Convergence Rates to Output Growth in a Global World: The Roles of Openness and Government Size

Abstract

In this article, we examine the effects of three openness measures on 54 industrial and emerging economies' output growth over the "globalization years" of 1986-2004. Controlling for standard determinants of the Solow growth model in panel data, we find positive effects of openness on real output growth. While we find support for higher convergence rates under the open economy, the convergence rates in this article for both samples are remarkably close to the 2% level documented in Mankiw et al. (1992). The inclusion of G/Y, however, reduces the speed of convergence more substantially in industrial economies.

Institutions: Key variable for economic development in Latin America

“…The significant government size coefficients range from -0.053 to -0.120 and are evidence that increasing expenditures as percentage of Latin American countries' GDP are detrimental to economic development, consistent with Lizardo and Mollick (2009) and Blanco (2013). Trade openness is significant at the 1% level in 11 out of 11 regressions in table 5 and its coefficients vary between 0.088 and 0.187, providing evidence in line with Rodrik (1998), Alesina and Wacziarg (1998), Cabral and Mollick (2012), and Benarroch and Pandey (2012). Inflation has a negative and significant coefficient in 6 out of 7 regressions in table 5, in line with Fischer (1993).…”

“…From that literature, we adopt the variables investment-to-output rate, population growth and human capital. 8 In addition, we add government size (Lizardo and Mollick, 2009;Cabral and Mollick, 2012) and trade openness (Rodrik, 1998;Alesina and Wacziarg, 1998;Cabral and Mollick, 2012;Benarroch and Pandey, 2012). Infrastructure is another key variable, as highlighted in Barro (1990) and Bougheas et al (2000).…”

“…1 Our model includes government size, which involves an important question dealt with by Lizardo and Mollick (2009) about government size and Latin American prosperity. It also controls for openness, which is assumed to be another key variable to development (Rodrik et al, 2004) that has been implemented by Cabral and Mollick's (2012) globalization model with flows of international capital. Next, we adopt infrastructure, proxied by the number of fixed telephone subscriptions per 100 people, a variable that measures the cost reduction in the production of intermediate inputs, fostering specialization (Bougheas et al, 2000).…”