Growth, Size, and Openness: a Quantitative Approach Natalia Ramondo UT-Austin and Princeton
Andr´es Rodr´ıguez-Clare PSU and NBER
ASSA Meetings, 2010
Growth and the Size of Countries I
In Quasi Endogenous Growth Models (QEGM), growth is driven by aggregate economies of scale (Jones, 95; Kortum, 97; Eaton and Kortum, 01) gy = ε · gL
I
Basic calibration reveals ε = 0.21 I
gy = 0.01 is growth rate of real output per worker in the OECD over the last four decades (K-RC, 05)
I
gL = 0.048 is growth rate of R&D employment over the last decades in the top five R&D countries (Jones, 02)
The Income-Size Elasticity: Data
I
The dynamic relationship gy = ε · gL implies aggregate economies of scale, log yn ∼ ε log Tn where Tn ≡ φn Ln is “equipped labor” in the R&D sector
I
We use data on a cross-section of nineteen OECD countries I I I
Ln is “equipped labor” from K-RC (05), avg. over 90’s φn is share of R&D employment from WDI, avg. over 90’s yn is real GDP per worker from PWT, avg. over 90’s
The Income-Size Elasticity: QEGM and Data 1
real income per worker (as share of US)
0.9
0.8
implied by QEGM data
0.7
0.6
0.5
0.4
0
0.05
0.1
0.15 0.2 0.25 L as share of total OECD(19)
0.3
0.35
0.4
The Income-Size Elasticity: The “Belgium Puzzle”
elasticity
ybelgium /yus
Quasi Endogenous Growth
0.21
0.45
Data OECD(19)
0.084
0.89
The Gains from Openness and the “Belgium Puzzle”
I
Of course, countries are not in isolation; they gain from interacting with the rest of the world through various channels
I
We focus on gains arising from Trade, Multinational Production (MP), and Diffusion of Ideas I
I
while trade and MP are directly observable, diffusion is not
We present an indirect approach to identify diffusion in the data I
we reconcile the income-size elasticity observed in the data and the one implied by the quasi-endogenous growth model
Overview of the Model
I
Eaton and Kortum’s (02) Model of Trade
Overview of the Model
I
Eaton and Kortum’s (02) Model of Trade
I
MP: Technologies can be used for production abroad at a cost (R-RC, 09)
Overview of the Model
I
Eaton and Kortum’s (02) Model of Trade
I
MP: Technologies can be used for production abroad at a cost (R-RC, 09) I
n sources for technologies, n locations for production
Overview of the Model
I
Eaton and Kortum’s (02) Model of Trade
I
MP: Technologies can be used for production abroad at a cost (R-RC, 09) I
I
n sources for technologies, n locations for production
Diffusion: some foreign technologies can be used for national production at no cost
Overview of the Model
I
Eaton and Kortum’s (02) Model of Trade
I
MP: Technologies can be used for production abroad at a cost (R-RC, 09) I
I
n sources for technologies, n locations for production
Diffusion: some foreign technologies can be used for national production at no cost I
ideas are first “national”, then diffuse and become “global”
Overview of the Model
I
Eaton and Kortum’s (02) Model of Trade
I
MP: Technologies can be used for production abroad at a cost (R-RC, 09) I
I
n sources for technologies, n locations for production
Diffusion: some foreign technologies can be used for national production at no cost I
ideas are first “national”, then diffuse and become “global”
I
if all ideas were “global”, then no trade, no MP, and same technology everywhere
Multinational Production (MP)
I
Start by assuming that countries interact only through MP -in tradable intermediates (T) and non-tradable final goods (N)
Multinational Production (MP)
I
Start by assuming that countries interact only through MP -in tradable intermediates (T) and non-tradable final goods (N)
I
We use MP data to compute (R-RC, 09) GMPn =
N Znn YnN
− eN
×
T Znn YnT
− eT
s is expenditure in goods produced in country n with where Znn technologies from n, in sector s = N, T
Multinational Production (MP)
I
Start by assuming that countries interact only through MP -in tradable intermediates (T) and non-tradable final goods (N)
I
We use MP data to compute (R-RC, 09) GMPn =
N Znn YnN
− eN
×
T Znn YnT
− eT
s is expenditure in goods produced in country n with where Znn technologies from n, in sector s = N, T I ε = 0.21 = ε N + ε T = 0.14 + 0.07 (AL, 07; R-RC, 09)
Multinational Production (MP)
I
Start by assuming that countries interact only through MP -in tradable intermediates (T) and non-tradable final goods (N)
I
We use MP data to compute (R-RC, 09) GMPn =
N Znn YnN
− eN
×
T Znn YnT
− eT
s is expenditure in goods produced in country n with where Znn technologies from n, in sector s = N, T I ε = 0.21 = ε N + ε T = 0.14 + 0.07 (AL, 07; R-RC, 09)
