Openness Specialization and the External Vulnerability of Developing Countries
November 3, 2016DECRG Kuala Lumpur Seminar Series

Deepening real and financial integration of developing countries into the world economy has prompted renewed interest in the contribution of external shocks to their macroeconomic fluctuations. This paper revisits the issue using four decades of annual data for a large sample of developing countries. The paper implements a conditionally-homogeneous panel vector autoregression with exogenous variables to model GDP fluctuations in these countries. It uses sign restrictions to identify four external structural shocks – demand, supply, monetary, and commodity shocks – and analyzes how their impact on growth is shaped by countries' policy and structural framework. External shocks are found to account for a small share of the forecast error variance of GDP, especially at short horizons.

However, their contribution has been on the rise in recent decades. Further, global monetary shocks have become the leading external source of GDP volatility in developing countries. The paper presents a quantitative assessment of the effects of real and financial opening up, as well as those of commodity specialization, on the impact of external shocks on GDP. The results suggest that increasing openness can account for the increasing trend in the volatility attributable to external shocks, as well as the changing roles of different shocks. Moreover, commodity-intensive developing countries are found to be more vulnerable than the rest to all types of external shocks, not just commodity shocks.

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  • Luis Servén

    Research Manager, Macroeconomics and Growth, Development Research Group
    Luis Servén is Research Manager for Macroeconomics and Growth in the Development Research Group. After joining the Bank in 1988, he worked at the Research department, and between 1999 and 2004 he managed the regional research program on Latin America and the Caribbean. Prior to joining the Bank he worked as a senior researcher at FEDEA and taught at the Universidad Complutense of Madrid, MIT and CEMFI. His recent research focuses on open economy macroeconomics, fiscal policy and growth, exchange rate regimes, international portfolio diversification, saving and investment determinants, and microeconomic regulation and growth. He holds a Bachelor in Economics from the Universidad Complutense de Madrid and a Ph.D. in Economics from the Massachusetts Institute of Technology.
Event Details
  • WHEN: Thursday, November 3, 2016; 12:30-2:00PM
  • WHERE: World Bank Malaysia Office, Level 3, Sasana Kijang, No. 2, Jalan Dato’ Onn
  • RSVP: Kindly RSVP by Wednesday, November 2, 2016