Trade and growth: A theoretical exploration into foreign debts by NICs

Abstract

This paper studies foreign debts of newly industrializing countries (NICs). These countries develop by imitating foreign technology and by exporting goods that are lower down the 'quality ladder'. Differentiated by quality differences, such goods are often substitutes to those exported by advanced countries in the West. As NIC incomes rise their consumers seek to smooth their consumption over time. The novelty of our finding is that NICs borrow from abroad on-ly when these goods are substitutes, but they would not have done so had the goods been complements. The intuition, obvious yet ignored in the literature, is the opposite terms of trade effects arising from substitutes and complements in consumption. Most papers in the 'growth-debt' literature adopted the Romer/Lucas steady-state framework. They concentrated on issues such as population growth and foreign debt, but neglected the imitation-growth-debt relation. A simple theoretical model is devised to fill this gap in the literature. © 2000 Elsevier Science B.V. All rights reserved.