Openness, Specialization, and the External Vulnerability of Developing Countries

57 Pages Posted: 19 Jul 2016

Date Written: June 20, 2016


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.

Keywords: Consumption, Economic Conditions and Volatility, Industrial Economics, Economic Growth, Fiscal & Monetary Policy, Economic Theory & Research

Suggested Citation

Barrot, Luis-Diego and Calderon, Cesar A. and Servén, Luis, Openness, Specialization, and the External Vulnerability of Developing Countries (June 20, 2016). World Bank Policy Research Working Paper No. 7711, Available at SSRN:

Luis-Diego Barrot (Contact Author)

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

Cesar A. Calderon

World Bank ( email )

1818 H Street NW
Washington, DC 20433
United States
202-458-7214 (Phone)
202-522-7528 (Fax)


Luis Servén

CEMFI ( email )

Casado del Alisal 5
28014 Madrid

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