REED ECONOMICS 314 - Empirical Evidence on Economic Growth

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Economics 314 Coursebook, 2008 Jeffrey Parker 6 EMPIRICAL EVIDENCE ON ECONOMIC GROWTH Chapter 6 Contents A. Topics and Tools ..................................................................................2 B. Growth Accounting ..............................................................................3 Methods of growth accounting ...........................................................................3 Denison’s estimates for the United States ...........................................................3 Maddison’s evidence for six major industrial countries ........................................5 Evidence for Asian and Latin American countries ..............................................7 Recent revival of U.S. productivity growth.........................................................8 Growth accounting and the Solow model ..........................................................10 C. The Convergence Question...............................................................11 Graphical evidence on convergence...................................................................13 A digression on the econometrics of linear regression..........................................13 Applying linear regression to analyze convergence.............................................17 Regression studies of absolute convergence across countries..................................18 Tests of absolute β-convergence using sub-national data ....................................20 Testing conditional β-convergence....................................................................25 Mankiw, Romer, and Weil: Taking Solow seriously .........................................27 D. Non-Regression Approaches to Convergence..................................28 The concept of σ-convergence ...........................................................................28 Tests of convergence in the cross-country distribution of incomes.........................30 Pritchett’s test of plausibility of convergence......................................................31 E. Cross-Country Correlates of Growth................................................32 Barro and Lee’s cross-country evidence on human capital ..................................32 Robustness in cross-country growth studies........................................................36 Cross-country vs. panel data estimation............................................................38 Institutions and economic growth .....................................................................40 Inequality and growth.....................................................................................456 - 2 Studies of cross-country income differences ........................................................47 Empirical evidence on rent seeking and growth.................................................48 F. Empirical Studies of Endogenous Growth.........................................50 Evidence on returns to scale .............................................................................50 Evidence on growth vs. level effects of economic changes.....................................51 Evidence on the effects of private human capital vs. public knowledge ................52 G. Suggestions for Further Reading.......................................................53 Overviews of growth and empirical results .......................................................53 Selected growth accounting studies ...................................................................53 H. Studies Referenced in Text................................................................54 A. Topics and Tools This chapter concludes our examination of economic growth by reviewing the empirical evidence about growth. Because growth is a long-run phenomenon and macroeconomic time series are lamentably short, most empirical studies of growth tend to rely largely on cross-sectional samples. While this avoids many of the typical time-series macroeconometric nemeses, it raises other problems. No-tably, it is difficult when comparing growth rates across countries to measure and include all of the institutional characteristics that are relevant to international differences in growth behavior. If these omitted characteristics are also corre-lated with the growth determinants we have included, their effects will be picked up by the included variables leading to biased estimates of the true impact of the variables in the equation. The voluminous literature surveyed selectively here has explored many alter-native strategies for interpreting the growth evidence. However, the lack of clear-cut conclusions suggests that our empirical knowledge of economic growth may grow as future decades add to our data samples.6 - 3 B. Growth Accounting Methods of growth accounting One of the earliest attempts to quantify economic growth empirically was the direct attempt to determine how much of economic growth can be explained by increases in various inputs. This exercise is called growth accounting. Since it does not require comparisons across countries, growth accounting can be per-formed on an individual basis for any economy with relevant data on output and inputs. This kind of analysis emerged quite naturally from efforts in the 1940s to construct current and historical national account statistics for major economies. As discussed by Romer on pages 29−31, growth accounting attempts to break down total real-output growth into components attributable to growth in capital input, growth in labor input, and growth in total factor productivity–the so-called Solow residual that measures the increase in output that can’t be explained by input growth. Using Romer’s equation (1.34), growth accountants estimate the share attributable to growth capital input as ()/,KKKα the share due to labor as ()/,LLLα and the part resulting from total factor productivity (TFP) as ()( )()///.KLYY KK LL−α −α1 Romer gives citations to many of the major authors in the growth accounting literature. In this section, we will survey the results of three major works: Ed-ward Denison’s work for the United States, Angus Maddison’s long-term meas-ures for several advanced countries, and the results summarized by Robert Barro from work of Victor Elias and of Alwyn Young for selected countries in the post World War II period. Denison’s estimates for the United States One of the most


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