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Doesopennessleadtosustainedeconomicgrowth?Exportgrowthversusothervariablesasdeterminantsofeconomicgrowth

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Forthcoming in Journal of the Asia-Pacific Economy (august 2015)

Does openness lead to sustained economic growth?

Export growth versus other variables as determinants of economic growth

Sanika Sulochani Ramanayake* and Keun Lee**

*Ph.D. Researcher, Inha University and Seoul National University, Department of Economics, Seoul, Korea

** Corresponding author; Professor, Department of Economics, Seoul National University, Seoul, Korea

(Received February 2015 1; accepted 9th April 2015)

Different versions of this paper were presented in several places, including the 2014

Globelics Conferences held in Ethiopia. The authors acknowledge the support from the Korean

government through the National Research Foundation of Korea (NRF-2013S1A3A2053312).

*Postal Address: Seoul National University, BK International House, 946A-102, 1 Gwank-ro, Gwank-gu, Seoul,

151-150, Korea (E-mail- sulochani00@gmail.com, H. Phone:+82-10-51322144)

**Postal Address: Department of Economics, Seoul National University, Shillim Dong, Seoul

151 746 KOREA (E-mail: kenneth@snu.ac.kr, Tel. Phone: +822 880 636)

2

Abstract

This research revisits the issue of economic growth determinants in developing countries with a

focus on international integration variables. Four alternative variables are tested, namely, export

growth, trade openness, export diversification, and foreign direct investment (FDI), in a single

framework. This study finds that export growth is the most robust, in addition to export specialization,

and that traditional variables of trade openness and FDI are not robust. This result is based on the

econometric estimations that use not only cross-section and fixed-effect panel estimations but also

system-GMM estimations. The findings warn against the traditional emphasis on simple trade

openness and FDI as policy prescriptions for developing countries. In other words, simply opening an

economy for international integration does not guarantee sustained economic growth unless these

actions lead to export growth, which requires capability building in indigenous firms and investments

in innovations. This observation is consistent with the experiences of successful economies in Asia,

such as Korea, Taiwan, and China.

Key words: export growth, trade openness, export diversification, foreign direct investment,

economic growth, developing and developed countries

3

1. Introduction

The determinants of economic growth still remain an important issue in economics. The literature

has identified several factors for economic growth, such as policies, institutions, and geography (Lee

and Kim, 2009). Among these factors, policies are often represented by policies for economic

integration and openness, with the so-called Washington Consensus as the prime example

(Williamson, 1994; 1996; 1997). The importance of institutions has been identified due to the fact that

good policy prescriptions are argued to fail because of poor institutional conditions, such as insecure

property rights and a weak rule of law (Knack and Keefer 1995; Acemoglu et al. 2001; 2002; Rodrik

et al. 2004). Specifically, Easterly (2001) argued that none of the traditional factors would affect

economic performance if a stable and trustworthy institutional environment was not present to sustain

the economy. Questioning the robustness of institution variable, Glaeser et al. (2004) argued that

institutions do not cause growth but rather economic growth brings in good institutions, such as

democracy, as in the case of formerly authoritarian states like South Korea. Lee and Kim (2009)

found that (political) institutions are significant only in low- and lower-middle-income countries,

whereas innovation and higher education are significant in upper-middle and higher-income countries.

Another stream of research focuses on the phenomenon of ‘growth spurts and collapse’ in short

periods of time that occurs in many countries in the South. For instance, Jones and Olken (2005),

Hausman et al. (2005), and Rodrick (2006) noted that many developing countries could show growth

spurts for a certain period of time (usually less than a decade) but were unable to sustain this growth

over a longer period. These studies underscore the importance of sustaining growth instead of only

initiating growth.1 A related phenomenon is the middle-income trap, which indicates the problem of

the growth slowdown in middle-income countries, as Eichengreen et al. (2012; 2013), Lee (2013), and

the World Bank (2010) noted.

The recent surge of interest in sustained economic growth motivated this study to revisit the

importance of international economic integration with a new variable other than trade openness,

export diversification, or foreign direct investment (FDI). This study proposes export growth as a new

binding constraint for economic growth in the South instead of the aforementioned factors.

Although the benefits of economic integration and openness have been recognized in the vast

literature (Dollar 1992; Ben-David 1993; Sachs and Warner 1995; Edwards 1998; Vamvakidis 1999;

Harrison 1996), the actual effects of openness and the variables that would represent the best

international integration are still under debate. For instance, whereas some studies find a positive

correlation between economic growth and trade openness (Frankel and Romer 1999; Rodriguez and

1 They have investigated the causes for this phenomenon and suggested that political leadership and investment

sustainability are the suspected factors.

4

Rodrik 2001; Yanikkaya 2003), others find that trade openness is not robust as a factor for economic

growth (Rodriguez and Rodrik 2001; Vamvakidis 2002; Lee and Kim 2009). Similar controversies

exist over the FDI variable as scholars are divided between pro-FDI (Balcao Reis 2001; Hermes and

Lensink 2003; Alfaro et al. 2004; Balasubramanyam et al. 1996; Durham 2004; Doych and Uctum

2011; Borensztein et al. 1998; Hsiao and Shen 2003; Makki and Somwaru 2004) and skeptical-FDI

groups (Carkovic and Levine 2002; Adams 2009). Export diversification is another variable that is

subject to debate because some find this concept significant for economic growth in the South (Hasse,

2009; Amurgo-Pacheco and Pierola, 2008; Dennis and Shephrd, 2007), whereas others find export

specialization to have significant effects on growth (Pliimper and Graff 2001; Dalum et al.1999;

Greenaway et al. 1999; Fosu 1990).

In place of these three variables of trade openness, FDI, and export diversification, this research

introduces export growth as an alternative variable to represent economic integration and openness.

Considering exports as an important factor for economic growth is not new. In particular, economic

growth in many emerging countries has been characterized as export-led growth (Little et al. 1970;

Krueger 1978; Arthur Lewis 1980; Tyler 1981; Cline 1982; Balassa 1985). However, emerging

literature argues that not starting but sustaining exports is critical for economic growth. The research

focuses on the issue of export survival and discusses various variables, such as the comparative

advantage of products, competitiveness of exports, export diversification, learning through exporting,

and export composition (Brenton et al. 2010; Besedes and Prusa 2006b; Nitsch 2009; Fugazza and

Molina 2009; Gorge et al. 2007; Volpe and Carballo 2008; Cadot et al. 2009; Hausman et al. 2007).

