The Quantitative Importance of Openness in Development

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. The Quantitative Importance of Openness in Development Abstract 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. Terms of use: Documents inJEL-Code: O110, F430, O140.

The micro elasticity of substitution and non‐neutral technology

“…The elasticity of substitution between capital and labor is central for several policy questions in economics. It determines how firms' usage of labor and capital respond to policy changes that affect factor prices, such as investment subsidies (Hall and Jorgenson, 1967); tariffs on capital goods (Cai, Ravikumar, and Riezman, 2015); changes in trade barriers (Dornbusch, Fischer, and Samuelson, 1980); minimum wages (Aaronson and French, 2007); and firing costs (Petrin and Sivadasan, 2013). The elasticity is also important to understand both some of the reasons why firms innovate (Acemoglu, 2010), as well as how technological change affects relative factor intensities, either through nonneutral productivity (Hicks, 1932;Sato, 1975), or investment specific technical change (Greenwood, Hercowitz, and Krusell, 1997).…”

The impact of capital goods prices on Africa's economic performance

“…According to the related literature, the differences observed in the levels and trends of the relative price of investment goods between countries may be accounted for by differences in economic policies, particularly the trade policy (Cai et al, 2015; Estevadeordal & Taylor, 2013; Johri & Rahman, 2020; Lian et al, 2020) and the fiscal policy (Jones, 1994; Sarel, 1995), disparities in economic structure and industry composition (Samaniego & Sun, 2020), efficiency in producing exportable goods that might be traded for machinery and equipment goods relative to efficiency in other sectors (Hsieh & Klenow, 2007; Lian et al, 2020), price discrimination practices adopted by some exporters (Alfaro & Ahmed, 2010), and distortions linked to corruption, bureaucracy, and institutions (Alejandro & Carlos, 1970; Easterly, 1993; Restuccia & Urrutia, 2001; Schmitz, 2001). A thorough explanation of the sources of differences observed in terms of the RPI levels in Africa as well as their trends goes beyond the scope of this article, needing, therefore, further empirical investigations.…”

“…Agents should pay an extra charge over the price of consumption goods for a unit of investment goods due to barriers and impediments to investment. That being said, a single unit of output can be transformed into one unit of consumption goods and to invested units only (Cai et al, 2015; Restuccia & Urrutia, 2001). The parameter σ t represents barriers to investment caused by distortionary and counterproductive institutional arrangements, policy choices, bureaucratic regulations, obstacles to production, and prohibitions.…”

“…From the foregoing, it follows that the relative price of investment could be used as a measure of the level of investment barriers. In a similar vein, many authors have previously used the relative price of investment goods as a measure of capital accumulation barriers (Alejandro & Carlos, 1970; Cai et al, 2015; Easterly, 1993; Jones, 1994; Restuccia & Urrutia, 2001). From Equations and , we get the following relationship: …”

A semi-endogenous growth model with public factors, imported capital goods, and limited export demand for developing countries

“…World income growth, multiplied by the income elasticity will drive up the terms of trade in (16) in case of price elastic exports, and through that also capital accumulation goes up as in all models based on Bardhan and Lewis (1970). 6 Falling capital goods prices, which serve as numéraire here, or increasing terms of trade, are the mirror image of the process of stimulating capital accumulation in (17) as discussed by Cai, Ravikumar, and Riezman (2015). On the other hand, (16) indicates that this effect is mitigated by the negative impact of capital accumulation on the terms of tradeemphasized by Acemoglu and Ventura (2002) in case of a price elasticity making the denominator of (16) negative.…”