Catch-Up Growth and Inter-Industry Productivity Spillovers

Developing economies tend to export more skill-intensive products as they become more productive. This paper provides a new tractable, quantitative framework to examine the role of inter-industry productivity spillovers in this development process. I start by documenting that a country’s comparative advantage tends to increase in industries that employ occupations that are used most intensively in current exports. In the model, productivity growth is driven by occupation-specific dynamic scale economies, which generate productivity spillovers between occupationally similar sectors. By exploiting cross-sector heterogeneity in foreign demand shocks, I find that dynamic scale economies are substantial in high-skilled production but negligible in low-skilled production. As a result, inter-industry productivity spillovers are larger in richer countries, and access to foreign markets allows developing countries to shift labor into sectors that contribute more to aggregate productivity growth. The model can account for a substantial share of the variation in aggregate and industry-level labor productivity growth across developing economies. Counterfactual exercises suggest that inter-industry spillovers play a quantitatively substantial role in accounting for slow cross-country convergence. Moreover, spillovers increase the gains from trade, especially in developing economies with a comparative advantage in manufacturing.