This study hypothesizes that export growth (sustaining exports) is one of the most binding factors for

economic growth in the South, based on the reasoning that developing countries must earn hard

currencies through exporting to pay for the imported capital goods that are required investments for

sustaining economic growth. In other words, export growth promotes economic growth by generating

the foreign exchange that enables the importation of machinery and intermediate goods, which are

needed for investment.

Although some empirical research focuses on export as a determinant of economic growth, most of

them are limited in other aspects. First, the research surveyed in Appendix Table 1 tends to use gross

domestic product (GDP) growth but not per capita GDP growth as in typical growth literature. The

only study that uses per capita income growth is that of Michaley (1977), which does not conduct

regressions but only considers correlations. The other research surveyed in Appendix Table 2 uses the

generalized method of moments (GMM) method to control endogeneity but does not use export

growth. Instead, it uses other variables, such as export GDP ratio, and export composition (share of

high tech export). Moreover, many of these studies do not divide samples into separate income groups,

such as developing and developed countries.

5

This study is one of the first to consider and compare the variable of export growth in the same

regression models with other integration variables, such as trade openness, export diversification, and

FDI variables. It also divides countries into two groups, developing and developed, and conducts not

only panel estimations but also the system–GMM estimations to control endogeneity. This study uses

long and recent data periods for both five-year- and fifteen-year-based growth rates.

This paper is organized as follows: Section 2 provides the literature review and hypotheses. Section

3 discusses the empirical methodology, data, and results. Finally, Section 4 presents the summary and

concluding remarks.

2. The Four Variables Representing International Integration: Hypotheses

In this study, we consider four variables to represent international integration: trade openness,

export diversification, FDI, and export growth rate.

Trade Openness

Openness is a typical variable that represents international integration. Dollar (1992) and Sachs and

Warner (1995) found a positive effect of openness on growth and tested the corresponding robustness

using a wide range of openness measures, including subjective indicators. Simultaneously, Sachs and

Warner (1995) stated that open economies successfully avoid balance-of-payments crises, whereas

many closed economies eventually succumb to such crises.2 Using panel data estimation, Vamvakidis

(1999) and Harrison (1996) found that openness has a positive and statistically significant correlation

with growth and investment. Frankel and Romer (1999) confirmed that trade has a large and robust

effect on growth. Yanikkaya (2003) explained that trade openness and growth have a positive and

significant association.

By contrast, others find that trade openness is not robust as a determinant of economic growth.

Rodriguez and Rodrik (2001) considered the indicators of openness that researchers use as measures

of trade barriers to be problematic and often highly correlated with other sources of poor economic

performance. Using cross-country regression, Vamvakidis (2002) showed that long-term trade

openness and growth are not always positively correlated.3 Lee and Kim (2009) also determined that

trade openness is not robust.

FDI

FDI is identified as another integration variable and as a determinant of economic growth. Growth-

oriented governments of emerging economies and developing countries have been competing to entice

2 Sachs and Warner (1995), used a different variable of openness, that is, a dummy variable between 0 and 1, and the sample

consisted of 135 countries. In this research, we consider ‘trade openness’ as the total trade share of GDP and ‘openness’ as

the openness dummy variable.

3 He used data from 1870 to 1970. Even during war periods, the correlation between trade openness and growth was

negative.

6

foreign capital with various attractive schemes. Now, FDI stands as one of the most important foreign

financing sources in these economies. FDI has also long been recognized as a major source of

technology and know-how to developing countries. Some research shows that FDI has positive effects

on growth, whereas others indicate that FDI has negative effects on growth. Borensztein et al. (1998)

found that the FDI effect on growth is conditional upon the level of absorptive capacity. Regarding the

developing countries, Balasubramanyam et al. (1996) found that FDI has a positive effect on

economic growth. Hsiao and Shen (2003) found that institutional strength and high levels of

urbanization are the pre-conditions for positive effects of FDI on growth in developing countries.

By contrast, some studies do not find any relationship between FDI and growth. Carkovic and

Levine (2002) showed that FDI inflows do not exert an independent robust positive influence on

economic growth.4 Adams (2009) analyzed the effect of FDI and domestic investment on economic

growth in sub-Saharan Africa over the period of 1990 to 2003. The result indicates that FDI is positive

and significant only in the ordinary least square (OLS) estimation but is insignificant in the fixed

effect estimation.

Export diversification or specialization

The growth effects of export specialization or diversification have two different views.

On the one hand, many empirical analyses show a positive relationship between export

diversification and growth. Recent studies on product-level export data demonstrate that an economy

with an export-mix that is diverse and sophisticated tends to experience a fast growth. Agosin (2007),

Cadot et al. (2009), and Hausman et al. (2007) also indicated that export diversification and

comparative advantage are the key factors to economic growth. Al-Marhub (2000) provided empirical

evidence that shows that export diversification associated with a high investment rate is a key factor

for the growth of developing countries. Al-Marhubi (2000) and Ferranti et al. (2002) also found

evidence in favor of diversification-led economic growth. A number of trade models also imply a link

between export diversification and growth. Pineres and Ferrantino (1997) argued that general growth,

export growth, and export diversification are all linked. Pineres and Ferrantino (2000) claimed that

export diversification affects long-run growth as suggested by endogenous growth theory, which

emphasizes the role of increasing returns to scale and dynamic spillover effects. Felipe et al. (2012)

found that countries that belonged to the upper-middle-income group simultaneously had a diversified,

sophisticated, and non-standard export basket, and that they were about to jump from the lower-

income level to the middle-income level. Balaguer and Cantavella-Jorda (2004) also established a

positive relationship between diversification and growth using co-integration and causality tests.

On the other hand, a large volume of literature discusses the linkage between export specialization

and growth. Pliimper and Graff (2001) found that export specialization in certain goods has a

4 Carkovic and Levin (2002) used GMM panel estimator using World Bank and IMF datasets over the period of 1960-1995.

7

significant effect on economic growth.5 Greenaway et al. (1999) found that export specialization is

positively related to growth in developing countries over the period of 1980 to 1990.6 Worz (2005)

presented further evidence that the selected specialization of exports in the high-tech sectors matters

for growth. Plumper and Graff (2001) established that export specialization is important for growth.

