Productive Capacities, Economic Growth and Economic Growth Volatility in Developing Countries: Does Structural Economic Vulnerability Matter?

Abstract

Recent years’ global shocks (e.g., the 2008 financial crisis and the COVID-19 pandemic) and environmental shocks — such as natural disasters — have heightened the vulnerability of developing countries to future shocks, and can compromise their development prospects. International institutions and researchers have advocated that the strengthening of productive capacities in these countries would help enhance the resilience of their economies to shocks, and promote sustainable development. This paper has examined the effect of productive capacities on economic growth and economic growth volatility in developing countries, in particular when they face a high level of structural economic vulnerability. The analysis covers 117 developing countries over the period of 2000–2018. It shows that productive capacities not only promote economic growth, but also reduce economic growth volatility. On the other hand, structural economic vulnerability reduces economic growth (in particular when it exceeds a certain level), and induces greater volatility of economic growth. Interestingly, productive capacities promote economic growth and reduce economic growth volatility in countries that face a high degree of structural economic vulnerability. These findings support the recommendation by international institutions and researchers that if they were to enhance the resilience of their economies to shocks, and promote sustainable economic growth, developing countries (in particular the poorest ones) should strengthen their productive capacities.