Emerging economies may grow fast because there is a potential for catching-up. In this paper foreign knowledge spillovers raise productivity of R&D in the exposed sector. The higher the productivity gap the more profitable investment in R&D will be. As a result labour productivity in the production department of the exposed sector rises fast. The sheltered sector realizes no productivity increases but gains because the terms of trade rise in favour of non-tradables. In the long run the rate of growth of the economy converges to the exogenous world rate. Capital mobility speeds up the process of convergence at the expense of accumulating foreign debt. Moreover, temporary shocks have long lasting effects as the economy exhibits hysteresis in case of perfect capital mobility. Regulation in the sheltered sector induces mark-up pricing and a decline in the demand for non-tradables. The market for tradables expands and it becomes more profitable to invest in R&D. Regulation of this kind as is often practised in developing countries thus enhances economic growth. Again the results differ whether or not capital mobility is assumed. Maintaining equilibrium on the balance of trade leads to a higher long-run aggregate consumption level, which may explain the often observed reluctance to introduce free international capital mobility.
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Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number
51.
Find related papers by JEL classification: F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies O41 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
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Coe, David T & Helpman, Elhanan & Hoffmaister, Alexander, 1995.
"North-South R&D Spillovers,"
CEPR Discussion Papers
1133, C.E.P.R. Discussion Papers.
[Downloadable!] (restricted)
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David T. Coe & Elhanan Helpman & Alexander Hoffmaister, 1995.
"North-South R&D Spillovers,"
NBER Working Papers
5048, National Bureau of Economic Research, Inc.
[Downloadable!] (restricted)