Fosu (1990) showed that developing countries specializing in manufacturing achieved higher

economic growth than those specializing in primary sector exports.7 Naude et al. (2010) suggested

that export specialization rather than export diversification is associated with the local economic

growth of a country.

Given the diverse results with the regard to the effect of export structure, adding this dimension to

the framework of the present research is important to determine the effect of export diversification or

specialization on growth. In this study, we investigate the role of export diversification together with

other international integration variables using the HH-based export diversification index.

Export growth

Exports and export growth are widely discussed topics in economic literature. Many scholars have

been discussing these issues, especially after the rise of East Asia with export-led growth. Recent

studies also recognize the importance of exports and export survival, but they tend to raise more

questions about the sustenance of exports rather than the effect of exports on economic growth. For

instance, Brenton et al. (2010) found that the initial size of export flow is among the important

determinants of its survival, and Hausman et al. (2007) found that export goods associated with high

productivity levels grow rapidly. Eaton et al. (2008), Besedes and Prusa (2007), Brenton and

Newfarmer (2007), Helpman et al. (2008), and Felbermayr and Kohler (2006) indicated that the

length of trade relationships matters for the survival of export growth. Besedes and Prusa (2006a) and

Nitsch (2009) asserted that the duration of trade flow is important in the survival of export growth.

Gorg et al. (2007) and Cadot et al. (2009) found that the long survival of a product is a comparative

advantage for the country.

By contrast, our interest leans toward explaining the value of export growth in the economic growth

of developing countries. Our straightforward answer is that exports are important because they are a

hard (foreign) currency gainer for developing countries. For growth, developing countries need to

invest especially in capital goods. To engage in capital investment, these countries should also have

hard currencies (dollars) to import capital goods from foreign countries. In other words, export growth

5 Their analysis used 90 countries and the data from 1980 to 1990. POLS, FE, and LSDV methods were used for the

estimation. 6 They used GMM estimation for 69 LDCs and OECD countries, and the selected data period was from 1975 to 1993.

7 Fosu (1990) uses cross-Sectional OLS estimations that were used for 64 developing countries over the period of 1960-

1980.

8

promotes economic growth by generating the foreign exchange that enables the import of machinery

and intermediate goods needed for investment. In a similar vein, Kóny (2006: p.979) observed that

‘increased exports may permit the imports of high quality products and technologies, which in turn

may have a positive effect on technological change, labor productivity, capital efficiency, and

eventually, on national production’. In other words, export is important not only for its power to

generate hard currencies but also for its productivity-enhancing effects through learning-by-exporting,

which has been confirmed in many studies (Reinhardt 2000; Jung and Lee 2010). Furthermore, most

of the developing countries or latecomer countries have market sizes that are not sufficient for their

extended production and products, and thus they need large market sizes; the only way to extend the

market size is through exporting (Hasse, 2009; Konya, 2006). Therefore, we can hypothesize that high

export performance and high export growth are important (especially in developing countries) to

achieve long-sustaining economic growth.

A country story that is consistent with this hypothesis is that of Mauritius. In an earlier study,

Subramanian and Roy (2001) explained the ‘Mauritian Miracle’ in terms of strong participatory

institutions, geography (the location of Mauritius), and ethnic diversity. By contrast, Ramanayake and

Lee (2014) argued that Mauritius faced the middle-income trap situation and explained the recent

growth slowdown in Mauritius in terms of the export slowdown associated with increasing domestic

wage rates compared with that of rival countries, such as Bangladesh in garment exports.

Summary

In summary, this study hypothesizes that export growth is a better and more robust variable to

represent the international integration to growth linkage than the traditional variables of trade

openness, FDI, and export diversification. Increasing the trade to GDP ratio cannot sustain growth

because this ratio may increase from increased imports that lead to trade deficits in many developing

countries. FDI to growth linkage is often conditional upon certain initial conditions. Moreover, it has

been subject to many criticisms as FDI may jeopardize the growth of indigenous firms, which are

necessary to sustain growth given the global footless mobility of FDI firms that are looking for cheap

wages (Lee and Mathews 2012). Export diversification is certainly a good indicator of the strength

and quality of exports but may be a long-term goal for many developing countries that tend to have

weak export capabilities. Sustaining exports requires continuous upgrading, but upgrading does not

directly mean increasing diversification because upgrading can occur in the value chain of the same

sector or by moving into a new sector, thus changing the sectors of specialization. Diversification can

then emerge as a long-term endeavor that results in a series of sequential specialization across

different sectors.

9

3. Empirical Method and the Results

3.1. Methodology and Data

This study uses the three estimation methods of the Pooled OLS (POLS) estimation, panel

estimations, and the GMM estimation. The panel approach, which was used by Islam (1995), deals

with the omitted variable bias of the OLS method. However, this approach is not free from the

possible endogeneity problem. Thus, the system–GMM estimation from Arellano and Bover (1995)

and Blundell and Bond (1998) is applied to correct this potential problem. To evaluate the system–

GMM estimation model specifications, we use two criteria: the Hansen over-identification test and the

test for second-order serial correlation (AR2) of the residuals in the first differenced equation. The AR

(2) test also provides additional checks on the specification of the model and on the legitimacy of the

instrumental variables in the differenced equation.

In the regression, we use the standard growth model specifications that consist of the typical control

variables (Xit), a set of the interest variables (Zit), and other controls (Oit) as follows:

= Function (Xit, Zit, Oit) + , (1)

where is the GDP per capita growth rate in country i in year t, and is the error terms. Xit

variables include the (log) initial GDP per capita of a country i expressed in constant US dollars

(ln_intgdp ), population growth (popgrowth ), human capital (H_cap ) measured using the primary

and secondary school enrollment, and gross capital formation (P_cap ). Our variables (Zit) of interest

include the four variables of export: growth rate ( , trade openness ( , export

diversification ( , and FDI ( . The additional controls (Oit) include

democracy ), which represents institutions, and life expectancy ( , which represents

the basic health conditions of populations. Therefore, we have the following simple growth equation:

. (2)

In the regression, four variables of interest that represent economic integration are used individually

or together as a pair or a group. A detailed explanation of the definitions of the variables and the data

sources is presented in Appendix Table 3. The descriptive statistics are presented as Table 1, and

correlation tables are presented as Appendix Tables 4. The data period is from 1980–2009, which is

divided into six sub-periods, and we consider 156 developing and 49 developed countries.

