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Long-Run Development in the Open Economy

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  • Petros Milionis

Abstract

Are open economies characterized by superior economic performance in the long-run? This paper revisits this important question from the point of the view of unified growth theory. Contrary to other recent attempts to study this question, the paper considers two distinct channels through which openness might affect growth, namely trade in final goods and technology transfer. Constructing a two-country two-sector unified growth model that incorporates both these channels, it is argued that although trade and the resulting specialization in production generate a force of divergence between the two economies, this can be mitigated or even countered by the effect of technology transfer. In this context, the paper identifies differences in the level of education between the two countries as the crucial factor in determining which of the two forces is going to dominate. The predictions of the theory are then confronted with empirical evidence from cross-sectional and panel growth regressions that span the period from 1870 to 2008. The obtained estimates indicate a strong pattern of convergence among open economies with high initial levels of human capital which is robust to various specification tests.

Suggested Citation

  • Petros Milionis, 2012. "Long-Run Development in the Open Economy," DEGIT Conference Papers c017_059, DEGIT, Dynamics, Economic Growth, and International Trade.
  • Handle: RePEc:deg:conpap:c017_059
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    File URL: http://degit.sam.sdu.dk/papers/degit_17/C017_059.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Unified Growth Theory; International Trade; Technology Transfer; Human Capital; Convergence;

    JEL classification:

    • F10 - International Economics - - Trade - - - General
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
    • N70 - Economic History - - Economic History: Transport, International and Domestic Trade, Energy, and Other Services - - - General, International, or Comparative
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • O14 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Industrialization; Manufacturing and Service Industries; Choice of Technology
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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