Export diversification and economic growth in Chile - An econometric analysis

It is frequently suggested that export diversification contributes to an acceleration of the growth process of developing countries. Yet there have been remarkably few systematic empirical investigations into the links between export diversification and growth. This paper attempts to examine the hypothesis that export diversification is linked to economic growth via externalities of learning-by-doing and learning-by-exporting fostered by competition in world markets. The diversification-led growth hypothesis is tested by estimating an augmented Cobb-Douglas production function on the basis of time series data from Chile. Statistical procedures are used to test for a unit root by considering the possibility that structural breaks at unknown time points occurred over the period 1962-2001. The results indicate that all but one series are integrated. To test for cointegration between the integrated series of order 1 the multivariate cointegration methodology proposed by Johansen is used. An error-correction model is fitted to the series of different orders of integration to estimate the long-run relationship between the variables and to provide a further test of cointegration. The dynamic OLS procedure is applied to allow for a direct and asymptotically efficient estimation of the mixture of I(1) and I(0) variables. The estimation results suggest that export diversification plays an important role in economic growth.