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1) Several studies have found that exports are more strongly associated with economic growth when they are in non-traditional sectors like manufacturing rather than raw materials. Greater export diversification is also linked to higher growth. 2) Hausmann, Hwang, and Rodrik developed a measure of export sophistication based on the GDP per capita of countries that typically export those goods. Their analysis found China's exports in 1992 implied a GDP six times higher than China's actual GDP, suggesting China's industrial policy influenced its export basket. 3) While these studies link what a country exports to growth, no studies have conclusively shown that industrial policy changes to export composition caused growth, so the role of industrial policy can only be

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57 views1 page

File 0076 PDF

1) Several studies have found that exports are more strongly associated with economic growth when they are in non-traditional sectors like manufacturing rather than raw materials. Greater export diversification is also linked to higher growth. 2) Hausmann, Hwang, and Rodrik developed a measure of export sophistication based on the GDP per capita of countries that typically export those goods. Their analysis found China's exports in 1992 implied a GDP six times higher than China's actual GDP, suggesting China's industrial policy influenced its export basket. 3) While these studies link what a country exports to growth, no studies have conclusively shown that industrial policy changes to export composition caused growth, so the role of industrial policy can only be

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Ed Z
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Trade, Foreign Investment, and Industrial Policy for Developing Countries 4071

(1994), Khalafalla and Webb (2001), Pineres and Ferrantino (1997), and Xu and Wang
(1999). With one exception, all these studies find that exports are more likely to lead to
growth if they are in nontraditional sectors such as manufacturing or skill-intensive
goods rather than primary products or raw materials; studies also find that greater
export diversification is more likely to be associated with growth.
Hausmann, Hwang, and Rodrik (2005) develop a measure of the sophistication of a
country’s exports based on the level of GDP per capita associated with the export of dif-
ferent goods worldwide. Once they have attached a level of GDP per capita to each
detailed export category based on which countries export the good, they can then
derive the implied GDP level of a country’s exports. Countries whose export baskets
contain items typically produced by higher income countries have a “high” level of
export sophistication relative to what would be expected given their level of develop-
ment. In principle, one could construct a measure of the distance between the implied
income level of a country’s exports and the country’s actual level of GDP per capita. In a
related paper, Rodrik (2006) shows that China’s exports in 1992 were associated with
an income level more than six times higher than China’s per capita GDP at that time.
Rodrik suggests that the gap between the implied level of income of China’s exports
and China’s actual GDP per capita is too large to have occurred naturally and is one out-
come of China’s activist industrial policy.
These studies suggesting that what a country exports is more important than how
much the country exports for long-run growth are suggestive that IP has played an
important role in country growth experiences, but are not conclusive. No researchers
have identified an association between the existence of Marshallian externalities in par-
ticular sectors, industrial promotion of those sectors, consequent changes in the com-
modity composition of a country’s export basket, and growth. Consequently, we can
only loosely infer that rapid changes in the composition of a country’s exports toward
more sophisticated products could be indicative of IP.

4. TRADE AND ECONOMIC DEVELOPMENT


Countries intervene in trade for many reasons, including the desire to shift production
toward sectors with positive externalities (industrial policy), to raise revenue, to affect
terms of trade, and to satisfy special interests. We reviewed in Section 3 some of the
studies that explicitly evaluate the success of IP. There is almost no research that has
been able to isolate the effects of IP on welfare, taking into account all the other
motives for protection. However, there is a large literature which estimates the reduced
reform relationship between openness to trade and economic growth. In this section,
we review nearly 200 prominent studies that use some kind of reduced form approach.
We discuss the different measures of openness used in this literature, the datasets, the
identification strategies, and the results.

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