Technology choices and growth: testing New Structural Economics in Transition Economies

Abstract

We explore the relationship between development policies, finance and growth as approached by New Structural Economics (NSE) with special reference to Transition Economies (TEs). On a sample of 164 economies for 1963-2009, our analysis confirms NSE propositions that the type of development policies, as captured by the Technology Choice Index (TCI), has a significant effect on long-term growth. However, this differs for TEs as a whole and its subgroups. Further to this, using a sample of 94 countries for 1985-2009, we provide a first empirical test of the relationship between growth, TCI and financial structure distortions and we show that there is a negative relationship between financial distortions and TCI on the one hand and medium-term growth on the other hand. We also find that the negative effect of a higher ratio of TCI on medium-term growth is partly mitigated, although not eliminated, by moderate level of financial sector distortions. This points towards some positive externalities of simultaneous financial and industrial sector distortions, at least in the medium run. However, TEs are shown to differ from the rest of the sample as financial distortions play a more pronounced direct negative effect on medium-term growth in these countries.

Comparative Advantage Following (CAF) development strategy, Aid for Trade flows and structural change in production

“…Rather, it aims to test whether this approach is related to structural change in production, including in conjunction with AfT flows. Nonetheless, in light of the findings in the existing literature that the CAF development strategy promotes economic growth (e.g., Bruno et al 2015;Lin 2012) and reduces growth volatility (Lin 2012), enhances inclusive growth (Lin 2004) and helps reduce poverty (Siddique 2015), we are tempted to argue that countries that adopt a CAF strategy could experience a higher extent of structural change in production, given that the CAF development strategy would help them progressively move towards activities of high value addition, including in line with the dynamic change in their factor endowments. We do not however exclude the possibility that the empirical exercise would show a negative effect or statistically nil effect of the CAF development strategy on the extent of structural change in production, including in the presence of higher AfT flows.…”

“…The variable "TCI" stands for the proxy for the development strategy based on comparative advantage (i.e., CAF or CAD) adopted by a given country (see for example Liu, 2004 andBruno et al 2015). Following for example, Lin and Liu (2004) and Bruno et al (2015), we calculate TCI using the formula:…”

“…In the existing literature, many studies have now investigated the macroeconomic impact of the CAF/CAD development strategy including for example, in terms of economic growth (Bruno et al 2015); economic growth and growth volatility (Lin 2012); inclusive growth (Lin 2004); inequality (Chen and Lin 2008); and poverty (Siddique 2015). On the other hand, while there is now an important literature on the effectiveness of AfT (Cirera and Winters 2015;Ghimire et al 2013Ghimire et al , 2016Gnangnon 2019;Hühne et al 2014a, b;Martínez-Zarzoso et al 2017; see a literature review in OECD/ WTO 2017), to the best of our knowledge, only one study 2 (Cirera and Winters 2015) has looked at the structural change effect of Aid for Trade programmes.…”

Why do we need a theory and metrics of technology upgrading?

“…The econometric evidence for this proposition is quite persuasive and has been tested in the context of the transition economies (Bruno, Douarin, Korosteleva, and Radosevic 2015). However, this approach seems largely applicable in the transformation from low to middle-income levels but less so to the transition from middle-income to (upper) high income.…”

Transition economics meet new structural economics: editorial introduction

“…The paper by the UCL team (Bruno et al 2015), "Technology choices and growth: testing new structural economics in transition economies", tests and extends key propositions of NSE to extend its empirical research program. First, it confirms the overall relevance of technology distortions for growth, but finds that this does not generalize to the overall group of TEs.…”