10

Table 1: Descriptive statistics of the key variables

Variables Developing Countries Developed Countries

Obs. Mean Std. Dev. Min Max Obs. Mean Std. Dev. Min Max

GDP per capita growth 819 1.51 4.91 -42.88 33.14 263 2.15 2.50 -7.16 13.85

Log initial GDP per capita 797 3.04 0.50 1.79 4.20 260 4.29 0.23 3.53 4.95

Population growth 932 1.78 1.36 -4.99 6.81 284 1.24 1.83 -16.05 12.08

School enrollment 816 71.21 24.40 7.94 125.07 211 96.86 14.30 25.28 140.56

Gross capital formation 793 23.39 9.02 3.58 86.79 220 23.11 5.27 11.45 47.50

Export growth rate 593 6.16 8.96 -21.20 73.76 183 5.35 3.59 -3.01 17.72

Trade openness 836 82.13 42.60 1.75 266.42 228 91.97 70.69 12.44 448.67

Export diversification Index (1-HHI) 717 0.65 0.21 0.05 0.96 213 0.75 0.20 0.15 0.95

FDI net inflow (% of GDP) 797 3.36 6.45 -16.64 121.66 212 7.66 36.35 -2.44 388.44

Life expectancy 912 62.81 9.69 29.00 80.00 255 75.98 3.38 65.00 82.00

Democracy 724 -1.33 17.24 -88.00 10.00 178 7.78 4.40 -15.00 10.00

3.2. Regression Results

Given the four variables that represent international economic integration, namely, export growth,

trade openness, export diversification, and FDI, this section tests the robustness of these variables as

determinants of economic growth in countries with different income levels. Robustness is verified in

several steps. First, we run growth regressions with each of the integration variable separately with the

basic control variables. Second, we try different pairs of integration variables, such as export growth

and trade openness with a regression. Third, we combine the four integration variables as the final test.

In these experiments, we run the POLS, fixed effects, and GMM model for each regression model.

The robustness is confirmed only when the variables are significant in all three estimation methods, or

at least in both the fixed and GMM methods. Before running this robustness check, we check the

correlation coefficients among the four integration variables. As they are not highly correlated, we

continue using our model (See Table 2 for the pair wise correlations).

Table 2: Pair wise correlations of the four economic integration variables

Developing Export

growth

Trade

openness

Export diversification

(1-HHI)

FDI net inflow

(% of GDP)

Export growth 1.0000

Trade openness -0.0353 1.0000

Export diversification (1-HHI) 0.0058 0.0660 1.0000

FDI net inflow (% of GDP) 0.2133 0.4046 0.1066 1.0000

Developed Export

growth

Trade

openness

Export diversification

(1-HHI)

FDI net inflow

(% of GDP)

Export growth 1.0000

Trade openness -0.0003 1.0000

Export diversification (1-HHI) 0.1255 -0.2751 1.0000

FDI net inflow (% of GDP) 0.0421 0.6647 0.0187 1.0000

11

First, Table 3 shows the results for the first step or one integration variable in each model separately

for the developing and developed country groups. All the four variables are significant in both the

fixed and GMM results for the developing country group. In other words, the estimated coefficient of

the export growth variable is positively significant for both developing and developed samples. Trade

openness is significant in developing countries but insignificant in developed countries. The FDI

variable is significant in developing countries but insignificant in developed countries. The export

diversification index is negative and significant in developing countries but insignificant in developed

countries.

These results change in Table 4 when we try different pairs of the variables and all four in a single

regression model. First, according to the pairwise results, trade openness and export diversification

fail to be significant in both the fixed and GMM results according to the pairwise results, whereas

export growth and DFI are significant in both the fixed and GMM results. Second, only the export

growth and export diversification variables remain significant in both fixed and GMM for the results

involving all four variables. These two variables are actually significant in the OLS, fixed, and GMM

results. In the results of the developed country group, the only variable that passes the test is export

growth. None of the other three variables are significant in both the fixed and GMM results for the

pairwise and all-together models.

Therefore, the emerging picture is that export growth is the only variable that is significant and

robust as a determinant of economic growth in both developing and developed countries. If we

analyze the GMM results with all the four integration variables together, we can also see that export

diversification is negative and significant in all three specifications of OLS, fixed, and GMM in

developing countries. This result implies that sustaining economic growth by not diversifying but by

specializing into a few sectors is the effective way to sustain economic growth in developing countries.

With regard to the other control variables, fixed capital formation and life expectancy are positive and

significant when all the four integration variables are analyzed together, whereas the democracy

variable that represents political institutions is not significant in the economic growth of developing

countries.

12

Table 3: Determinants of Economic growth I: Developing Vs. Developed

Dependant variable

GDP per capita

growth rate

Developing countries Developed countries

POLS 1 FE 1 GMM 1 POLS 2 FE 2 GMM 2 POLS 3 FE 3 GMM 3 POLS 4 FE 4 GMM 4 POLS 1 FE 1 GMM 1 POLS 2 FE 2 GMM2 POLS3 FE 3 GMM 3 POLS 4 FE 4 GMM 4

ln_Initial GDP per

capita

-1.56***

(-3.57)

-9.71***

(-6.18)

-3.01***

(-3.13)

-1.32***

(-2.67)

-16.62***

(-10.15)

-4.72***

(-3.42)

-1.93***

(-3.71)

-19.34***

(-10.29)

-5.01***

(-3.86)

-1.56***

(-3.54)

-10.45 ***

(-6.73)

-3.43***

(-2.89)

-.93

(-1.41)

-4.52*

(0.087)

-.92

(-1.43)

-3.14***

(-3.54)

-11.36***

(-4.96)

-3.58***

(-3.58)

-2.99***

(-3.28)

-11.14***

(-4.11)

-4.16***

(-3.29)

-3.02 ***

(-3.42)

-11.50***

(-5.14)

-3.76 ***

(-3.17)

Population Growth

-.26*

(-1.83)

-1.12***

(-4.02)

-.34

(-1.34)

.08

(0.51)

