The rapid and sometimes explosive growth, first of Japan, then of the `little dragons', and now most recently of the other emerging markets in Asia, Latin America and Eastern Europe raises the issue of whether there is some secret formula, some `elixir' that could suddenly turn previously torpid or declining economies into growth miracles. In Discussion Paper No. 1165, Research Fellow Patrick Minford, Jonathan Riley and Eric Nowell suggest the elixir is `open economy capitalism', (the adoption of secure property rights), and that development, or `convergence', can be explained as the transfer of technology embodied in machinery to the manufacturing sector of those developing countries that institute the necessary property rights.

The authors model the process within a Heckscher-Ohlin-Samuelson (HOS) framework with capital mobility and endogenous supplies of immobile factors: skilled and unskilled labour and land. The key assumptions in HOS are constant returns to scale, and that factors of production can be distinguished by broad type, particularly mobile versus immobile, with only the latter playing the usual HOS role of determining comparative advantage. The paper builds on these assumptions with three main elements: a division of factors of production into mobile and immobile, based mainly on the degree of international market integration; a non-traded goods sector; and a number of hypotheses about the supply of factors and the transfer of technology to provide the dynamics of the model. The model suggests a factor price-based PPP method of measuring developing countries'. Model simulations of the assumed technical transfer to developing countries imply falling wages and employment of unskilled labour in developed countries, combined with improvements in their terms of trade: shared gains from trade combined with a distributional bias.

The Elixir of Growth: Trade, Non-Traded Goods and Development
Patrick Minford, Jonathan Riley and Eric Nowell

Discussion Paper No. 1165, May 1995 (IM)