the logo after 1 em space; see diagram B), or under the logo the right of the logo (centered vertically along the height of (the space between the logo and the words "THE WORLD the logo after 1 em space; see diagram B), or under the logo BANK" should be the same as the cap height of the words, (the space between the logo and the words "THE WORLD aligned flush left; see diagram C). When the logo is placed 46270 BANK" should be the same as the cap height of the words, on aalignedorflush dark black background, the logo should reverse to left; see diagram C). When the logo is placed whiteon(see diagram D). a dark or black background, the logo should reverse to PRMED Knowledge Brief white (see diagram D). 2. The words "THE WORLD BANK" should be set in ALL Trade andConvergenceGrowth IncomeCAPS, 2. The words "THE WORLD BANK" should be set in ALL Univers Bold. The size of the type in relation to the logoCAPS, remainBold. Economic shouldUnivers constant. Always use the art provided in The size of the type in relation to the Jesús Crespo Cuaresma an electronic file or in CRC. logo should remain constant. Always use the art provided in Jes´us Crespo Cuaresma Department of Economics, University of Innsbruck, Austria an electronic file or in CRC. Department of Economics, University of Innsbruck, Austria jesus.crespo-cuaresma@uibk.ac.at jesus.crespo-cuaresma@uibk.ac.at Placement of Logo Placement of Logo All World Bank books must display the World Bank logo on All World Bank books must display the World Bank logo on The Solow model of economic growth (Solow, 1956, Swan, 1956) concludes that poorer countries will The degree of openness of a country tendsthe be found to be a robust determinant of growth in GDP the front and back covers, the spine, and the title page. tofront and back covers, the spine, and the title page. tend to grow faster than richer ones--provided that countries share the same production function, per capita in cross-country and panelFrontFront growthcovercover regressions. Furthermore, Ben-David (1996) shows that savings rate and population growth, and labour-augmenting technology grows at the same rate in trade incentivates income convergenceOn(among groups of trading partners). From a theoretical point all countries. The existence of income convergence has thus been usually taken to be a test of of view, international trade allows forlowerlower specialization through comparative advantages, the exploitation the front cover, the logo should be placed at either the On the front cover, the logo should be placed at either the or upper left corner and should be accompanied by the or upper left corner and should be accompanied by the exogenous growth model versus endogenous growth models--that do not necessarily conclude on the of increasing returns from larger markets and incentivates technology difussion. words "THE WORLD BANK." Placement of the World Bank words "THE WORLD BANK." Placement of the World Bank existence of convergence in income per capita among economies. Here we describe different concepts Most of the empirical literature onlogologo ongrowth does not explicitly deal with the issue of economic blockblockthe front cover should be as follows: the outside on the front cover should be as follows: the outside of convergence used in the empirical literature edgeeconomic growth and summarize the results of this potential endogeneity of trade measures. Inofparticular, countries whose incomes are high for reasons edge onthe logo (the outer box) should be between 2.25 picas of the logo (the outer box) should be between 2.25 picas literature. others than trade may just trade more.(3/8 the other hand, the eect of trade on technology adoption Oninch) (3/8 inch) and 3.75 picas (5/8 inch) from the trim. The logo and 3.75 picas (5/8 inch) from the trim. The logo may induce nonlinearities in the relationship between openness and economic growth. should be placed equidistant from both trim and spine. See should be placed equidistant from both trim and spine. See samples on next page. In this note we will describe modernsamples developments in the assessmentonlythese two empirical issues in on next page. The Solow model and incomeThe cross-country growth regressions. WeThe alsoWorld the main contributions to the empirical assess- willWorldreview convergenceis of BankBank is thethe logologo logo to appear on front covers only logo to appear on front covers and spines of publications published by EXTOP. Any exception ment of technology adoption throughand trade. We focus on how to deal empirically with endogeneity spines of publications published by EXTOP. Any exception Total output (Yt) is assumed to