-.29

(-1.20)

.37

(1.26)

-.04

(-0.23)

-.45*

(-1.89)

.17

(0.63)

.06

(0.44)

-.30

(-1.31)

.11

(0.40)

-.55***

(-4.17)

-1.28***

(-3.17)

-.56***

(-4.89)

-.31**

(-2.39)

-.42

(-1.57)

-.33

(-1.12)

-.25

(-1.60)

-.44

(-1.60)

-.26

(-0.78)

-.34***

(-2.63)

-.47 *

(-1.79)

-.32

(-1.17)

School Enrollment

.01

(1.06)

.03**

(2.07)

.04**

(2.44)

.00

(0.33)

.02

(1.58)

.02

(1.12)

-.00

(-0.08)

.02

(1.43)

.04**

(2.04)

.00

(0.02)

.02

(1.25)

.02

(1.07)

.00

(0.30)

.01

(0.67)

.00

(0.16)

.02

(1.600

.01

(0.76)

.03

(1.61)

.02

(1.55)

.01

(0.76)

.03

(1.58)

.05

(1.10)

.05

(0.33)

.02

(1.03)

Gross capital

formation

.06***

(2.91)

.06**

(1.96)

.12**

(2.35)

.19***

(8.16)

.16***

(5.37)

.31***

(4.52)

.19***

(7.64)

.27***

(7.88)

.32***

(5.67)

.09 ***

(4.36)

.09 ***

(2.85)

0.20***

(3.09)

.06**

(2.04)

.17***

(3.39)

.05**

(2.02)

.06*

(1.66)

.03

(0.49)

.07

(1.20)

.06

(1.55)

.04

(0.79)

.07

(1.35)

.07*

(1.85)

.06

(1.17)

.07

(1.41)

Export growth

.22***

(12.30)

.19***

(10.23)

.28***

(5.49)

.28***

(8.31)

.26***

(6.38)

.28***

(4.95)

Trade Openness

.00

(0.24)

.05***

(5.95)

.02*

(1.78)

-.00

(-0.02)

.02

(1.49)

.00

(0.09)

1-HHI (Export

diversification

Index)

-.94

(-0.96)

-6.45***

(-3.89)

-4.87*

(-1.70)

1.28

(0.86)

-.91

(-0.26)

.44

(0.19)

FDI net inlow (%

of GDP)

.31***

(8.41)

.25 ***

(5.25)

.24***

(3.86)

.06

(1.49)

.13***

(2.63)

.07

(1.12)

Life expectancy

.09***

(3.25)

.23***

(4.68)

.11***

(2.63)

.07**

(2.27)

.30***

(5.45)

.17***

(2.74)

.11***

(3.53)

.45***

(7.45)

.22***

(3.41)

.09***

(3.30)

.26 ***

(5.09)

.16***

(3.03)

.01

(0.09)

.20*

(1.71)

.00

(0.06)

.06

(0.84)

.22

(1.63)

.06

(0.48)

.06

(0.79)

.35***

(3.03)

.09

(0.80)

.04

(0.66)

.31***

(2.92)

.07

(0.56)

democracy

.04***

(3.12)

.03**

(2.12)

.03

(1.51)

.02*

(1.83)

.04***

(2.63)

.04

(1.55)

.02

(1.16)

.02

(1.38)

.02

(0.69)

.05***

(3.95)

.05 ***

(3.37)

.06***

(3.36)

-.09**

(-2.18)

-.15**

(-2.36)

-.09***

(-3.09)

-.08

(-1.44)

-.03

(-0.36)

-.08

(-1.12)

-.10*

(-1.68)

-.05

(-0.55)

-.08

(-1.30)

-.08

(-1.52)

-.0 4

(-0.43)

-.07

(-1.15)

constant -2.43*

(-1.74)

13.66***

(2.79)

-2.99

(-1.19)

-3.51**

(-2.33)

23.71***

(4.62)

-5.32

(-1.32)

-3.32**

(-2.11)

28.78***

(5.14)

-3.94

(-1.07)

-2.60*

(-1.93)

12.85***

(2.66)

-4.69

(-1.59)

3.74

(0.97)

2.14

(0.35)

4.13

(1.09)

8.10

(1.61)

31.34***

(3.31)

9.42

(1.45)

6.78

(1.26)

22.32**

(2.43)

8.82

(1.19)

8.94*

(1.78)

26.05 ***

(3.91)

10.27

(1.55)

R² 0.34 0.16 0.14 0.02 0.16 0.03 0.26 0.08 0.52 0.41 0.19 0.15 0.20 (0.16) (0.21) (0.18)

Number of

Observations 508 508 508 607 607 607 557 557 557 602 602 602 144 144 144 159 159 159 155 155 159 159 159

Hausman test

[0.00] [0.00] [0.00] [0.00] [0.04] [0.00] [0.01] [0.00]

AR2

[0.878] [0.012] [0.037] (0.003) [0.573] [0.507] [0.519] 0.308

Hansen & Sargan

test [0.668] [0.315] [0.329] (0.217) [0.145] [0.001] [0.001] [0.001]

Lag

(1/2) (1/2) (1/2) (1/2) (1/2) (1/2) (1/2) (1/2)

Note: The dependent variable is GDP per capita growth rate ( five year annual averages over the 6 sub-periods during 1980-2009). Figures in parentheses are t-statistics.

*** Significant at 1%;** significant at 5%; * significant at 10%

13

Table 4: Determinants of Economic growth II: Developing vs. Developed

Note: The dependent variable is GDP per capita growth rate (five year annual growth). T-statistics are in the parentheses.

