Productive Capacities, Economic Growth and Economic Growth Volatility in Developing Countries: Does Structural Economic Vulnerability Matter?

Abstract

Recent years' global shocks (e.g., the 2008 financial crisis and the COVID-19 pandemic) and environmental shocks - such as natural disasters - have heightened the vulnerability of developing countries to future shocks, and can compromise their development prospects. International institutions and researchers have advocated that the strengthening of productive capacities in these countries would help them enhance the resilience of their economies to shocks, and promote sustainable development. The present paper has examined the effect of productive capacities on economic growth and economic growth volatility in developing countries, in particular when they face a high level of structural economic vulnerability. The analysis covers 117 developing countries over the period 2000-2018. It shows that productive capacities do not only promote economic growth, but also reduce economic growth volatility. On the other hand, structural economic vulnerability reduces economic growth, in particular when it exceeds a certain level, and induces greater volatility of economic growth. Interestingly, the findings suggest that productive capacities promote economic growth and reduce economic growth volatility in countries that face a high degree of structural economic vulnerability. These findings support the recommendation by international institutions and researchers that if they were to enhance the resilience of their economies to shocks, and promote sustainable economic growth, developing countries (in particular the poorest ones) should strengthen their productive capacities.

Development Aid and Export Resilience in Developing Countries: A Reference to Aid for Trade

“…Above all arguments mentioned above, Gnangnon (2021b) has found empirically that productive capacities help reduce economic growth volatility, including by acting as an absorber of shocks. In this way, greater productive capacities can contribute to enhancing export resilience.…”

“…This indicator of productive capacities has been constructed on the ground that enhancing productive capacities, particularly in developing countries and the Least developing countries (LDCs 7 ) among them, would help build economic resilience to future shocks, and concurrently promote economic growth and sustainable development. Some papers have used this indicator of productive capacities to provide empirical support to the international policy discourse that enhancing productive capacities in developing countries, and particularly LDCs contribute to improving economies complexity (Gnangnon, 2021a), promoting economic growth and reducing output volatility (Gnangnon, 2021b), and building countries' resilience to shocks (Gnangnon, 2021c). In addition, Gnangnon (2021d) has uncovered empirically that development aid, in particular Aid for Trade flows play a strong role in building productive capacities in developing countries, including LDCs.…”

Structural Economic Vulnerability and the Utilization of Unilateral Trade Preferences: Does Development Aid Matter?

“…Some studies have documented the negative effect of structural economic vulnerability on economic growth in developing countries (e.g., Guillaumont and Wagner, 2012;Gnangnon, 2021a;Cordina, 2004;Wagner, 2014). The importance of development aid for addressing structural impediments to growth and development, and the usefulness of using the EVI (along with other standard indicators) as a criterion for aid allocation, has been pointed out by some studies (e.g., Guillaumont, 2009Guillaumont, , 2010Guillaumont, , 2011aGuillaumont, , 2013Guillaumont et al, 2017).…”