Export-Led Growth in Transition Economies

Abstract

The purpose of this paper is to demonstrate the role of industrial structure and productivity growth imbalances in determining export growth, aggregate growth, and a country's transition trajectory. The theoretical framework is a two-sector supply-side model of a small open economy with endogenous industrial structure and cross-sectoral subsidies. First, we show how a larger cross-sectoral productivity growth differential positively affects growth when industrial structure is given exogenously. Distinct industrial structures lead to distinct regimes: "high growth and low inflation" and "low growth and high inflation," respectively. Second, we endogenize the industrial structure. The condition under which a higher productivity growth differential positively affects growth is now related to an economy's structural flexibility. Distinguishing between regimes of a widening productivity growth gap across sectors, and, respectively, regimes of a narrowing gap, allows for a more refined assessment regarding which industrial structures are most favorable to growth. Alternative evolutions of industrial structure are associated with distinct transition trajectories.