. *** Significant at 1%; ** significant at 5%; * significant at 10%

Dependant variable

GDP per capita

growth rate

Developing countries Developed countries

POLS 1 FE 1 GMM 1 POLS 2 FE 2 GMM 2 POLS 3 FE 3 GMM 3 FE 3 GMM 3 POLS4 FE 4 GMM 5 POLS 6 FE 6 GMM 6 POLS 1 FE 1 GMM 1 POLS 2 FE 2 GMM 2 POLS 3 FE 3 GMM 3 FE 3 GMM 3 POLS4 FE 4 GMM 5 POLS 6 FE 6 GMM 6

ln_Initial GDP per

capita

-

1.60***

(-3.66)

-11.21***

(-7.14)

-2.94***

(-3.27)

-1.55***

(-3.38)

-10.41***

(-5.97)

-2.23**

(-2.02)

-1.48***

(-3.37)

-9.4 2***

( -5.96)

.53

(0.51)

-

21.66***

(-11.49)

-5.43***

(-4.01)

-1.59***

(-3.46)

-

12.54***

(-7.09)

-2.62***

(-2.63)

-1.47***

(-3.19)

-12.28

***

(-6.87)

-1.66**

(-2.01)

-.94

(-1.42)

-6.54**

(-2.39)

-.96

(-1.61)

-1.15*

(-1.69)

-4.71

(-1.62)

-1.15*

(-1.88)

-.83

(-1.27)

-5.29**

(-2.02)

-.85

(-1.44)

-

12.22***

(-4.42)

-3.24***

(-2.92)

-1.13*

(-1.66)

-6.96**

(-2.32)

-1.13*

(-1.85)

-1.05

(-1.54)

-7.47**

(-2.52)

-1.05*

(-1.82)

Population Growth -.24* (-1.71)

-.79*** (-2.82)

-.20 (-0.78)

-.39*** (-2.60)

-.97*** (-3.30)

-.28 (-1.09)

-.18 (-1.25)

-.98 *** (-3.48)

-.72 ** (-2.45)

-.15 (-0.62)

.25 (0.9)

-.38** (-2.48)

-.58* (-1.94)

-.33 (-1.39)

-.30* (-1.95)

-.4 9 (-1.61)

-.25 (-1.03)

-.59*** (-4.35)

-1.42*** (-3.53)

-.59*** (-5.00)

-.73*** (-4.22)

-1.31*** (-3.08)

-.73*** (-5.37)

-.56 *** (-4.31)

-1.34*** (-3.36)

-.56*** (-5.28)

-.44 (-1.58)

-.26 (-0.79)

-.76*** (-4.32)

-1.45*** (-3.45)

-.76*** (-4.91)

-.76*** (-4.34)

-1.45*** (-3.53)

-.76*** (-5.21)

School Enrollment .01

(0.99)

.03**

(2.10)

.03*

(1.81)

.01

(0.71)

.03*

(1.78)

.04**

(2.51)

.001

( 0.80)

.03*

( 1.78)

-.02

( -0.72)

.02

(1.25)

.03*

(1.68)

.01

(0.67)

.02

(1.60)

.04**

(2.20)

.01

(0.45)

.02

( 1.48)

.02

( 1.23)

.00

(0.05)

.01

(0.86)

.00

(0.05)

.00

(0.31)

.01

(0.72)

.00

(0.35)

-.00

(-0.19)

.00

( 0.41)

-.00

(-0.20)

.01

(0.83)

.02

(1.38)

.00

(0.14)

.01

(0.99)

.00

(0.15)

-.00

(-0.13)

.0 1

(0.59)

-.00

(-0.13)

Gross capital

formation

.05**

(2.39)

.04

(1.37)

.11**

(2.10)

.06**

(2.29)

.08**

(2.29)

.14**

(2.46)

.04*

(1.89)

.03

(0.80)

-.02

(-0.46)

.23***

(6.88)

.31***

(5.50)

.05**

(1.97)

.07**

(1.97)

.12**

(2.00)

.04

( 1.54)

.05

(1.25)

.10*

( 1.65)

.06**

(2.16)

.17***

(3.38)

.06**

(2.30)

.06**

(2.08)

.17***

(3.36)

.06***

(2.74)

.06 **

( 2.21)

.17 ***

( 3.51)

.06 **

( 2.36)

.02

(0.44)

.06

(1.18)

.06**

(2.17)

.17***

(3.42)

.06***

(2.70)

.06 **

(2.26)

.19***

(3.75)

.06***

(2.91)

Export growth .21***

(12.36)

.19***

(10.11)

.25***

(5.45)

.24***

(12.24)

.20***

(9.49)

.31***

(5.55)

.21***

( 11.31)

.19***

( 9.38)

.33***

(6.24)

.24***

(12.27)

.19***

(9.31)

.28***

(5.45)

.2 3***

(11.30)

.19 ***

(9.04)

.27***

(5.42)

.27***

(8.13)

.24***

(5.80)

.27***

(5.32)

.28***

(8.22)

.26***

(6.21)

.28***

(4.86)

.27 ***

( 8.22)

.25***

( 6.07)

.27 ***

(5.22)

.27***

(7.96)

.23***

(5.62)

.27***

(5.20)

.27 ***

( 8.02)

.22***

( 5.46)

.27***

( 5.30)

Trade Openness .01

(1.24) .04***

(4.43)

.01

(0.60)

.05***

(5.48)

.01

(0.94)

.00

(0.89)

.04***

(4.43)

.00

(0.19) -.00

(-0.03)

.04***

(4.16)

-.01

(-0.69)

.00

(1.19)

.03**

(2.15)

.00

(1.21)

.02*

(1.67)

.00

(0.34)

.00

(1.03)

.03**

(2.33)

.00

(1.03) -.00

(-0.05)

.02

(1.38)

-.00

(-0.07)

1-HHI (Export

diversification

Index)

-1.46*

(-1.75)

-4.91***

(-3.10)

-1.23 (-0.58)

-5.69***

(-3.50)

-4.61*

(-1.80)

-1.43*

(-1.72)

-4.68***

(-3.02)

-3.20*

(-1.90)

-1. 50*

(-1.79)

-5.01***

(-3.20)

-3.70**

(-2.40)

-2.26*

(-1.66)

-1.20 (-0.30)

-2.26**

(-2.16)

-2.07 (-0.58)

1.33 (0.61)

-2.06 (-1.50)

-.79 (-0.20)

-2.06*

(-1.91) -2.37*

(-1.71)

-.61

(-0.16)

-2.36**

( -2.27)

FDI net inflow (%

of GDP)

.13 ***

( 3.00)

.1 3**

(2.39)

.28 **

( 2.51)

.15 ***

( 2.93)

.08

(1.20)

.17*

(1.72)

.05*

( 1.69)

.07*

(1.86)

.05

(1.27)

.06

(1.44)

.12**

( 2.09)

.06

(1.31)

Life expectancy .09***

(3.34)

.21***

(4.46)

.12***

(2.96)

