Download Discussion by J. Imbs

Technological Diversification
By Koren and Tenreyro
Discussion
CEPR-World Bank Conference on
The Growth and Welfare Effects of Macroeconomic Volatility
CREI March 2006
1. Theory combining love for variety and
firm failures to get: (i) endogenous
growth, (ii) endogenous increase in
varieties, (iii) endogenous fall in volatility
2. Aggregating up firm dynamics
(Presentation)
3. Open economy with endogenous
specialization
4. Empirical tests at country, sector, firm
levels
Ambitious, Relevant, Well-realized…
WOW!
But you gotta do what you gotta do…
• Nitpick on Theory
• Nitpick on Empirics
• Nitpick on Contribution
• Some suggestions on the way
Theory - Foundations
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Growth = Number of varieties / firms
Volatility falls because of
(i)
(ii)
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availability of “nearby” substitutable inputs
LLN
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Substitutability crucial. Under inputs complementarity,
volatility increases with number of varieties. Now, for Kremer
(e.g.), sophistication = complementarities.
Unless *labor* is substitutable across sectors. Can salvage the
result if assume failure is just fall in productivity rather than
shutdown, and labor can reallocate freely between firms.
Varieties lower volatility because increase opportunities to
reshuffle labor in order to limit output drops.
But now labor has to be substitutable if other inputs are not.
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Cut your losses: you need substitutability.
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Theory – First Floor: Sectors
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LLN: impact of shock to one variety diluted with
many varieties, i.e. in sophisticated sectors.
Flavor of Acemoglu-Zilibotti where fixed cost of
new variety easier to cover for rich economies
(which are rich because they have many varieties)
Bit of a difference in that this here is a model of
sophistication/varieties at the sectoral level.
Electricity production, agriculture can source away
from shock in rich economies. Not in primitive poor
economies.
Aggregate volatility only falls because volatility in
each sector falls – not because number of sectors
increases. LLN within sector, not between as A-Z
Theory – Second Floor: Countries
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Cross-country dimension introduced through model of
trade and comparative advantage specialization.
Assumption 1: cannot import output of foreign firms
(otherwise could circumvent having to install varieties
domestically, and grow without domestic
sophistication). Can only import foreign goods to use
for installing domestic firms. Plausible?
Assumption 2: balanced trade each period, and no
borrowing, which constrains investment and forces
gradual growth in varieties. Weakness relative to
Acemoglu-Zilibotti who have international capital
flows. In addition, plausible?
Theory – Third Floor: Open Economy
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Assumption 3: international specialization motivated by
directed technological change. Skill labor is more
productive, generates more profits in sectors where it is
in use, and attracts more investment.
Increasing Returns and History Dependence. Countries
born with some skill-labor intensive sectors will attract
investment, specialize and grow rich. Opposite for the
others.
Implies “volatility traps” and “volatility divergence”
Implies the same sector becomes less volatile in
growing country – remains unchanged elsewhere (as in
Agriculture, Electricity examples).
Empirics – What’s up?
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Model is one of sector-level volatility.
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In cross-section: is the same sector more volatile in poor country
controlling for aggregate volatility (not what is in the paper)
In panel: is divergence in GDP associated with divergences in
sectoral volatility? Are there volatility traps?
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In both cases, difference in differences estimation: relative to a
treatment (non growing) economy, are GDP differences related
with volatility differences in a given sector?
Also important to control for aggregate developments, e.g.
institutions (finance?) liable to affect aggregates. Focus on
international differentials at sector level, controlling for country
differences.
Empirics – What’s in the paper (I read)
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Volatility correlates negatively with per capita GDP.
Technology diffuses from rich to poor countries
Sector volatility higher and sector productivity lower in
poor countries (NOT controlling for aggregates – could
be higher/lower across all sectors)
Labor productivity higher, less volatile in sectors that,
in the US, use capital inputs originating from a large
number of other sectors.
Empirics – What’s in the paper (I read)
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Negative correlation between volatility and per capita GDP is a
stylized fact – does not vindicate this model particularly (cross
country or over time).
R&D is highest in rich economies – that’s where technologies are
developed, and then they diffuse to rest of the world – does not
vindicate this model particularly
Sector test fine – but controls are missing
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Complexity measure. Two concerns:
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Why not use some international evidence on I/O tables? Text says that
“actual level of complexity observed would respond endogenously to the
level of development of the country”, which prevents using data outside of
the US. But is that not precisely what is being tested?
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Tables (in the paper) suggest complex manufacturing sector is “leather
products”, “pottery”, “glass”.
Is that plausible? Is it plausible that I/O relations are the same across all
countries for these sectors (or others)?
Empirics – What’s in the paper (I read)
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Poor countries specialize in less complex, more volatile
sectors. Captured via interaction term:
Complexity(US) i x GDPj or Volatility i x GDPj
Nice result.
But even more convincing if show directly mapping
between
Skill => Complexity => Low Volatility
(e.g. using country specific measure of complexity)
Empirics – What’s in the presentation (I hope)
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Firm level evidence:
Large firms are less volatile – firm of size N is less volatile
than N firms of size 1 (I think)
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Again, nice result.
But large firms could differ from small ones in many
other ways than their access to a wide range of inputs.
Not quite ceteris paribus – e.g. access to finance,
indivisibilities…
Conclusion
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Extremely ambitious and impressive
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“It’s good to be the Discussant!”
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Perhaps be more transparent on model assumptions,
especially open economy.
Clearer predictions on within and between sectors
volatility. Contrast with Acemoglu-Zilibotti
Tie empirics with model
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