Page 16 - DECO503_INTERNATIONAL_TRADE_AND_FINANCE_ENGLISH

International Trade and Finance

Notes • Generally, they associate that situation with a better allocation of resources (according to the
comparative advantages), with a greater utilisation of the productive capacity (which makes it
possible to obtain economies of scale), with the greater propensity to implement technological
improvement (in answering to the greater competition that they face) and with the higher level
of employment created in comparison with introverted strategies.
• Although this body of literature enlarged the original framework, technology was still treated
as a public good.
• However, on the one hand, in view of the neoclassical theory’s limitations (mainly because the
technological progress is exogenous but also because, in open economies, this suggests that, in
practice, the increase of the convergence among countries is not verifiable) and, on the other
hand, in view of the many developments and suggestions which are afforded by Smith,
Schumpeter, Knight, Arrow, Kaldor and Uzawa, among others, economists have recently started
to model the process of knowledge accumulation, and the resulting literature is known as
endogenous growth theory. This allows us to develop tractable and flexible models that embody
the vision of economics life as an endless succession of innovation and change wrought by
competition.
• These growth models allow for an economy to be able to reach a balanced growth path through
endogenous forces and underscore the microeconomic foundations of the growth process,
identifying in detail the driving force of growth (which is knowledge, generally under the form
of technological innovation), its respective dynamics as well as the driving forces which influence
its accumulation. Thus, in most new models the determining factor of economic growth is
endogenous innovation, and this innovation is still influenced by IT. Consequently, the modelling
which these new models afford brought with it a more exact approach to the relation between
EG and IT. So we can say that the dynamic potential created by IT was decisively recovered
more recently with the advent of the models of endogenous growth.
• Furthermore, the endogenous approach, bringing increasing returns and non-competitive market
structures into the core of growth analysis, made it so that perfect competition would no longer
be a sine qua non condition for optimal trajectories of growth to exist. The growth path may not
be optimal. So, the governmental intervention may be useful in order to move the growth path
towards the optimal one.
• Regarding the contribution of IT to EG, in light of the new approach, we alluded to Romer’s
work (1990), which viewed IT as a motivating factor of growth, when integrating economies
with different levels of human capital. We also saw that the assumptions as to differences among
countries condition trade patterns and their effect on growth. With respect to this, Lucas (1988)
and Grossman and Helpman (1991a) assume that the only differences among countries have to
do with initial provision of factors, whereas Grossman and Helpman (1990) point to differences
in respect to the countries’ technological capacities.
• The works of Grossman and Helpman (1991b and 1991c) and Rivera-Batiz and Romer (1991a)
have also helped clarify why a country’s participation in an integrated world economy can
speed up its growth : among other reasons, it allows access to a wider base of technological
knowledge, it makes technological diffusion easier, it motivates research and avoids
redundancies in research. We also presented Romer’s work (1993), which recommended that
the LDCs open to the foreign investment with more advanced technology so that they could
register increases in the rate of innovation and in the economy’s rate of growth.
• In this context, the abundant empirical evidence, specifically, suggests that trade openness tends
to be beneficial for growth. Especially for the DCs, because they affect the domestic rates of
innovation. And for the LDCs (which hardly invest in R&D) because of the dynamic effects of
the economic integration with DCs, the catch-up of the convergence, the importation of capital
goods and the capacity for adaptation and implementation of innovations. Finally, let us mention
that the intensity of dynamic effects depends simultaneously on the geographic structure of
international trade (i.e., on the level of development of trade partners), on the composition and

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