.09***

(3.26)

.27***

(4.65)

.08*

(1.80)

.09 ***

(3.42)

.21 ***

(4.31)

.08*

(1.72)

.45***

(7.48)

.23***

(3.55)

.10***

(3.31)

.28***

(4.92)

.11***

(2.57)

.10***

( 3.40)

.27***

(4.65)

.10***

(2.62)

-.01

(-0.12)

.20

( 0.77)

-.01

(-0.22)

.00

(0.06)

.21

(1.64)

.00

(0.06)

-.01

(-0.14)

.20*

(1.69)

-.01

(-0.21)

.22

(1.58)

.07

(0.59)

-.01

(-0.21)

.09

(0.67)

-.01

(-0.24)

-.01

(-0.22)

.16

( 1.09)

-.01

(-0.25)

democracy .04***

(3.19)

.03**

(2.02)

.03*

(1.65)

.04**

(2.54)

.03*

(1.91)

.03

(1.37)

.04***

( 2.97)

.04**

( 2.15)

.05 **

( 2.14)

.02

(1.20)

.02

(0.71)

.04**

(2.54)

.03

(1.63)

.02

(1.04)

.03 **

(1.99)

.03

(1.38)

.02

(1.32)

-.09**

(-2.14)

-.13*

(-1.92)

-.09***

(-3.02)

-.08*

(-1.95)

-.16**

(-2.32)

-.08***

(-2.63)

-.10**

(-2.34)

-.14 **

(-2.20)

-.10***

( -3.46)

-.03

(-0.30)

-.09

(-1.34)

-.08*

(-1.92)

-.12*

(-1.86)

-.08***

(-2.69)

-.09**

(-2.10)

-.12 *

(-1.85)

-.09***

(-3.05)

constant -2.60* (-1.85)

16.28*** (3.39)

-3.53 (-1.50)

-1.30 (-0.86)

16.27*** (3.15)

-3.29 (-1.18)

-2.7 8** ( -1.97)

14.28

*** (2.90)

-5.00* (-1.85)

32.42*** (5.89)

-3.85 (-1.05)

-1.42 (-0.94)

19.22*** (3.78)

-1.49 (-0.63)

-1.6 7 (-1.10)

19.53*** (3.82)

-2.21 (-0.99)

4.65 (1.18)

17.00* (1.87)

5.10 (1.51)

6.75 (1.56)

3.48 (0.42)

6.75** (2.01)

4.69 (1.21)

5.77 (0.92)

5.00 (1.41)

36.29*** (2.94)

7.06 (1.05)

7.63* (1.73)

19.55* (1.84)

7.63** (2.54)

7.97* (1.81)

17.68 * (1.68)

7.97** (2.48)

R² 0.34 0.11 0.35 0.15 0.35 0.16

0.03 0.35 0.10 0.36 0.09

0.53 0.39 0.53 0.42 0.53 0.41

0.13 0.54 0.39 0.54 0.38

Number of

Observations 508 508 508 465 465 465

502 502 502 550 550 465 465 465

459 459 459 144 144 144 140 140 140

144 144 144 155 155 140 140 140

140 140 140

Hausman test

[0.00] [0.00] [0.00] [0.00] [0.00] [ 0.00] [0.02] [0.04] [0.04] [0.01] [0.00]

AR2

[0.924] [0.552]

[0.702]

[0.031] [0.626]

[0.613]

[0.612] [0.535]

[0.807]

[0.476] [0.543]

[0.728]

Hansen & Sargan test

[0.902] [0.928] [0.307] [0.671] [0.994] [1.000] [0.401] [0.499] [0.394 ] [0.001] [0.549] [ 0.566]

Lag

(1/2) (1/2) (2) (1/2) (1/2) (1/2) (1/2) (1/2) (1/2) (1/2) (1/2) (1/2)

14

As an additional robustness check of the export growth variable, we run regressions for the long-

term economic growth with the per capita GDP growth over the 15-year period as the dependent

variable (1995–2009). For the groups of developing countries, developed countries, and all countries,

we run OLS estimations with a main concern on the variables of export growth and trade openness,

respectively, and other controls. Table 5 presents the results. The export growth variable is still

positive and significant for the models of the developing, developed, and all countries. However, trade

openness has an insignificant coefficient on the growth of developing, developed, and all countries.

Capital formation and life expectancy remain significant, whereas democracy is not.

Table 5: Determinants of ‘longer term’ economic growth: Cross-country analysis

Note: The dependent variable is GDP per capita growth rate over the fifteen years (1995-2009). Figures in parentheses are t

& z statistics. *** Significant at 1%; ** significant at 5%; * significant at 10%

4. Summary and Concluding Remarks

This research revisits the determinants of economic growth in developing countries with a focus on

international integration variables. The four alternative variables of export growth, trade openness,

export diversification, and FDI are used in a single framework. This study finds that aside from export

Dependent variable

GDP per capita growth rate

Period : 1995-2009 (OLS)

Developing Developed All

1 2 1 2 1 2

ln_Initial GDP per capita -1.44***

(-2.79)

-1.47**

(-2.26)

-1.44***

(-2.79)

-1.47**

(-2.26)

-1.86***

(-4.93)

-1.84***

(-3.95)

Population Growth -.34

(-1.57)

-.17

(-0.65)

-.34

(-1.57)

-.17

(-0.65)

-.29*

(-1.77)

-.11

(-0.54)

School Enrollment

.02

(1.35)

.02

(0.97)

.02

(1.35)

.02

(0.97)

.02*

(1.80)

.02

(1.29)

Gross capital formation .07**

(2.07)

.14***

(3.12)

.07**

(2.07)

.14***

(3.12)

.07**

(2.34)

.12***

(3.32)

Export growth .21***

(6.15)

.21***

(6.15)

.21***

(6.80)

Trade openness

-.01

(-1.08)

-.01

(-1.08)

-.002

(-0.38)

Democracy -.00

(-0.01)

-.03*

(-1.90)

-.00

(-0.01)

-.03*

(-1.90)

-.00

(-0.01)

-.03*

(-1.91)

Landlocked dummy .51

(1.16)

.44

(0.79)

.51

(1.16)

.44

(0.79)

.39

(1.05)

.26

(0.57)

Life expectancy .09***

(2.92)

.07*

(1.70)

