Export-Led Growth in Transition Economies : The Role of Industrial Structure, Productivity Growth Differentials and Cross-Sectoral Subsidies

The purpose of this paper is to demonstrate the interrelation between industrial structure, productivity growth imbalances and cross-sectoral subsidies when it comes to determining economic growth and shaping a country’s transition trajectory. The theoretical framework is a two-sector supply side model of a small open economy with endogenous industrial structure and cross-sectoral subsidies. First we show how a larger productivity growth differential impacts positively on growth when sector sizes are exogenous. By incorporating differences in industrial structure we distinguish between industrial regimes with 'high growth and low inflation' and 'low growth and high inflation' respectively. Second, we endogenize sector sizes by relating the industrial structure to the productivity growth differential. The condition for when a higher productivity growth differential impacts positively on growth is now related to the sector size elasticity. Distinguishing between a diverging and a converging productivity growth differential and highlighting an economy’s structural flexibility allows us a more refined assessment regarding which industrial structures are most friendly to growth. By pinpointing how the industrial structure matters for an economy’s ability to take advantage of the incentives for structural shifts, the paper highlights the context specific nature of an economy’s transition trajectory