growth, to provide a measurement of its strength. Second, they enable us to determine the temporal pattern of the response of income to exports. In some cases export-led growth is a long-run phenomenon, in the sense that export promotion strategies adopted today have their strongest effect after eight to 16 years. In other cases the opposite is true; exports have their greatest influence in the short run (less than four years). We find modest support for the export-led growth hypothesis, if “support” is taken to mean a unidirectional causal ordering. Conditional on import growth, we find a causal ordering from export growth to income growth in 30 of the 126 countries analyzed; 25 have the reverse ordering. Using a weaker notion of “support” — stronger conditional feedback from exports to income than vice versa, 65 of the 126 countries support the export-led growth hypothesis, although the difference in strength is small. Finally, we find that for the “Asian Tiger” countries of the Pacific Rim, the relationship between export growth and output growth becomes clearer when conditioned on human capital and investment growth as well as import growth.
Raymond G. Riezman, Charles H. Whiteman, Peter M. Summers

Analysis of Co-Movements and Convergence at Regional Level of Incomes


Productivity and Convergence Across U.S. States and Industries

We examine the sources of aggregate labor productivity movements and convergence in the U.S. states from 1963 to 1989. Productivity levels vary widely across sectors and across states, as do sectoral output and employment shares. The main finding is the diverse performance of sectors regarding convergence. Using both cross-section and time series methods, we find convergence in labor productivity for both manufacturing and mining. However, we find that convergence does not hold for all sectors over the period. Decomposing aggregate convergence into industry productivity gains and changing sectoral shares of output, we find the manufacturing sector to be responsible for the bulk of cross-state convergence.
Andrew B. Bernard, Charles I. Jones

Aggregate and Regional Disaggregate Fluctuations

This paper models fluctuations in regional disaggregates as a nonstationary, dynamically evolving distribution. Doing so enables study of the dynamics of aggregate fluctuations jointly with those of the rich cross-section of regional disaggregates. For the US, the leading state — regardless of which it happens to be — contains strong predictive power for aggregate fluctuations. This effect is difficult to understand if only aggregate disturbances affect aggregate business cycles through aggregate propagation mechanisms. Instead, a better picture might be one of a “wave” of regional dynamics, rippling across the national economy.
Danny T. Quah

Public Services, Money, and Growth Linkages


Estimating the Impact of Government Consumption on Growth: Growth Accounting and Endogenous Growth Models

Panel data is analyzed on government consumption and GDP growth in 116 countries, 1950–90. The purported positive impact of government growth on GDP growth is due to simultaneity bias. The negative cross-national correlation between government size and economic growth reflects in part an equilibrium relationship. Growth is a non-monotonic function of government size (measured at current domestic prices). Growth rates are increasing in government consumption expenditures up to a level around 12 percent of GDP.
Steve Dowrick

Growth and the Neutrality of Money

Using two simple stochastic growth models that nest both exogenous and endogenous growth, this paper shows that money should not be neutral in the long run if it is not neutral in the short run and if growth is endogenous. By contrast, if growth is exogenous, money should be neutral in the long run. The paper also tests whether money is neutral in the long run, finding no contrary evidence. Given that money is not neutral in the short run, this finding indicates that exogenous growth cannot be rejected in favor of endogenous growth.
Paul Evans


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