Do Countries Catch-up with the Technological Frontier? Antonio Álvarez University of Oviedo Alejandro Fernández CEMFI

Technological Catch-up Technological Catch-up: backward countries move towards the technological frontier This is due to a process of technological diffusion which depends on the ability to assimilate and apply new knowledge Trade Openness Foreign Direct Investment (FDI) Human capital

Objective of the paper Two main questions  Is the technological gap between rich and poor countries closing?  What factors contribute to catch-up? In particular, study the role of institutional variables (social infrastructure)

Empirical Models of Technological Catch-up

Stochastic Frontiers and Catch-up Our approach is based on the Stochastic Frontier Model  U (inefficiency) is the distance to the frontier It is specified as a non-negative random term It is assumed to follow a half-normal distribution  The change in U can be interpreted as a measure of catching-up with the technological frontier

Explaining Catch-up The general form of a model that incorporates the factors that affect catching up is: Three general alternatives for U it (Z it ):  Allow the exogenous variables Z to affect the mean, the variance or both the mean and the variance of the pretruncated distribution of U

Empirical models Heterogeneity in the mean  Battese and Coelli (1995) Heterogeneity in the variance  Caudill, Ford and Gropper (1995) Heterogeneity in the mean and the variance  Alvarez, Amsler, Orea and Schmidt (2006)

Empirical Application

Data Balanced panel data set 78 countries  Excluded: Eastern European countries, very small countries 26 years ( ) Sources:  Penn World Table 6.2  Other

Variables (I) Dependent variable:  Gross Domestic Product Inputs:  K: Stock of private capital  L: Labor Control variables:  Z: Percentage of Rural Population  Country-group dummies

Variables (II)  Leading Country: USA.  Industrialized Countries: Canada, Australia, New Zealand, Japan, Israel.  Northern Europe: Denmark, Norway, Sweden, Finland, UK, Ireland, Germany, Belgium, Netherlands, Austria, Switzerland, France, Italy.  Southern Europe: Portugal, Spain, Greece.  Latin America: Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, Dominican Rep., Ecuador, El Salvador, Guatemala, Honduras, Nicaragua, Panama, Paraguay, Peru, Uruguay.  Asia: China, Hong Kong, India, Indonesia, Jordan, Korea, Malaysia, Nepal, Pakistan, Papua New Guinea, Philippines, Sri Lanka, Syria, Taiwan, Thailand, Turkey.  Northern Africa: Benin, Central African Rep., Congo, Ivory Coast, Ghana, Mali, Niger, Senegal, Sierra Leone, Togo, Tunisia.  Southern Africa: Cameroon, Congo, Kenya, Malawi, Mozambique, Rwanda, South Africa, Tanzania, Uganda, Zambia, Zimbabwe.  Oil Exporting: Algeria, Mexico, Venezuela, Iran.

Variables (III) Efficiency determinants (Z it )  Economic variables Human Capital (H) Average years of schooling of the population 15+ Source: Barro and Lee (2000) Trade Openness Exports plus imports over GDP Source: PWT 6.2

Variables (IV) Efficiency determinants  Institutional variables Political Rights and Civil Liberties Source: Freedom House Dummy of Conflict from Uppsala Source:Uppsala Conflict Data Program  Geographic variables from CID: Latitude Distance to equator Source:Center for International Development Dummy of access to sea coast Source: Center for International Development

Empirical Specification Translog production frontier Neutral technical change Estimation by Maximum Likelihood  LIMDEP 9

Estimation – Production frontier Battese and CoelliCaudill et al.Alvarez et al. VariablePar. Coef. Constant 0 lnL 1 lnK 2 lnL * lnL  lnK * lnK  lnL* lnK  Trend tt Observations2028 Log-likelihood

Estimation – Control variables Battese and CoelliCaudill et al.Alvarez et al. Variable Coef. Rural Population USA Industrial Count Northern Europe Southern Europe Latin America Asia Southern Africa Oil Countries

Estimation – Inefficiency term Battese and CoelliCaudill et al.Alvarez et al. Variable Coef. Coef. Mean Constant Human Capital Trade Openness Political Rights Civil Liberties Conflict Latitude Coast σ u / σ v σuσu σvσv 0.11

Results On average there has been no catch-up effect  Only 40 countries got closer to the frontier Best performers:  China, Malawi, Zimbabwe, South Africa, Paraguay Worst performers  Turkey, Nepal, Ecuador, Philippines

Conclusions Modelling  The frontier is robust to the specification of the inefficiency term Results  Human Capital and Institutional variables play a significant role in the process of catching-up