Essays on International Development
The chapters of this dissertation are devoted to the study of three aspects of international development. In the first chapter, I ask whether it is true that a "competitive real exchange rate" is behind China's success, something that the media and many policy makers sustain, but that is not supported by the most prominent economic models. I develop a model that uses insights from the "unlimited supply of labor" and "de-industrialization" literatures (W.A. Lewis, W. Max Corden and Peter Neary) to gain a better understanding of these issues. In particular, I propose a 3-sector model with labor market frictions that explains how a policy aimed at increasing domestic savings and depreciating the RER can, at the same time, generate real growth through a reallocation of workers from a low-productivity traditional sector into a high-productivity manufacturing sector. The policy is particularly effective in countries with relative abundance of labor, scarcity of agricultural resources, and high barriers for the entry of workers into the manufacturing sector. Empirically, I verify that higher real undervaluation (measured as deviations from PPP) is positively associated with GDP and manufacturing growth in countries with lower per capita agricultural land and higher rural population. The relationship vanishes and even becomes negative in the opposite cases. Finally, I propose a simple methodology for the identification of real depreciations exogenously induced (i.e. that are not related to changes in productivities or in terms of trade). I find that, during the last 20 years, such episodes have been mainly observed in East Asian developing countries.
In the second chapter, I present a simple, general theoretical framework that explains how individuals' decisions on the structure of the household, the allocation of time between market and home work, and the degree of elaboration of the purchased market goods, are affected by three key dimensions of technological progress: the rise in market wages, the decline in the price of domestic appliances, and the increase in the access to more elaborated goods and services. In the model, the production of the final consumption good comprises a continuum of tasks (or stages) that increase the degree of elaboration of the good until it is ready to be consumed. Individuals can produce the final good in different ways, using in each case a market good with a particular degree of elaboration, and adding the amount of homework that completes the process of elaboration. The existence of fixed costs in homework provides the incentives to form a household for the joint production and consumption of the final good. The predictions of the model are supported by both, the changes observed in the American household in the last century, as well as the differences in household structure, labor market conditions, access to basic public goods and services, and durable goods currently observed across countries.
Finally, in the third chapter I explore the effects that exogenous aggregate volatility can have on the composition of investment and the pattern of sectoral production of the economy. The key assumption in the proposed mechanism is that aggregate production can be performed by combining different factors of production (other than labor), whose marginal returns are affected in different ways by aggregate uncertainty. In this context, differences in the volatility of aggregate productivity can induce differences in the relative use of the factors of production and, therefore, in the pattern of production of the economy. The mechanism is analyzed in two different settings. First, in small open economy that produces manufactures and commodities based on natural resources, higher (relative) volatility of aggregate productivity increases the dependence of the economy on natural resources. Interestingly, the effect is stronger in economies with higher endowments of natural resources and lower average productivity. Second, in a closed economy with two sectors that differ in the degree of reversibility of their capital, higher aggregate volatility reduces the share of investment and production in the sector with more irreversible capital. The effect can be particularly strong if the elasticity of substitution between sectoral goods is high. In both models, higher concavity of preferences strengthens the change in the patterns of investment and production induced by volatility. Aggregate volatility can negatively affect growth by inducing an otherwise inefficient allocation of resources across sectors. The negative effect on growth can be larger in the long run if, for example, there is endogenous growth associated with the expansion of a sector that uses a very specific and irreversible type of capital