Testing creative destruction in an opening economy

Abstract

This paper analyses the relationship between trade liberalization and economic growth using a Schumpeterian framework of technological innovation and applies it to sector‐level South African data. The framework examines direct and indirect effects of trade liberalization on productivity growth. Indirect impacts operate through a differential impact of trade liberalization on firms conditional on their distance from the international technological frontier. Results confirm positive direct impacts of trade liberalization. Results confirm also that the greatest positive impact of trade liberalization will be on sectors that are close to the international technological frontier and that experienced a low level of product market competition before liberalization.

Structural Transformation in South Africa

“…The final negotiated economic policy focused on reassurances to local and international business, and the developmental state ideas were abandoned. Subsequent assessments of economic performance found strong path dependency effects, with the benefits of trade liberalization being realized by those firms that were already internationally competitive in 1994 (Aghion et al, 2013;. Industrial financing, including by development finance institutions, continued to flow towards the upstream industries .…”

Towards a New Industrial Policy for Structural Transformation

“…The final negotiated economic policy focused on reassurances to local and international business, and the developmental state ideas were abandoned. Subsequent assessments of economic performance found strong path dependency effects, with the benefits of trade liberalization being realized by those firms that were already internationally competitive in 1994 (Aghion et al, 2013;Bell et al, 2018;Mondliwa et al, 2021). Industrial financing, including by development finance institutions, continued to flow towards the upstream industries (Black and Roberts, 2009).…”

How Productivity and Trade Liberalization Can Affect the Economies of Developing Nations is Illustrated by the Vietnamese Manufacturing Sectors Case

“…The degree and nature of trade gains for each country are diverse and contingent upon national growth conditions, particularly in terms of differences in market size (Alesina et al, 2005), initial productivity levels (Devereux & Lapham, 1994), and intra-industry reallocations and aggregate industry productivity (Melitz, 2003). Aghion et al (2013) have formulated theoretical models that conceptualize the impact of trade liberalization on productivity growth in various countries, resulting in several predictions on the effects of trade. South African manufacturing is used as an example of a less-developed country that is relatively close to the technological frontier.…”

“…This raises questions about whether the economic opening policies of the last period have actually reduced or limited Vietnam's growth. This paper provides a more comprehensive model, based on the theoretical framework of Aghion et al (2013), to clarify the situation in developing countries. It also compares the case of Vietnam with that of South Africa, as both represent similar yet distinct cases of countries opening their economies to test the predictions of the theoretical framework.…”