depend on physical capital (Kt), labour input (Lt) and (labour- to this guideline needs to be approved by the publisher. to this guideline needs to be approved by the publisher. Additional logos (for cosponsors or copublishers) appear at the as augmenting) technology (At) accordingAdditional through trade. issues and nonlinearities in the trade-growth link,logoswell as the assessment of technology difussion to a Cobb-Douglas production function with costant bottom of the back cover, along with the World Bank logo. (for cosponsors or copublishers) appear at the returns to scale on all inputs, bottom of the back cover, along with the World Bank logo. Yt = Kt (AtLt)1 - , where (0,1). Labour input and technology are assumed to grow at constant rates n and g, Openness and economic growth: the role of geography respectively. Physical capital is accumulated through savings (with a constant savings rate s) and depreciates at a constant rate , A simple scatterplot of GDP per capita growth against trade openness (measured as total trade over GDP) depicts a signicant positive relationship between trade and economic growth. Figure 1 presents these variables for all countries for which Penn World Table data are available in the dKt (1) period 1970-2000. dt = K t = sYt - Kt. We can write (1) in terms of effective labour as .08 kt = syt - (n + + g)kt, (2) .06 where kt = Kt/(AtLt) and y = Yt/1970-2000(A.04L ) = kt . The steady state level of capital per unit of t t effective labour (k) can be found by setting kt = 0, which leads to GDPpc, .02 rates(k.00) = (n + + g)k. (3) Graphically, the equilibrium level ofgrowth k-.02is given by the intersection point of the investment per unit of effective labour curve, s(k),Annualwith the break-even investment line, [(n++g)k], as shown -.04 in Figure 1.1 Countries with levels of capital50per100 0 unit150of effective300 200 250 labour below k (see k1 in Fig- ure 1) present positive growth in the stock of capital per unit of effective labour (see (2)), while Openness (Trade over GDP), average 1970-2000 countriesIntoorderright of k will tend to decrease their stock of capital per unit of effective labour. the to isolate the pure eect of trade on growth, some studies use variation in trade policy as an instrument or alternative variable for trade openness (e.g., Easterly, 1993). Since Log-linearizing around the steady state level of income per unit of effective labour, market-oriented trade policies do not tend to take place isolated from other market-oriented domestic policies, such instrumental variables are not necessarily suitable instruments, since they dln(yt) dt = [ln(y) - ln(yt)], (4) 1 1The break-even investment line represents the investment needed to avoid the capital stock from falling. are correlated with the error term in the growth equation. Frankel and Romer (1999) propose using the eect of geographical variables on trade in order to obtain instrumental variables for openness. The underlying model used by Frankel and Romer (1999) assumes that income in a country (Yi) is aected by international (Ti) and within-country trade (Wi). Within-country trade is assumed to depend on the size of the country (Si) and international trade is assumed to depend on geographical proximity measures (Pi). Assuming a log-linear relatonship, this implies that ln Yi = 0 + 1Ti + 2Si + i, (1) where i is not necessarily uncorrelated with Ti but Pi can be used as an instrument for the international trade variable. The literature on gravity models for international trade provides geographical variables which can be used to evaluate the exogenous eect of trade on economic growth. Typical examples of such variables are the distance between country pairs and dummy variables for landlocked countries or countries sharing a common border. Using a sample of 150 countries, Frankel and Romer (1999) nd a stronger eect of trade on economic growth after accounting for endogeneity using geographical variables as instruments. The interpretation of this result is that the volume of goods traded among countries may under- estimate the growth eects linked to international openness and the technology adoption eects which are associated with it. Nonlinearities in the trade-growth link Papageorgiou (2002), Huang and Chang (2006) and Papageorgiou (2006) nd evidence that sets of countries with dierent openness levels tend to dier in the statistical model relating economic growth to other economic variables. Crespo Cuaresma and Doppelhofer (2007) evaluate the existence of nonlinearities caused by trade openness in the presence of model uncertainty. The econometric model put forward in Crespo Cuaresma and Doppelhofer (2007) is n m n i = + kxk,i + (j + jkxk,i)I(zji j) + i, (2) k=1 j=1 k=1 economic growth for country i in the period 1970-2000, the x-variables are potential determinants where I(·) is an indicator variable, taking value one if the argument is true and zero otherwise, i is of economic growth and the z-variables are variables which may cause nonlinearities in the relationship. The model in (2) hypothesizes dierent elasticities for the covariates depending on whether some variable is above or below a threshold level. In particular, the parameter associated with xk equals k for countries in which some other variable (zj) is above some threshold values and equals k + jk if zj is below that threshold. Crespo Cuaresma and Doppelhofer (2007) use 21 variables as possible covariates in the x-group, corresponding to those found robustly related to growth in Sala-i-Martin et alia (2004). The initial level of GDP per capita and the proportion of years that the economy is open according to the criteria in Sachs and Warner (1995) are used as z-variables. Crespo Cuaresma and Doppelhofer (2007) use Bayesian model averaging methods to assess the uncertainty about the covariates, the variables triggering the nonlinear eect and the threshold values in (2). They nd strong nonlinear eets caused by the length of the openness period, that render the eects of the East Asian dummy and African dummy unrobust for relatively closed and open countries, respectively. 2 The empirics of trade and technology adoption Coe and Helpman (1995) and Coe et alia(1997) propose that the rate of return of R&D is not only high in the investing countries, but also in their trading partners. Imitation, cross-border learning of production methods and the increase in variety of intermediate products and capital equipment are just three possible arguments for such an eect. Coe et alia (1997) estimate such an eect for the R&D investments embodied in trade ows between developed and developing countries. The specication used, which has been carried out to many other studies, hypothesizes that the level of total factor productivity in developing country i at time t (At) depends on the foreign R&D capital stock embodied in the trade ow to country i (St), the share of machinery and equipment imports from industrial countries in GDP (Mt) and the secondary school enrollment ratio (Et), ln Ait = 0 + 1 ln Sit + 2 ln Mit + 3 ln Eit + it. (3) Using data for 77 developing countries for the period 1971-90, Coe et alia(1997) estimate (3) in rst dierences and nd signicant north-south technology spillovers. Furthermore, the inter- action of the human capital variable and the share of machinery and equipment imports from industrial countries in GDP with the technology spillover also plays an important role when modelling the eect of trade on technology adoption. On the methodological side, it should be noted that the trending nature of the variables in (3) would imply that this specication is to be interpreted as a (panel) cointegration relationship among them. The development of panel cointegration methods is however relatively recent, so such specications tend to be estimated in rst dierences in earlier studies, such as Coe et alia(1997). 3 References [1] Ben-David D. (1996), Trade and convergence among countries. Journal of International Economics , 40, 279298. [2] Coe, D. T. and Helpman, E. (1995), International R&D spillovers. European Economic Review , 39, 859887. [3] Coe, D. T., Helpman, E. and A.W. Homaister (1997), North-South R&D spillovers. Eco- nomic Journal , 107, 134149. [4] Crespo Cuaresma, J. and G. Doppelhofer (2007), Nonlinearities in cross-country growth regressions: A Bayesian Averaging of Thresholds (BAT) approach. Journal of Macroeco- nomics , 29, 541554. [5] Easterly, W. (1993), How much do distortions aect growth? Journal of Monetary Eco- nomics , 32, 187212. [6] Frankel, J.A. and D. Romer (1999), Does trade cause growth? American Economic Review , 89, 380399. [7] Huang, H. and Y. Chang (2006), Trade as a threshold variable for multiple regimes: A comment. Economics Letters , 91, 458459. [8] Papageorgiou, C. (2002), Trade as a threshold variable for multiple regimes. Economics Letters , 77, 8591. [9] Papageorgiou, C. (2006), Trade as a threshold variable for multiple regimes: Reply. Eco- nomics Letters , 91, 460461. [10] Sachs, J. and A. Warner (1995), Economic reform and the process of global integration. Brookings Papers on Economic Activity , 1, 1-95. [11] Sala-i-Martin, X. Doppelhofer, G. and R. Miller (2004), Determinants of long-term growth: A Bayesian Averaging of Classical Estimates (BACE) approach. American Economic Review , 94, 813835. 4