Growth Analytics and Emerging Economies

Thinking more about the so-called middle-income trap, I suspect that the Eeckhout and Boyan Jovanovic trade-based analysis I mentioned in my last post (Is China’s Future Hazy?) has little relation to the World Bank’s rather loose description of “complex technical, social and political challenges that arise” for middle-income countries. In thinking about what might be a useful analytical framework for tackling the issues of sustained growth and the role of policy, it occurred to me that Dani Rodrik, with various co-authors, has been pursuing quite an interesting research agenda in this area.

In “What’s So Special about China’s Exports?” Rodrik argues that “Indeed, a major argument of this paper is that China is an outlier in terms of the overall sophistication of its exports: its export bundle is that of a country with an income per-capita level three times higher than China’s. China has somehow managed to latch on to advanced, high-productivity products that one would not normally expect a poor, labor abundant country like China to produce, let alone export. I will provide some evidence below that suggests this has been an important contributor to China’s recent growth. China’s experience indicates that it not how much you export, but what you export that matters.”

This argument is generalized in Hausmann, Hwang and Rodrik, “What You Export Matters.” This paper looks at some detailed cross-country data, and concludes, “Our results show that countries that export goods associated with higher productivity levels grow more rapidly, even after we control for initial income per head, human capital levels, and time-invariant country characteristics. What is the economic mechanism that drives this growth? In the simple model we sketched out, growth is the result of transferring resources from lower-productivity activities to the higher-productivity goods identified by the entrepreneurial cost-discovery process. An important characteristic of these goods is that there is elastic demand for them in world markets, so that a country can export them in large quantities without significant adverse terms-of-trade effects.”

Energy, environment, demographics and inequality can all be important factors influencing growth, but my guess is that the structural change associated with the export patterns identified in the two papers above is what is central for sustained growth. This idea fits with the Portugal story alluded to in my previous post. If one wants to draw out implications for investment opportunities in emerging markets, that, too, could be done, I think. The main point is that there is no middle-income trap per se, and no vague set of challenges. It’s all about the nature of the growth. On this basis, I think China continues to look solid. India might be getting there too, though its structural transformation is much less far along (see my paper “Services-Led Industrialization in India: Assessment and Lessons”).