Academic journal article Contemporary Economic Policy

The Sources of Growth at Different Stages of Development

Academic journal article Contemporary Economic Policy

The Sources of Growth at Different Stages of Development

Article excerpt

What separates wealthy nations from poor ones is one of the oldest and most fundamental questions in economics. But it has only been in recent years, with the development of powerful computational techniques and data sets, that empirical analysis of growth and why it happens (or, more revealingly, does not happen) has taken off. A common technique in this analysis has been cross-country regressions in which national economic performance, typically growth in per capita product, has been used as the dependent variable. Among the pioneering work in this regard is Barro (1991). The technique has also been applied to investigate derivative issues such as foreign aid (Burnside and Dollar 2000) and the effects of an open economy (Rodriguez and Rodrik 2001; Sachs and Warner 1995).

Yusuf and Stiglitz (2000) lay out what we know about achieving modernization in light of this empirical revolution, which they refer to as the settled issues in development economics. Among them are the importance of physical and human capital accumulation (including not just education but knowledge available nonrivalrously to all and produced by activities such as scientific research), low inflation, open trade, clean governance, secure property rights, flexible labor markets and provision of social safety nets. Other issues, for example, the role of industrial policy, remain unsettled.

But a tacit assumption of much of this empirical growth literature, as well as the aforementioned theoretical consensus, is catholicity--the notion that whatever the sources of growth, they operate identically in all countries, be they highly advanced or pre-industrialized. The growth process is assumed to be the same in Sweden as it is in Bangladesh, with only parameter values distinguishing the two. Typically this assumption plays out when data from all nations are thrown into a single cross-country growth regression covering all levels of per capita income.

This article investigates whether the findings of the growth literature are common to countries at different levels of per capita income. The results provide some insight with respect to proper sequencing of reforms when political constraints exist, and explain some of the stylized facts of development and the politics of international trade. Section I describes the econometric problem and some of the theoretical controversies in the literature its resolution might address, sections II-IV contain the empirical results, and section V draws some implications.

I. GROWTH NONLINEARITIES

The approach bears some similarity to Barro (2000a). There is a production function that relates potential output to a vector of inputs. At the same time, societies face constraints, imposed by government or beyond their control, that limit the efficiency of input conversion, and hence cause output to fall short of the production frontier. To the extent that these constraints are the results of policy choices, such choices thus have costs that may or may not be worthwhile but must be accounted for in understanding growth. Actual output then depends on available resources and the choices that have been made or the constraints that are faced with respect to macroeconomic management, political stability, and so on. These serve to limit actual output below the potential derived from the production technology.

An issue of interest is whether the resources available and the choices made have different effects at different levels of this function. Government spending, for example, is sometimes both in theory (Krichel and Levine 2001) and empirically (Barro 1991, 2000a; Tavares and Wacziarg 2001) shown to be negatively related to growth. Do advanced societies more frequently fall into factional warfare over government spoils to such an extent that they cripple the economy's productive capacity (Olson 1982)? Or is there a rent-seeking trap visible in government spending (or in economic distortions) that tends to affect the poorest countries most (Krueger 1974)? …

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