International trade, productivity and growth in open economies

This thesis studies aggregate productivity and growth of developing countries in open economies with access to international trade with a focus on China. It is divided into three chapters.;Chapter 1 argues that real exchange rate undervaluation improves resource allocation in the Chinese economy. The gain in allocative efficiency results from two institutional features of China's "state capitalism": (1) State-owned enterprises (SOEs) are generally favored by the government over private firms; (2) Private firms dominate the tradable sector, while SOEs retain strong presence in the non-tradable sector. These facts jointly point to potential resource misallocation between the tradable and the non-tradable sectors. Real exchange rate undervaluation mitigates this misallocation by raising the relative price of tradable goods, inducing resources to be reallocated toward the tradable sector. Foreign exchange reserve accumulation is a major instrument used by the Chinese government to keep a competitive real exchange rate.;To make quantitative assessments of this policy, in chapter 2 I develop a two-sector Eaton-Kortum model of international trade with two types of firms and type-and-sector specific distortions. I estimate distortions from Chinese industry-level data, and calibrate the model to match aggregate trade flows and sectoral spending data for the year 2007. Quantitative results suggest that reserve accumulation depreciates the real exchange rate by a moderate 4%, compared to a reference point with balanced trade, and the resulting improved resource allocation raises China's real GDP in 2007 by 1%. I show that alternative policies that can also generate real undervaluation, such as a moderate consumption subsidy on tradable goods, could deliver positive TFP effects without the need for a high trade surplus.;Chapter 3 is a theoretical exploration of how international trade facilitates international technology diffusion. In particular, it formalizes the notion of "learning-by-exporting" by embedding learning in an Eaton-Kortum type trade model with Bertrand competition. Exporting firms can learn from international best practices at an endogenously chosen learning intensity. The model is able to generate the so-called "catch-up growth" where an economy with relatively backward technologies exhibits faster growth rate than more advanced economies due to the opportunities to engage in international trade and learning. However, its growth slows down as the technology gap narrows, reducing gains from learning and also the endogenous learning intensity.