Growth, Size, and Openness: A Quantitative Approach

Natalia Ramondo, Andrés Rodríguez-Clare
2010 The American Economic Review  
It seems reasonable to argue that countries enjoy substantial gains from their interactions with the rest of the world. These gains from openness take place through several different channels. In this paper we focus on trade, multinational production (MP), and the diffusion of ideas. Our aim is to get some sense about the magnitude of these gains. Quantifying the gains from diffusion represents a significant challenge because, in contrast to the case for trade and MP, it is quite difficult to
more » ... asure diffusion in the data. Here we pursue an indirect approach based on a simple application of the semi-endogenous growth (SEG) model developed by Charles I. Jones (1995), Samuel S. Kortum (1997) , and in particular by Jonathan Eaton and Samuel S. Kortum (2001). Semi-endogenous growth theory postulates that growth is possible in the long run thanks to the ever expanding set of non-rival ideas associated with a growing population. The central equation in this theory is that the steady state growth rate of labor productivity is proportional to the growth rate of population, g = εg L . The cross-section implication of this dynamic relationship is that, if countries were in isolation, large countries would be more productive than small countries. In this paper we perform a simple calibration of the critical parameter ε using the SEG model and then explore the associated cross-country implications. The figure below shows the labor productivity levels implied by the calibrated SEG model and the real output per worker in the data against a model-consistent measure of country size. The figure reveals that the pattern of real income in the data is much flatter than the one implied by the SEG model. For example, a small country like Belgium (highlighted in the figure), whose size relative to the U.S. is 2.2%, is much richer (90% of the U.S. level) than what it would be under isolation according to the calibrated SEG model (45% of the U.S. level). The figure also reveals that there are several small and rich countries that exhibit this same gap between their observed and implied income. We refer to this phenomenon as . The views expressed here are those of the authors and do not necessarily reflect those of the institutions to which they are affiliated.
doi:10.1257/aer.100.2.62 fatcat:24igadah3bajnle62u3bzpsj5q