The quantitative importance of openness in development

Wenbiao Cai, B. Ravikumar, Raymond G. Riezman

Research output: Contribution to journalArticle

2 Citations (Scopus)

Abstract

This paper deals with a classic development question: how can the process of economic development-transition from stagnation in a traditional technology to industrialization and prosperity with a modern technology-be accelerated? Lewis (1954) and Rostow (1956) argue that the pace of industrialization is limited by the rate of capital formation which in turn is limited by the savings rate of workers close to subsistence. We argue that access to capital goods in the world market can be quantitatively important in speeding up the transition. We develop a parsimonious open-economy model where traditional and modern technologies coexist (a dual economy in the sense of Lewis 1954). We show that a decline in the world price of capital goods in an open economy increases the rate of capital formation and speeds up the pace of industrialization relative to a closed economy that lacks access to cheaper capital goods. In the long run, the investment rate in the open economy is twice as high as in the closed economy and the per capita income is 23% higher.

Original languageEnglish (US)
Pages (from-to)1839-1849
Number of pages11
JournalEconomic Inquiry
Volume53
Issue number4
DOIs
StatePublished - Oct 1 2015
Externally publishedYes

Fingerprint

Industrialization
Open economy
Openness
Capital formation
Prosperity
Subsistence
Per capita income
Dual economy
Economic development
Saving rate
Workers
World market
Stagnation

ASJC Scopus subject areas

  • Economics and Econometrics
  • Business, Management and Accounting(all)

Cite this

Cai, W., Ravikumar, B., & Riezman, R. G. (2015). The quantitative importance of openness in development. Economic Inquiry, 53(4), 1839-1849. https://doi.org/10.1111/ecin.12216

The quantitative importance of openness in development. / Cai, Wenbiao; Ravikumar, B.; Riezman, Raymond G.

In: Economic Inquiry, Vol. 53, No. 4, 01.10.2015, p. 1839-1849.

Research output: Contribution to journalArticle

Cai, W, Ravikumar, B & Riezman, RG 2015, 'The quantitative importance of openness in development', Economic Inquiry, vol. 53, no. 4, pp. 1839-1849. https://doi.org/10.1111/ecin.12216
Cai, Wenbiao ; Ravikumar, B. ; Riezman, Raymond G. / The quantitative importance of openness in development. In: Economic Inquiry. 2015 ; Vol. 53, No. 4. pp. 1839-1849.
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