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Openness, Specialization, and Productivity Growth in Less Developed Countries

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  • Diana Weinhold
  • James Rauch

Abstract

Many empirical studies have found a positive relationship between openness and growth in per capita GDP in less developed countries, and economists have produced many explanations for this correlation. However, the existing studies are consistent with all of these theories and thus do not provide direct evidence in support of any one of them. Quah and Rauch [18] show how increased openness to international trade can lead to increased specialization in models of endogenous growth through learning by doing. These models imply that increased specialization accelerates productivity growth by more fully realizing dynamic economies of scale. In order to test the hypothesis that specialization increases productivity growth in LDCs we first define a Herfindahl index of production specialization for the manufacturing sector in 39 countries. We then present a series of dynamic panel regressions controlling for country fixed effects which show that, for the less developed countries, the index of specialization is positively and significantly correlated with manufacturing productivity growth. We test the robustness of this correlation by including different variables that have been associated with growth in the regressions, such as openness, inflation, government spending, and investment.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 6131.

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Date of creation: Aug 1997
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Publication status: published as "Openness, Specialization, and Productivity Growth in Less Developed Countries", Canadian Journal of Economics, Vol. 32 (August 1999): 1009-1027.
Handle: RePEc:nbr:nberwo:6131

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  1. Sebastian Edwards, 1991. "Trade Orientation, Distortions and Growth in Developing Countries," NBER Working Papers 3716, National Bureau of Economic Research, Inc.
  2. Anderson, T. W. & Hsiao, Cheng, 1982. "Formulation and estimation of dynamic models using panel data," Journal of Econometrics, Elsevier, vol. 18(1), pages 47-82, January.
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