The curse and blessing of fixed specific factors in small-open economies

Abstract

This paper investigates how a country's specific-factors endowment affects its long-run economic performance. We build an open-economy version of the twosector neoclassical growth model in which we introduce fixed industry-specific inputs in both activities. We show that differences in input shares between sectors can contribute to explain why nations that seem to have similar factor endowments can show very different income levels. In particular, under (productivity-adjusted) factor-price equalization, larger amounts of factors specific to the industry with a lower (larger) labor share lead the economy to enjoy larger (smaller) long-run income levels. The model can also account for overtaking episodes between countries along their development paths.JEL Classification: O41, F43.

A model of unbalanced sectorial growth with application to transition economies

“…The latter paper calibrates a two-sector model with economies of scale to the data and establishes whether each considered country is situated in a low-income or a high-income equilibrium. 4 Our paper differs from the above literature in three dimensions. First, our set of assumptions leads to non-vanishing economic growth in a good equilibrium, as opposed to a bad equilibrium, in which there is no long-run growth.…”

“…As a result, our model can account for arbitrary large income differences between rich and poor countries, whereas a calibrated variant of a two-steady-state model produces too small income differences relative to the data, see Graham and Temple (2003). Secondly, we augment the standard two-sector model to include the service sector in a dynamic context, which allows us to focus on time-series patterns of the economic development, while 4 Other related literature can be classified in two groups. One group includes multisector neoclassical growth models, which focus on explaining the time-series behavior of the sectorial composition of one given country (Hansen and Prescott, 2000, and Kongsamut, Rebelo and Xie, 1997); in the absence of a permanent cross-country heterogeneity, these models do not account for the cross-country differences since the equilibrium in a neoclassical growth model is unique.…”

“…One group includes multisector neoclassical growth models, which focus on explaining the time-series behavior of the sectorial composition of one given country (Hansen and Prescott, 2000, and Kongsamut, Rebelo and Xie, 1997); in the absence of a permanent cross-country heterogeneity, these models do not account for the cross-country differences since the equilibrium in a neoclassical growth model is unique. The other group includes dynamic Heckscher-Ohlin models of comparative advantage, which explain the cross-country differences by heterogeneity in preferences and technology (Ventura, 1997), timing of development (Atkeson and Kehoe, 2000), endowment of natural resources (Guilló and Pérez, 2003). 4 Eswaran and Kotwal (2002) study the role of the service sector in a static context.…”

Neoclassical growth and the natural resource curse puzzle

“…Finally, multi-sector models of international trade and growth include Ventura (1997), Mountford (1998), Atkeson and Kehoe (2000), Kehoe (2006, 2010), Mountford (2006, 2008), and Guilló and Perez-Sebastian (2007).…”

“…Neither do Mountford (2006, 2008), which focus on the fertility and human capital dimensions. Guilló and Perez-Sebastian (2007) present a similar model, but only study the e¤ects of …xed sector-speci…c inputs on steady-state income.…”