Characterizing growth instability: new evidence on unit roots and structural breaks in countries’ long run trajectories

In this paper we investigate whether long run time series of income per capita are better described by a trend-stationary model with few structural changes or by unit root processes in which permanent stochastic shocks are responsible for the observed growth discontinuities. For a group of advanced and developing countries in the Maddison database, we employ a unit root test that allows for an unspecified number of breaks under the alternative hypothesis (up to some ex ante determined maximum). Monte Carlo simulations studying the finite sample properties of the test are reported and discussed. When compared with previous findings in the literature, our results show less evidence against the unit root hypothesis. We find even fewer rejections when relaxing the assumption of Gaussian shocks. Our results are broadly consistent with the implications of evolutionary macro models which posit frequent growth shifts and fat-tailed distribution of aggregate shocks

Global Value Chains in Africa

This paper provides evidence on the extent of Global Value Chain (GVC) participation by Africa as a region and for individual African countries. We find that Africa as a whole is heavily involved in GVCs, being more engaged in GVCs than many developing country regions as well as developed countries such as the USA. This overall finding hides the fact that much of Africa's participation in GVCs is in upstream production, with African firms providing primary inputs to firms in countries further down the value chain. The possibility of upgrading within GVCs in Africa is likely to be limited therefore, something which the current analysis suggests. Despite this, we observe a great deal of heterogeneity in terms of GVC participation and upgrading across African countries, with a number of African countries participating in GVCs to a relatively large extent. (authors' abstract

Productive efficiency, structural change, and catch-up within Africa

This paper studies the dynamics of labor productivity convergence and technology catch-up within Africa, shedding light on two important and inter-related issues that are central to Africa’s growth: (i) convergence of relative productivity among African countries and (ii) the role of technological change and technological catch-up in driving productivity change across and within African countries. We do this by using a nonparametric method to estimate an African production frontier. Productivity change in Africa is decomposed into two components: technological change and technological catch-up. Our results show that Botswana and Mauritius are the only two countries in Africa that have converged to the productivity as well as the efficiency level of the frontier. This successful convergence is driven more by technological catch-up and less by technological change. We explore the special role of technological catch-up by decomposing it into within-sector convergence, between-sector convergence and initial specialization using a structural model (Shift and Share catch-up decomposition). The results highlight the special role of structural change in closing the productivity gap with the frontier. This paper contributes to recent evidence suggesting that countries can climb up the income ladder at a faster rate through a two-pronged transformation – i.e., structural change and technological catch-up

North-South foreign direct investment and bilateral investment treaties

Bilateral investment treaties (BITs) have become increasingly popular as a means of encouraging foreign direct investment (FDI) from developed to developing countries. We adopt a difference-in-difference analysis to deal with the problem of self-selection when estimating the effects of BITs on FDI flows from a sample of OECD countries to a broader sample of lesser developed countries. Our results indicate that forming a BIT with a developed country significantly increases FDI inflows to developing countries. We further find that the development of new FDI flows and the reinvigoration of deteriorating FDI relationships accounts for the majority of the increase in FDI flows due to BIT formation

Revisiting international knowledge spillovers:the role of GVCs

The diffusion of knowledge is an important determinant of economic development. International trade has been established as a key mechanism in facilitating diffusion. The rise of global value chains (GVCs) has transformed trade in recent years. Yet the role of GVCs in giving rise to knowledge spillovers remains under-explored. In this paper, we study the elasticity of industry-level total factor productivity (TFP) to technology that is imported through intermediate trade in GVCs. To do so, we combine novel input-output decomposition methods with recent insights from the literature on the factor content of trade. We focus on a panel of 32 countries and 39 sectors over the 2000-2014 period using WIOD and OECD data. We find that domestic TFP is elastic to knowledge flows arising from GVCs and that the magnitude of this effect is larger relative to all other knowledge flows. We also find that GVC participation is particularly conducive to technology upgrading in countries that are far away from the technology frontier, and that GVC-related spillovers persist over large geographical distances

On the relationship between the breadth of PTAs and trade flows

This paper uses matching econometrics to extend the literature investigating the impact of Preferential Trading Arrangements (PTAs) on goods trade flows. Heterogeneity in PTAs is accounted for through a 'provision count index' derived from data provided in a recent World Bank study (Hofmann et al, 2017). PTA formation now involves two separate, sequential decisions - first, whether two trading partners should form a PTA and, second, if they do, how broad that agreement should be. We find that our explanatory variables are significant for both decisions, but often have opposing effects on each. Using our matched PTA and non-PTA groups of country-pairs, we estimate a dose response function which indicates that arrangements with few provisions and arrangements with many provisions do not appear to have a significant impact on goods trade flows between their members. PTAs in an intermediate range are shown to have a significant positive effect. We then relate these outcomes to the actual content of the PTAs using the concept of 'provision intensity'

On PTAs and Bilateral Trade:Is GVC Trade Sensitive to the Breadth of Trade Policy Cooperation?

We study the relationship between the scope of trade policy cooperation and bilateral trade flows with a particular focus on global value chain (GVC) trade using data on the core and non-core provisions included in preferential trade agreements (PTAs). We find that broader PTAs have a larger impact on trade flows involving intermediates relative to flows involving all products, suggesting that GVC trade is particularly sensitive to the scope of trade policy cooperation. We also investigate different dimensions of heterogeneity in PTAs. We find that core provisions tend to drive the effect of PTAs on the level of GVC trade and that PTAs are particularly effective in raising the level of GVC trade between developing economies. We explore these issues using a sample of 189 countries over the period 1990–2015, with data obtained from the latest release of the EORA multi-regional input–output tables and UN-COMTRADE data

Heterogeneous effects of bilateral investment treaties

Bilateral Investment Treaties (BITs) are an increasingly used policy instrument to encourage FDI inflows, particularly inflows into developing countries. In this paper we estimate a gravity model of FDI flows from a sample of OECD countries to a broader sample of developing economies, examining the impact of BITs on these flows. BITs are signed between highly heterogeneous country-pairs, with important differences found in terms of the institutional and economic distance between BIT signatories. These differences may help explain the mixed results on the effects of BITs on FDI flows in the existing literature, with our exploration of non-linearities in this relationship suggesting that the effects of BITs are increasing in the difference in GDP and GDP per capita between source and host. BITs appear to have no impact upon FDI flows for country-pairs that are too dissimilar in terms of the strength of their political institutions

Trade Liberalization, Structural Change, and Economic Growth

Trade and the integration of countries into the global economy is one of the main forces shaping the structural composition of economies, an effect which in turn is expected to impact upon productivity and growth. Structural change can be restrained or reinforced by international trade. This chapter reviews the theory on the relationship between trade and trade liberalization and both structural change and growth, from the contributions of Adam Smith to the more recent new new trade theory beginning with the work of Melitz. The chapter further discusses the existing empirical evidence on the relationship between trade and structural change, before concluding by presenting evidence on the impact of trade liberalization on productivity growth for a broad sample of countries, further decomposing the effect into an effect due to structural change and an effect due to within sector productivity developments

Decomposing Total Factor Productivity Growth in Manufacturing and Services

Using the World Input–Output Database, this paper calculates total factor productivity (TFP) growth for a sample of 40 economies during the period 1995–2009 to show that TFP growth in Asian economies has been relatively strong. In a number of Asian economies, TFP growth in services has outpaced that in manufacturing. This paper presents a novel structural decomposition of TFP growth and shows that the main drivers of aggregate productivity growth, as well as differences in productivity growth between services and manufacturing, have been changing factor requirements. These effects tend to offset the negative productivity effect of a declining ratio of value added to gross output