In this chapter we explore the popular but controversial idea that developing countries benefit from abandoning policy neutrality vis-a-vis trade, FDI and resource allocation across industries. Are developing countries justified in imposing tariffs, subsidies, and tax breaks that imply distortions beyond the ones associated with optimal taxes or revenue constraints? We refer to this set of government interventions as “industrial policy.” We explore the theoretical foundation for industrial policy and then review the related empirical literature. We follow this with a broader look at the empirical work on the relationship between trade and FDI and growth. In this review we find no support for “hard” interventions that distort prices to deal with Marshallian externalities, learning by exporting, and knowledge spillovers from FDI. Nevertheless, we still envision an important role for what we refer to as “soft” industrial policy. The goal is to develop a process whereby government, industry and cluster-level private organizations can collaborate on interventions to increase productivity. We suggest programs and grants to help particular clusters by improving the formation of skilled workers, technology adoption, regulation and infrastructure.

/pdf/trade-foreign-investment-and-industrial-policy-for-1xf71lgb5r.pdf

Trade, Foreign Investment, and Industrial Policy for Developing Countries*

The economic development and growth literature contains extensive discussions on relationships between exports and economic growth. One debate centres on whether countries should promote the export sector to obtain economic growth. An abundant empirical literature on this export-led growth (ELG) hypothesis has followed. We aim to contribute to this literature in two ways. In this paper, part 1, we provide a comprehensive survey of more than 150 export-growth applied papers. We describe the changes that have occurred, over the last two decades, in the methodologies used empirically to examine for relationships between exports and economic growth, and we provide information on the current findings.The last decade has seen an abundance of time series studies that focus on examining for causality via exclusions restrictions tests, impulse response function analysis and forecast error variance decompositions. Our second contribution is to examine some of these time series methods. We show, in part 2, that ELG ...

/pdf/export-led-growth-a-survey-of-the-empirical-literature-and-47ss4xazqa.pdf

Export-led growth: a survey of the empirical literature and some non-causality results. Part 1

This paper comprehensively tests the export-led growth (ELG) hypothesis for Malaysia for the period 1955 - 90, using cointegration and causality testing based on Hsiao's synthesis of the Granger test and Akaike's minimum final prediction error criterion. The results provide support for the ELG hypothesis; aggregate exports Granger-cause real GDP and non-export GDP. This relationship is found to be driven by manufactured exports rather than by traditional exports.

Exports, export composition and growth : cointegration and causality evidence for Malaysia

Ekanayake, E.M..December, 1999.Exports and economic growth in Asian developing countries,Articles,Seoul, South KoreaThe Economic Research Institute of Chung-Ang University,14

Exports and economic growth in Asian developing countries Cointegration and error-correction models

Purpose – This paper aims to examine the export‐led growth hypothesis for Fiji and Papua New Guinea (PNG).Design/methodology/approach – The paper investigates the export‐led growth hypothesis for Fiji and PNG who have been facing dismal economic growth performances over the last couple of decades.Findings – Findings of the study suggest that for Fiji there is evidence of export‐led growth in the long‐run, while for PNG there is evidence of export‐led growth in the short‐run.Originality/value – The findings of this paper have important messages for policy makers given that export sectors in both countries investigated are underdeveloped due mainly to a sustained period of political instability.

Export‐led growth hypothesis: evidence from Papua New Guinea and Fiji

In this study the validity of the Fisher hypothesis is investigated for Canada under both fixed and floating exchange rate regimes. An empirically distinction is drawn between the weak and strong form of the Fisher hypothesis. The Johansen-Juselius (JJ) multivariate cointegration methodology is applied to test the weak form while the Phillips–Hansen fully modified ordinary least squares (FM-OLS) technique is used for the strong form hypothesis. The caninical correlations (JJ) methodology has the smallest bias and dispersion and hence is the best among the alternative testing procedures available. The FM-OLS procedure, on the other hand, allows for an unrestricted cointegration test correcting for both endogeneity in the data and asymptotic bias in the coefficient estimates. The Fisher hypothesis is soundly rejected.

The Fisher hypothesis: examining the Canadian experience §

The export growth-economic growth cointegration structure is investigated for a large sample of low/middle/high income countries, including the newly industrialized ones. Previous Granger causality studies in this area are fundamentally flawed due to the absence of any form of pretesting for cointegration, hence we forward our study. Extensive stationarity tests are conducted including the KPSS procedure. In sequence we conduct cointegration tests based on the Phillips-Hansen fully modified OLS method and then run the Phillips-Ouliaris tests of non-stationarity on the residuals. For the majority of the countries in our sample, export growth and economic growth are cointegrated.

An empirical investigation of the export growth-economic growth relationship

This paper examines the weak and strong forms of the foreign exchange market efficiency hypothesis (MEH) (as defined in the paper) using the recently available Harris-Inder null of cointegration procedure, which is powerful enough to distinguish between cointegration and near cointegration, and thus provide more robust results than conventional cointegration tests. Our results indicate that both forms of the MEH are rejected for all the major currencies of the European Economic Community (EEC). (JEL F310).

A Note on the Foreign Exchange Market Efficiency Hypothesis

The validity of the monetary approach as a model of long-run exchange rate determination is examined under both fixed and flexible rate regimes. The powerful KPSS and JJ multivariate cointegration procedures are sequentially applied to test the order of integration and common trends in the monetary model under consideration.

An empirical note on the monetary exchange rate model

The foreign exchange market efficiency hypothesis revisiting the puzzle

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