.09***

(2.92)

.07*

(1.70)

.09***

(3.34)

.07*

(1.96)

Tropical climate dummy -.41

(-0.87)

-.78

(-1.29)

-.41

(-0.87)

-.78

(-1.29)

-.40

(-0.99)

-.88*

(-1.70)

constant -2.63

(-1.31)

-.11

(-0.04)

-2.63

(-1.31)

-.11

(-0.04)

-1.75

(-1.07)

.55

(0.27)

R² 0.61 0.34 0.61 0.34 0.60 0.34

Number of Observations 95 108 95 108 120 134

15

specialization, export growth is the most robust and that the traditional variables of trade openness

and FDI are not robust. This result is based on econometric estimations using not only cross-section

and fixed-effect panel estimations but also system–GMM estimations. This aggregate level evidence

of importance of export growth is consistent with the firm-level analysis in Lee and Temesgen (2009)

which find a robust impact of export-orientation on firm growth in a large sample of developing

countries, in contrast to the weak impacts of firms engaged in FDI.

The results in this study warn against the traditional emphasis on simple trade openness and FDI as

policy prescriptions for developing countries. In other words, opening an economy for international

integration or for inviting FDI into a host country does not guarantee sustained economic growth

unless these actions lead to export growth, which requires capability building in indigenous firms and

investments in innovation (Jung and Lee 2010). This observation is consistent with the experiences of

successful catching-up economies in Asia, such as Korea, Taiwan, and China.

With these results and the literature on other determinants of growth at different stages of

development, such as Lee and Kim (2009) on the role of institution, education, and innovation, Lee et

al. (2012) on the role of large businesses for middle- or high-income countries, and Kim et al. (2012)

on the role of minor (petit patents) versus regular (regular patents) forms of IPR (intellectual property

rights) protection for economic growth in the South versus the North, we may deliver a

comprehensive picture of economic growth at different stages of economic development. Therefore,

the important variables for economic growth at the low- and lower-middle income level of

development include the variables of export growth, export specialization, political institutions, minor

forms of IPR protection (utility models), and primary and secondary education. For economic growth

at the upper-middle or higher income stages, the important concepts are the variables of innovation,

large business, regular patent protection, high education, and export growth.

Acknowledgements

The authors acknowledge the support from the Korean government through the National Research

Foundation of Korea (NRF-2013S1A3A2053312).

16

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Appendix Table 1: Empirical studies on the relationship between export and economic growth

Source: Jung and Marshel (1985), Greenway et al. (1999)

21

Appendix Table 2: Studies with System GMM analysis

Study Data set Economic

growth Export growth Technique conclusion

Heiko Hesse

(2006)

Panel - 96 countries

Avg. 5 years of 1961-2000

Per capita GDP

growth

Export

concentration System GMM

Export diversification

caused growth

Greenaway, Morgan & Wright

(2002)

Panel – 69 countries

1975-1993

GDP per head Export composition Dynamic model,

GMM

Strong positive

relationship between export growth and real

output growth, export

composition matters

Falk (2009)

Panel avg. 5

years , 22 OECD

countries 1980-2004

Initial GDP per

capita (PPP)

Export share of high-technology

industries

Dynamic growth model, System-

GMM

High-tech exports and economic growth in

industrialized countries

Mahoney (2001) 1960-1992 GDP per capita

growth

Avg. export share of

GDP

Moment –

system GMM

Common law and

growth

Nair-Reichert & Weinhold (2001)

24 developing

countries

1971-1995

GDP growth Export share % of GDP

Granger causality model

FDI & economic

growth in developing

countries

Appendix Table 3: Variable definitions and sources

Variable Definition

GDP per capita growth rate

Initial GDP per capita

School enrollment

gross capital formation

Trade openness

Export growth rate

Democracy

Export Diversification

Life expectancy

Developing & Developed

countries

Average annual growth of GDP per capita (Constant US$ in 2000).

Source: World Bank, World Development Indicator

GDP per capita of the initial year of each sub-period (Constant US$ in 2000).

Source: World Bank, World Development Indicator

Sum of primary school enrollment (% gross) and secondary school enrollment (% gross) divided by 2.

Source: World Bank - World development Indicator

gross capital formation (% of GDP), Source: World Bank, World development Indicator

Exports plus Imports divided by GDP. The export and import figures are in national currencies from the World

Bank and United Nations data archives. Source: Penn World tables

Growth rate of exports of goods and services (constant 2000 US$),

Source: World Bank, World development Indicator

Source: Lee & Kim (2009) data base

Feenstra et al. (2004) for the data up to 2000; for the 2000-2010 period, calculations using Uncomtrade

Average of life expectancy for each sub-period, Source: World Bank, World development Indicator

A country with constant real GDP per capita higher than $10,000 (Constant US$ in 2000) considered as a

developed country; the rest as developing country.

22

Appendix -Table 4: Sample Correlations: Developing country Sample

Variables

Developing countries

GDP per

capita growth

Log initial

GDP per

capita

Population

growth

School

enrollment

Gross capital

formation

Export

growth rate

Trade

openness

Export

diversification

Index (1-HHI)

FDI net

inflow (% of

GDP)

Life

expecta

ncy

Democracy

GDP per capita growth 1.0000

Log initial GDP per capita 0.0505 1.0000

Population growth -0.2062 -0.4277 1.0000

School enrollment 0.1719 0.6511 -0.5864 1.0000

Gross capital formation 0.2464 0.1960 -0.2409 0.2989 1.0000

Export growth rate 0.5138 -0.0527 -0.0181 -0.0251 0.1514 1.0000

Trade openness 0.0850 0.2320 -0.2465 0.2425 0.3183 -0.0399 1.0000

Export diversification Index

(1-HHI) 0.0596 0.2197 -0.4153 0.2912 0.0825 0.0252 0.0699 1.0000

FDI net inflow (% of GDP) 0.3078 0.1210 -0.2967 0.2401 0.2990 0.2284 0.3740 0.1353 1.0000

Life expectancy 0.2268 0.7454 -0.5328 0.7369 0.3169 0.0506 0.2050 0.3398 0.1886 1.0000

Democracy 0.1521 0.2262 -0.2245 0.2666 0.1495 0.0342 0.0690 0.1875 0.1305 0.2516 1.0000