A joint conference on ‘Growth: Transfer of Technology, Capital and Skills’ was held in Alghero on 19/20 September 1997. The conference was organised by CEPR and by the Centre for North-South Economic Research (CRENoS) of the University of Cagliari, with additional support provided by CNR (Consiglio Nazionale delle Ricerche, Roma) and CREI (Centro de Recerca in Economia International). The workshop formed part of CEPR’s research programme on International Trade. The organisers were Richard Baldwin (Graduate Institute of International Studies, Geneva, and CEPR) and Giorgia Giovannetti (European University Institute, Firenze), with assistance from Francesco Pigliaru (Università di Cagliari and CRENoS) and Marco Vannini (Università di Sassari, and CRENoS).

The focus of the conference was on the influence exercised by transfers of technology and transfers of factors of production on the growth process. In particular, the ten papers presented tried to go beyond the traditional closed-economy growth framework to examine the implications of globalization for the development process in different countries. For example, do movements of capital and labour necessarily produce convergence among economies, as in the traditional neoclassical growth model, or is there, instead, the possibility that some economies will lose from these transfers? And how does technology spread across economies? Questions such as these were investigated from both the theoretical and the empirical points of view.

In her paper on ‘Labour Market Institutions, International Capital Mobility, and the Persistence of Underdevelopment’, Graziella Bertocchi (Università di Modena and CEPR) explored the growth implications of different institutional structures of the labour market in an integrated world. The focus was on a small open developing economy where labour is unionized, and the wage rate is therefore determined through bargaining, but in a context where capital is internationally mobile and labour is not. Bertocchi showed that the impact of globalization on this economy depends crucially on the characteristics of the labour market in the larger economy with which it interacts. Convergence of wages and income was shown to occur only when the large economy is subject to decentralized bargaining. When either centralized bargaining or perfect competition prevail, the small economy may reach a ‘poverty trap’ characterized by lower wages and permanent capital inflows.

Rikard Forslid (Lunds Universitet and CEPR) noted that some clarification of the inter-temporal trade balance and of whether total output is exhausted in all cases would have been helpful. A possible extension would be incorporation of the oft-cited empirical finding that the relationship between the level of centralization and the labour share of output is U-shaped. Raquel Fernandez (New York University and CEPR) suggested analysing the dynamic relationship between two ‘large’ economies, and between one large unionized economy and one small economy with perfect competition in the labour market – both of these being models that seem to fit well with the empirical evidence.

Stephen L Parente (University of Pennsylvania) presented ‘Homework in Development Economics: Household Production and the Wealth of Nations’, written with Richard Rogerson (University of Minnesota) and Randall Wright (University of Pennsylvania). The authors pointed out that, aside from income, a notable difference between the rich and the poor countries is the fraction of economic activity that takes place in formal markets. In their paper, they introduced home production into the neoclassical growth model, and examined its consequences for international income differences. Because policies which affect capital accumulation change the mix of market and non-market activities, differences in policies can generate much larger differences in steady-state levels. The authors’ numerical explorations suggest that a version of the neoclassical growth model that does not abstract from home production, and which allows for the accumulation of a second type of capital, may prove a useful starting point for a theory of international income differences.

Gianmarco Ottaviano (Università di Bologna and CEPR) acknowledged the importance of non-market activities for an understanding of economic development. Some empirical doubts remain, however. First, the practicality of measuring non-market activities is questionable. Second, could also the same calibration of the model be valid for both the short and the long run?

In a paper entitled ‘Poverty Trap Equilibria Under International Trade: A Dynamic Specific Factor Model’, Andrew Mountford (University of Southampton) showed that, in contrast to a dynamic Heckscher-Ohlin model, a dynamic specific-factors model may exhibit multiple steady-state equilibria, even for a small open economy under diversification. The paper thus showed that there was no necessary reason to expect economic integration or free trade to cause conditional convergence. Moreover, it provided a justification for growth strategies based on temporary government measures to boost the value of a relevant state variable in an economy, such as the level of the capital-labour ratio.

Christian Upper (European University Institute, Firenze) stressed that more work was required on the policy implications. It was important to know how to identify the exact state of the system at any point in time, and to define policy measures which relied on less restrictive assumptions than a tax on land, as had been done in the paper.

Using a new dataset on European regions, Raffaele Paci (Università di Cagliari and CRENoS) and Francesco Pigliaru (Università di Cagliari and CRENoS) undertook an in-depth empirical analysis of the stylized facts about European productivity growth. Two main points emerged from their paper on ‘The Empirics of Regional Growth in Europe’. The first was that, although incomes per capita in European regions did not converge in the 1980s, despite large differences in inter-regional unemployment and participation rates, there was convergence in labour productivity, a variable more directly linked to the standard growth model. The second point derived from the authors’ consideration of industrial composition and the sources of productivity growth – structural change turned out to be of great relevance as a source of convergence.

Teresa Garcia-Milà (Universitat Pompeu Fabra, Barcelona) argued that the authors might consider an alternative procedure: first, estimating convergence rates for labour productivity, allowing for different steady states; second comparing the distribution of these steady states with those estimated for income per capita in previous works; and, finally, looking for variables that may explain the distribution of steady states. Moreover, she suggested introducing an additional dimension to the split of productivity growth by differentiating between a truly sectoral growth component and a more regionally differentiated component within each sector.

