Patterns of specialization and economic growth

This thesis deals with the relationship between patterns of production and trade specialization, and economic growth. Chapter 1 begins by observing that throughout most of history, most countries have exported only a handful of commodities. While countries outside the industrialized core were specialized to a similar degree, economic performance varied widely. What explains this divergence? New terms of trade data, constructed for the period 1870-1940 covering a large sample of developing countries, suggest strongly that differences in terms of trade movements mattered. Depending on the particular commodities a country exported, countries faced spectacularly different degrees of volatility in export prices. These differences translated into differences in how fast income rose across countries. Those with lower volatility grew faster while those with greater volatility grew more slowly. The remaining chapters consider the post-war period, when rapid growth dramatically lifted the standards of living in parts of the developing world, notably in East Asia. Economic growth in these regions coincided with structural transformation whereby production shifted towards more sophisticated goods traditionally exported by much richer economies. Might there be a causal link from changes in production and trade structure to growth? Theoretically, such links are possible if there are externalities arising from entry into new sectors. Chapter 2 provides a simple model and provides evidence consistent with the predictions: Export sophistication matters for growth and is determined in part by scale economies. The final chapter documents an important new fact: Once a country discovers and enters a sector in which it can profitably export, that country receives a significant boost to growth by converging to the global productivity frontier in the new sector. Chapter 3 shows that an important difference between fast-growing and stagnant economies is the extent to which economies have transitioned into activities in which such convergence can occur. A simple model of entry into new sectors with within-sector quality convergence illustrates this idea and makes a novel prediction: More diversified economies should be further away from the global productivity frontier in what they export. The data strongly confirm this prediction.