The Quantitative Importance of Openness in Development
This 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.
|Date of creation:||Nov 2013|
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- Kei-Mu Yi & Jing Zhang, 2010.
"Structural Change in an Open Economy,"
595, Research Seminar in International Economics, University of Michigan.
- Jing Zhang & Kei-Mu Yi, 2009. "Structural Change in an Open Economy," 2009 Meeting Papers 804, Society for Economic Dynamics.
- Timothy Uy & Kei-Mu Yi & Jing Zhang, 2013. "Structural change in an open economy," Working Paper Series WP-2013-09, Federal Reserve Bank of Chicago.
- Kei-Mu Yi & Jing Zhang, 2011. "Structural change in an open economy," Staff Report 456, Federal Reserve Bank of Minneapolis.
- Gary D. Hansen & Edward C. Prescott, 2002.
"Malthus to Solow,"
American Economic Review,
American Economic Association, vol. 92(4), pages 1205-1217, September.
- Westphal, Larry E, 1990. "Industrial Policy in an Export-Propelled Economy: Lessons from South Korea's Experience," Journal of Economic Perspectives, American Economic Association, vol. 4(3), pages 41-59, Summer.
- Stephen L. Parente & Edward C. Prescott, 2002. "Barriers to Riches," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262661306, December.
- Restuccia, Diego & Urrutia, Carlos, 2001. "Relative prices and investment rates," Journal of Monetary Economics, Elsevier, vol. 47(1), pages 93-121, February.
- Betts, Caroline & Giri, Rahul & Verma, Rubina, 2013. "Trade, Reform, And Structural Transformation in South Korea," MPRA Paper 49540, University Library of Munich, Germany.
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