Productivity and Externalities: Models of Export-Led Growth

In developing countries, successful export-led growth (ELG) strategies have been associated with rapid structural change and productivity growth. There are major difficulties in explaining this phenomenon using a standard neo-classical growth model. To develop a more satisfactory framework, we start from empirical and theoretical models incorporating externalities. We develop a simple analytical model with an export externality that captures the large increase in both total factor productivity and trade share associated with export-led growth. We develop a second model that decomposes growth into various components: (1) factor accumulation; (2) a factor reallocation effect, from moving factors from low to high productivity sectors; (3) an export externality effect, arising from exporting light and heavy manufactures; and (4) an import externality effect arising from importing capital goods (heavy manufactures). This second model is implemented with data for a representative semi-industrial country. In addition to accounting for a higher total factor productivity (TFP) growth observed in countries pursuing ELG strategies, the model captures the pattern of structural change experienced by such countries better than simpler neo-classical models without disequilibrium features or externalities.