How trade and macroeconomic policies affect economic growth and capital accumulation in developing countries

The author of this report provides cross-country empirical evidence on the relationship between trade and macroeconomic policy and economic growth. He finds that countries following sustainable strategies perform better than those following unsustainable strategies. Indeed, unsustainable policies hurt growth. Sustainable policies (as in Korea, Taiwan, Singapore, Hong Kong, Thailand, and Malaysia) promote exports and lead to real exchange rates that are either fully aligned or even undervalued for prolonged periods of time but are relatively stable. Unsustainable policies (more common in developing countries) include polices that tax export and overvalue exchange rates for extended periods, leading to periodic balance of payments crises and a highly unstable real exchange rate. The author also finds that: (a) export promotion policies generate faster growth than policies that remove import restrictions; (b) economic instability and foreign debt are key determinants of capital growth; and (c) contrary to conventional belief, capital accumulation appears to be stimulated by direct export restrictions and does not seem to be directly affected by economic instability.