1 4. Explaining the Dual Divergence: The Role of External Shocks and Specialization Patterns José Antonio Ocampo and María Angela Parra * The traditional focus of the literature on economic growth is the determinants of long- term trends. This approach makes sense for industrial economies, where a stable long- term growth pattern is discernible, as in the United States, or where major historical breaks can be identified, as in Western Europe (Maddison, 1991). However, as a growing literature has shown, long-term growth patterns in the developing world are not independent of economic fluctuations. Even for industrial economies, as a leading theorist of growth has pointed out, ‘it is impossible to believe that the equilibrium growth path itself is unaffected by the short-to medium-run experience’ (Solow, 2000: xvii). Breaks or instability of long-term patterns are thus of the substance, not a marginal feature of growth patterns in developing countries. In turn, major external shocks play an essential role in explaining breaks in growth patterns. This underscores the need to look carefully at the interaction between external and domestic factors in the macroeconomic dynamics of developing countries. Specialization patterns create another critical interaction between external and domestic factors, and also play an essential role in explaining growth performance in the developing world. This chapter explores the impact of external shocks and specialization patterns on long-term growth in the developing world over the past four decades. It is divided into five sections. The first section succinctly presents major analytical issues involved in understanding growth in the developing world. The second looks at developing countries’ performances, underscoring the widening income gap between developed and developing countries, but also the divergent performances of developing countries, which jointly generate a pattern of ‘dual divergence’. The third section explores the interaction between external and domestic macroeconomic factors, and the fourth considers the role of changes in specialization patterns. The last section draws conclusions and major policy recommendations. Critical analytical issues for understanding growth in the developing world Fluctuations and changes in the trend are an essential component of ‘long-term’ growth patterns in the developing world. The experience of developing countries indicates, indeed, that growth does not take place in steady flows, but involves a mix of episodes of stable growth with spurts and collapses of different frequency, magnitude and duration. The typology of growth experiences is thus diverse: it includes a few experiences of persistent convergence vis-à-vis industrial countries, but also (and more commonly) truncated convergences, growth collapses and development traps (Ocampo, 2005; Pritchett, 2000; Ros, 2005). External factors, particularly terms of trade shocks and fluctuations in international capital markets, play a central role in explaining breaks in long-term growth patterns. In one of the best known studies on economic growth instability in the * This chapter draws upon Ocampo and Parra (2006a). The authors are grateful to Cornelia Staritz for her excellent research assistance in the preparation of this chapter.