The Quantitative Importance of Openness in Development
AbstractThis paper deals with a classic development question: how can the process of economic development – transition from stagnation in a traditional technology to industrialization and prosperity with a modern technology – be accelerated? Lewis (1954) and Rostow (1956) argue that the pace of industrialization is limited by the rate of capital formation which in turn is limited by the savings rate of workers close to subsistence. We argue that access to capital goods in the world market can be quantitatively important in speeding up the transition. We develop a parsimonious open-economy model where traditional and modern technologies coexist (a dual economy in the sense of Lewis (1954)). We show that a decline in the world price of capital goods in an open economy increases the rate of capital formation and speeds up the pace of industrialization relative to a closed economy that lacks access to cheaper capital goods. In the long run, the investment rate in the open economy is twice as high as in the closed economy and the per capita income is 23 percent higher.
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Bibliographic InfoPaper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 4412.
Date of creation: 2013
Date of revision:
openness; industrialization; capital formation; relative price of investment;
Other versions of this item:
- Wenbiao Cai & B. Ravikumar & Raymond Riezman, 2013. "The quantitative importance of openness in development," Working Papers 2013-025, Federal Reserve Bank of St. Louis.
- Wenbiao Cai & B. Ravikumar & Raymond G. Riezman, 2013. "The Quantitative Importance of Openness in Development," Departmental Working Papers 2013-02, The University of Winnipeg, Department of Economics.
- O11 - Economic Development, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
- F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
- O14 - Economic Development, Technological Change, and Growth - - Economic Development - - - Industrialization; Manufacturing and Service Industries; Choice of Technology
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