Keywords

Catching-up • Total factor productivity (TFP) • Stylized facts of growth • Knowledge spillovers • Growth projections • Solow model • Endogenous growth • New goods • Capital accumulation • Technology • Research and development • Innovation

Introduction

Chapters 5 and 10 argue that, in general, imposing trade and capital restrictions reduces economic prosperity for various reasons. Other things equal we should therefore expect that open economies tend to be wealthier than closed economies. This chapter analyses the theoretical and empirical links between ‘globalization’, by which we mean the extent to which an economy is open to outside influences, and economic prosperity and development in the long run. It will confirm the basic arguments on the positive relationship between openness and prosperity laid down in previous chapters.

As the core of this chapter is dynamic in nature, we start by giving some insight into the degree to which differences in economic growth rates translate into differences in income levels. Next, we discuss the fundamentals of economic growth in a closed economy, focusing on the importance of human and physical capital accumulation, labour inputs, and technology improvements. After a discussion of some stylized empirical facts, we turn to the importance of innovation by firms and entrepreneurs, knowledge accumulation, knowledge spillovers, and market power for bringing about the technology improvements that ultimately increase our standard of living. Finally, we discuss the various ways in which open economies are better able to achieve human and physical capital accumulation, reach a more stable economic environment, and benefit from access to foreign (incorporated) knowledge. To conclude this discussion, we present two Asian case studies, namely a brief review of the economic developments in Japan since about 1500 and a discussion of China’s experience in the second half of the twentieth century.