I
We calculate the implied income under isolation yndata /GMPn
The Income-Size Elasticity: still the “Belgium Puzzle”
elasticity
ybelgium /yus
Quasi Endogenous Growth
0.21
0.45
Data OECD(19)
0.084
0.89
MP
0.089
0.84
Trade
I
Now, assume that countries interact through MP and Trade
Trade
I
Now, assume that countries interact through MP and Trade
I
We use trade data to compute (R-RC, 09) GTn =
Xnn YnT
−ε T
where Xnn is expenditure in domestic intermediate (tradable) goods and ε T = 0.07 (R-RC, 09)
Trade
I
Now, assume that countries interact through MP and Trade
I
We use trade data to compute (R-RC, 09) GTn =
Xnn YnT
−ε T
where Xnn is expenditure in domestic intermediate (tradable) goods and ε T = 0.07 (R-RC, 09) I
We calculate the implied income under isolation yn /(GTn × GMPn )
The Income-Size Elasticity: Closing the Gap
elasticity
ybelgium /yus
Quasi Endogenous Growth
0.21
0.45
Data OECD(19)
0.084
0.89
MP
0.089
0.84
MP + Trade
0.095
0.75
Diffusion: Reconciling the “Puzzle” I
Countries interact through MP, Trade and Diffusion of Ideas
Diffusion: Reconciling the “Puzzle” I
Countries interact through MP, Trade and Diffusion of Ideas
I
We use data on equipped labor and R&D employment, and ε = 0.21 to compute ε ∑i Ti GDn = 1 − κ + κ Tn
Diffusion: Reconciling the “Puzzle” I
Countries interact through MP, Trade and Diffusion of Ideas
I
We use data on equipped labor and R&D employment, and ε = 0.21 to compute ε ∑i Ti GDn = 1 − κ + κ Tn
I
Key parameter is κ = share of “global”, or diffused, ideas
Diffusion: Reconciling the “Puzzle” I
Countries interact through MP, Trade and Diffusion of Ideas
I
We use data on equipped labor and R&D employment, and ε = 0.21 to compute ε ∑i Ti GDn = 1 − κ + κ Tn
I
Key parameter is κ = share of “global”, or diffused, ideas I κ = 6.6% calibrated to match ε = 0.21
Diffusion: Reconciling the “Puzzle” I
Countries interact through MP, Trade and Diffusion of Ideas
I
We use data on equipped labor and R&D employment, and ε = 0.21 to compute ε ∑i Ti GDn = 1 − κ + κ Tn
I
Key parameter is κ = share of “global”, or diffused, ideas I κ = 6.6% calibrated to match ε = 0.21
I
We calculate the implied income under isolation yn /GOn where GOn = GDn × GMPn × GTn
The Income-Size Elasticity: Adding Diffusion
1
real income per worker (as share of US)
0.9
0.8 implied by QEGM adjusted by GO
0.7
0.6
0.5
0.4
0.3
0.2
0
0.05
0.1
0.15 0.2 0.25 size (as share of OECD L)
0.3
0.35
0.4
The Income-Size Elasticity: the “Belgium Puzzle” Reconciled elasticity
ybelgium /yus
Quasi Endogenous Growth
0.21
0.45
Data OECD(19)
0.084
0.89
MP
0.089
0.84
MP + Trade
0.097
0.75
MP + Trade + Diffusion (κ = 6.6%)
0.21
0.50
The Gains from MP, Trade, and Diffusion 2.5 GO GMPT GMP
Gains
2
1.5
1
0
0.05
0.1
0.15 0.2 0.25 size (as share of OECD L)
0.3
Figure: Gains and Size. OECD(19).
0.35
0.4
The “Belgium Puzzle”: More Countries (prelim.) real income per worker (relative to U.S.) data y /GMP y /GTMP y /GO T 0.21 Belgium
0.89
0.80
0.73
0.47
0.45
Chile
0.38
0.38
0.37
0.16
0.29
Mexico
0.39
0.38
0.38
0.20
0.37
China
0.08
0.08
0.08
0.07
0.66
I
GO = GT × GMP × GD
I
diffusion calculated with κ = 6.6%
Final remarks I
Gains from Openness for a country arise from many possible channels
Final remarks I
Gains from Openness for a country arise from many possible channels I
We focus on Trade, Multinational Production, and Diffusion of Ideas
Final remarks I
Gains from Openness for a country arise from many possible channels I
I
We focus on Trade, Multinational Production, and Diffusion of Ideas
We show that to reconcile key facts about Growth, Size, and Openness we need to include diffusion of ideas across countries
Final remarks I
Gains from Openness for a country arise from many possible channels I
I
We focus on Trade, Multinational Production, and Diffusion of Ideas
We show that to reconcile key facts about Growth, Size, and Openness we need to include diffusion of ideas across countries I
even if a small country is closed to trade and MP, the data suggest that this country is much richer than implied by its small size
Final remarks I
Gains from Openness for a country arise from many possible channels I
I
We show that to reconcile key facts about Growth, Size, and Openness we need to include diffusion of ideas across countries I
I
We focus on Trade, Multinational Production, and Diffusion of Ideas
even if a small country is closed to trade and MP, the data suggest that this country is much richer than implied by its small size
Next step: extension to many countries with different diffusion rates
