growth in value added as shown by trajectory CB on the dotted line. For the same level of competition, industries closer to the frontier innovate and enjoy higher productivity growth. A sequencing of distance shortening policies followed by competition can enable the industry to move closer to the frontier, but along a flatter slope, i.e., with relatively slow growth in value added until competition is introduced.

Consider the three arrows in figure 16 that we use to illustrate the experiences of the BICs with distance shortening and competition policies. In the early 1980s, most industries in China and India faced low levels of competition and were located far from the frontier, say at point C. Brazilian labor productivity levels, however, were much higher and placed Brazil closer to the Korean technological frontier. Rapid opening up to foreign competition should have made industries in China and India uncompetitive and set them on a negative growth trajectory towards point B (or extinction). We know quite well that this did not happen although the outcomes were very different. Distance-shortening policies were a precursor to China’s opening up to foreign competition and boosted its labor productivity growth, preparing it for global competition. In the late 1980s, when China liberalized swiftly, it benefited from accelerated growth in labor productivity. The Chinese model, like the Korean, balanced an innovation focus (via adoption of distance-shortening policies) with competition. Unsurprisingly, China’s growth rate of labor productivity as reflected in its pace of catch up is the fastest. In comparison, India did not employ distance-shortening policies to boost the competitiveness of its manufacturing sectors in a significant manner. As a consequence, upon opening up, it was unable to compete in almost all manufacturing industries.

In the early 1980s, Brazil was closer to the frontier than China and India (figure 4). This reflected the stronger initial position of the Brazilian economy at the end of its “miracle” years. During the debt crisis, the economy stalled and lost its competitiveness as shown by a lower growth in labor productivity. When the Brazilian economy began to display a renewed productivity spurt in the 2000s, the high returns from China’s distance shortening policies and speedier rate of liberalization had already made China the country with the fastest growth in value added per worker among the BICs (and indeed globally).

An analysis of how competition and distance shortening policies have affected the _level_ of competitiveness in the BICs is illustrated in figure 17 with different variables on the axes. The x-axis displays distance to the frontier (from right to left) and the y-axis displays the level of value added per worker. Note Brazil’s initial position was close to the frontier in the 1980s. In levels, its labor productivity is still higher than China’s, as displayed in figure 4. Even though China has achieved faster growth in labor productivity, its distance from the Korean technological frontier remains significant and can be measured on the y-axis. In what follows, we test the Aghion et al. model using data for Korea and the BICs.

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