Gianmarco Ottaviano (Università di Bologna, Università Bocconi and CEPR) presented ‘The Geography of Take-offs: A Model of Growth and Catastrophic Agglomeration’, written with Richard Baldwin (Graduate Institute of International Studies, Geneva, and CEPR) and Philippe Martin (Graduate Institute of International Studies, Geneva, and CEPR). Their paper presented a parsimonious model that merged the insights of the so-called ‘new economic geography’ with those of endogenous growth theory. It showed that, after a certain threshold, gradual improvements in trade connections can lead to ‘catastrophic’ agglomerations and growth accelerations, reflecting a ‘stages’ approach to economic development.

Giorgia Giovannetti (European University Institute, Firenze, and CEPR) welcomed the authors’ attempt to link economic geography, endogenous growth and trade. She pointed out, however, that the model has relevance only if the facts provide clear evidence that a process of take-off occurs only in countries where industries agglomerate. She noted further that, while two steady states are fully characterized in the model, the transition phase is not analytically derived, and she suggested the authors might use computational methods to achieve this goal.

‘Empirical Perspectives on Long-Term External Debt’ was the title of the paper given by Philip R Lane (Trinity College, Dublin). Lane attempted to paint a statistical portrait of the determination of external debt for a set of low- and middle-income countries. His goal was to facilitate thinking about the role played by international capital flows in the development process. Empirically, he found that external debt was strongly increasing in the level of initial output, even controlling for variations in steady-state positions and credit risk. In addition, he found a positive association between trade openness and the level of external debt. Lane argued that these results may lend some support to theories of constrained access to international credit markets.

According to Raquel Fernandez (New York University and CEPR), it might have been preferable to exploit the time-series properties of the data in an attempt to distinguish among different sovereign-debt models (e.g. trade-sanctions versus reputation versus moral-hazard models). Alternatively, a pooled cross-section panel could have been constructed by using smaller time intervals, which would have allowed the author to avoid relying solely on the ratio of total debt to initial (1971) income level as the dependent variable.

Does trade with LDCs, abundant in low-skilled workers, affect developed-country labour markets? In ‘Quality Differentiation in Production and the Labour Market Effects of International Trade in Europe’, Alasdair Smith (University of Sussex and CEPR) outlined a model in which intra-industry trade reflected differences in skill endowments between countries, and therefore did have effects on relative wages. The model was consistent with those phenomena – rising skill intensities of production in the North, and rising skill premia in Southern as well as Northern labour markets – which have been used to cast doubt on trade as an explanation of labour-market changes. Preliminary calibration of the model, using very desegregated trade data, suggested that the labour-market effects of trade may be twice as large as those estimated by the standard trade model.

Ramon Marimon (European University Institute, Firenze, and CEPR) argued that an alternative explanation for the increase in demand for high-skill workers in developed countries is the reduction in the price of capital, which is unrelated to trade and consistent with Smith’s model of product varieties.

Moreover, despite Smith’s finding of some effects at the eight-digit (as opposed to three-digit) sectoral decomposition level, other evidence suggests that it may not be possible properly to account for effects on labour markets through the use of finer and finer disaggregations.

Henrik Braconier (Lunds Universitet) and Johan Torstensson (Lunds Universitet and CEPR) presented their paper on ‘Institutions and Economic Growth’. They examined a simple model in which institutions affect growth both directly through productivity, and indirectly through investment in human and physical capital. Confiscation of property has a direct negative effect, and bureaucratic efficiency a direct positive effect, on growth. Rent-seeking activities affect investment in human capital negatively, while bureaucratic efficiency affects it positively. The effects of rent-seeking activities and bureaucratic efficiency on physical capital investment are less clear. The authors also carried out an extensive sensitivity analysis of their model.

In discussion, it was noted that one of the main problems faced by the empirical literature on the relationship between institutions and growth relates to the possible endogeneity of the variables introduced. In this paper, it seemed that the causation between growth and some of the institutional proxies ran in both directions, so the estimated reduced form may not have captured the mechanisms it claimed to have identified. Moreover, Raquel Fernandez argued that a proxy for taxation, as well as a proxy for ‘confiscation of income’, should have been included in the empirical work, while Ramon Marimon criticized the proxy introduced for capturing ‘DUP’ activities.

What is the role of trade in spreading the benefits of innovation among countries? Jonathan Eaton (Boston University) addressed this question in his paper on ‘Technology and Bilateral Trade’. Eaton developed a model that delivered an equation for bilateral trade that, on the surface, resembled a gravity specification, but identified the underlying parameters of technology. He estimated the equation using data on intra-OECD trade in manufactures. The parameters he estimated allowed him to simulate the model to investigate the role of trade in spreading the benefits of innovation and to examine the effects of lower trade barriers. Typically, foreigners benefited by only a tenth as much as the innovating country, but in some cases the benefits to close neighbours approached those of the innovator.

The methodology developed by Eaton can be applied to answer a much wider range of questions. In particular, one of the most interesting applications of this framework could be to look at intersectoral trade, and then try to examine how R&D crosses into different sectors. Eaton pointed out that adding a sectoral dimension was analytically straightforward. The potential payoff was in identifying the role of research in carving out comparative advantage.

The final paper, by Marina Murat (Università di Pavia), was ‘Composition of the Productive Structure and Output Dynamics: Exogenous and Endogenous Growth’. Murat examined the relations between the composition of the productive structure and the output growth rate under two assumptions – that growth rates are exogenously and endogenously determined. In each case, she analysed the dynamic effects of policy interventions. Her results suggested that industrial policies may be useful when intersectoral links dominate productive processes, while more generalized interventions, aimed at increasing administrative efficiency or developing infrastructures, would be more appropriate in economies where the effects of generalized externalities are strong.