Long- and short-run relationships between industrial and developing countries

The purpose of this dissertation was to search for empirical macroeconomic relationships, in terms of growth or business cycles, that exist between industrial and developing countries. In particular, this dissertation is an attempt to identify the channels through which economic events in industrial countries are transmitted to the economies of developing countries. First, correlation analysis was used to see if business cycles are synchronized between industrial and developing countries. Little supportive evidence was found, which is surprising given the tendency for common business cycles among the industrial countries. Second, cointegration analysis is used to test whether RGDPs per capita of industrial and developing country trading partners follow the same stochastic growth path over the long run. This could be the case if the benefits of technological progress in the industrial countries are spread to developing countries by way of trade. Limited evidence of cointegration is found. Third, panel regressions are used to identify channels that transmit economic events from industrial countries to developing countries. By far the strongest channel found was the international real interest rate, which has a negative and significant impact on economic growth in developing countries. Higher international real interest rates discourage the use of debt finance to build either domestic capital or to purchase imported productive inputs, thereby reducing growth. The negative effect of international real interest rates on growth is also much stronger for developing countries with heavy debt levels. Openness to trade, on the other hand, is found to have a positive and significant effect on growth in developing countries, but only if the developing country has a low debt level. Openness enhances technological change in developing countries by enabling transfers of knowledge across borders. In terms of policy, the evidence in this dissertation shows that a developing country can reduce exposure to international interest rate fluctuations and reap benefits from international trade if a conservative fiscal policy is followed