OUTWARD-ORIENTED DEVELOPING-ECONOMIES REALLY DO GROW MORE RAPIDLY - EVIDENCE FROM 95 LDCS, 1976-1985

Examines sources of growth in 95 developing economies over the period 1976-85. Per capita income during this period grew at an average annual rate of 3.4% for 16 Asian economies but declined at rates of 0.3% in Latin America (24 countries) and 0.4% in Africa (43 countries). I develop a technique for estimating a cross-country index of real exchange rate distortion, using the international comparison of prices prepared by Summers and Heston. The norm for this index is the price level that corresponds to a country's particular resource endowment. Real overvaluation or undervaluation is measured relative to this norm and provides an indication of the extent to which incentives are geared to the domestic or international market. This index has the advantage that it can be calculated easily for a large number of countries. The procedure is implemented for 117 economies over the period 1976-85. The results indicate that Latin America, on average, was overvalued 33% relative to Asia during this period, while Africa was overvalued even more (86% relative to Asia). Asian economies also exhibited more stability of the real exchange rate than their Latin American and African counterparts. This cross-country index of real exchange rate distortion is then used to investigate whether there is any empirical relationship between outward orientation and economic growth. The main finding is that there is a significant, negative relationship between distortion in the real exchange rate and growth of per capita GDP, after controlling for the effects of real exchange rate variability and investment level. The robustness of these results is demonstrated on sensitivity analysis. -from Author