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Unit 1 : Trade as an Engine of Growth

1.5 Summary Notes

• In the present work we tried to explain the importance of commercial and technological
(dynamic) aspects underlying the IT to EG.
• We noted that the dynamic potential afforded by IT that was pointed out by the classics [Smith
(1776)] was disregarded by the ‘marginalist revolution’. This was due to the fact that the
‘marginalist revolution’ studies temporarily left out the lines of the long-term evolution of the
economy. As we know, after 1870 the EG was no longer viewed as a great issue for economists
due, as it seems, to the perspectives opened by IR. Nevertheless, as exceptions to the rule,
authors like Marshall, Young and Schumpeter still dealt with the importance of IT to EG. On
the other hand, for instance, the main development in what concerns the scope of the IT theory
(the Heckscher-Ohlin-Samuelson model) came to the conclusion that countries benefited from
the opening to IT; however, it did no more than identify static gains. But existing studies — for
example, Baldwin (1984) — conclude that the static effects (gains only for the increase in the
level of per capita income) are very modest.
• It was in this context that, namely after WWII, occurred some reactions to the classical and
neoclassical theories which ended up being put to practice in the experiments with introverted
and protectionist growth, specially in Latin America. In short, the defenders of these theses
maintain that the relevant products as regards IT were produced in keeping with the appeals of
the DCs markets and their technologies. Thus, the LDCs were in a disadvantageous situation
due to their reduced dimension and sophistication of their markets, as well as to the weak
capacity for technological innovation and to the commercial intervention in what concerns the
DCs consumers.
• The interest for the EG reawakened, however, with the works of Solow (1956 and 1957). From
then on there was a real concern in analyzing the questions belonging to growth in a quantified
and systematized way (with a clear distinction between questions belonging to growth and
questions belonging to development).
• It should be noted, however, that Solow’s (and Swan’s) neoclassical growth model assumed
technological progress to be exogenous, not because this was a realistic assumption, but because
it was the only tractable one. This suggests that interaction with other countries may have no
effect on an economy’s long term rate of growth. Nevertheless, there may be some interesting
effects of openness in the long term level of welfare, and in the transition to the steady state. In
the open economy version of the neoclassical model, international flows of capital raise the rate
of convergence to the steady state.
• In the late 1950s, the seminal paper by Solow (1957) attempted to account for economic growth
in the US, finding it to be not fully explained by the increase in productive inputs such as labour
and capital alone. The largest part of growth was thus attributed to a residual. In subsequent
research, much effort was devoted to trying to better understand the origin of productivity
increases by squeezing down the residual, by introducing other variables such as accumulation
of human capital, economies of scale, a better allocation of resources and new generations of
more productive machines. However, even with the introduction of new variables an
unexplained residual remained.
• Therefore, on the one hand, the attempt to determine sources of growth in their entirety and, on
the other hand, the failure of introverted growth experiences and the association of fast EG to
the opening of IT and to the resulting international specialisation in several countries led to the
undertaking of research on trade and growth (which adopted the neoclassical framework). We
mentioned some theoretical studies — structuralist syntheses, analyses that underscore economic
integration, the models of Findlay (1980 and 1984) and Feder (1982) —, empirical applications—
among others, structuralist studies, Feder (1982) and Ram (1987) — and studies and/or
recommendations about the external commercial policy — among others, UN recommendations,
Balassa (1978, 1986 and 1987), Krueger (1985) and WB (1987) — whose defining characteristic is
to view IT (above all the exporting component) as an explanatory variable of EG.

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