Globalisation, convergence and the case for openness in Developing Countries: what do we learn from open economy growth theory and empirics?

Abstract

This paper critically assesses the current policy consensus that greater integration into the world economy is beneficial for poor countries. It examines both the theoretical basis and recent empirical studies on the link between openness and economic performance. Although ‘new’ endogenous growth theory is often used to highlight the dynamic gains from economic integration, there is a surprising amount of ambiguity. The only unambiguous case for greater openness and economic integration comes from open-economy extensions of the ‘old’ neo-classical growth model. The empirical evidence remains ambiguous too. The final verdict, for instance, on the empirical link between growth and trade liberalisation is still open. More direct studies on technology diffusion, while providing evidence at the aggregate level, fail to pinpoint precise mechanisms. Microeconomic studies find that exporting activities do not seem to make firms more efficient, and foreign direct investment does not raise diffusion of knowledge to developing country firms. We are thus left with the conclusion that the potential benefits of greater openness and, by implication, increased globalisation for developing countries are frequently overstated