Academic journal article Atlantic Economic Journal

Do Country Characteristics Matter for Economic Growth among the Developed Countries?

Academic journal article Atlantic Economic Journal

Do Country Characteristics Matter for Economic Growth among the Developed Countries?

Article excerpt

I. Introduction

Almost everyone inside and outside of the economics profession believes that the characteristics of individual countries make a large difference in their economic growth. In contrast, there is growing literature on the determinants of economic growth that is usually based on the concept of a general growth pattern which applies to virtually all countries. Differences in growth rates by this approach are due to differences in the level of variables which affect all countries in similar fashion - world economic conditions, initial level of per capita product, and so on.

Over the time spans for which quantitative data were obtained, there is clearly a qualitative difference between the growth of the less developed countries and the wealthy industrialized countries. The majority of less developed countries (LDCs) have not drastically reduced the gap in per capita product between them and the U.S., as the wealthy countries did after World War II. This is not to say they may not do so in the future. However, one cannot reject the hypothesis that country characteristics have made the growth of the LDCs different from the wealthy developed countries [Leff and Sato, 1993].

However, country characteristic are not just invoked to explain the gap between the LDCs and DCs. The differences in growth rates between the U.S. and other developed countries, e.g., Japan and Germany, are also attributed to country characteristics. It appears obvious that individual DCs differ significantly in their growth patterns over shorter periods. These differences can frequently be traced to differences between countries in government policies, investment in human capital, savings rates, and so on. This paper is not concerned with these shorter period growth patterns, but the longer period growth over four to 12 decades.

The issue studied here is, do long-run growth rates among the developed countries depend on country characteristics? The alternative possibility is that there is an overall long-run growth pattern among the DCs that dominates the effects of country differences. This paper proposes to test whether country differences can explain a significant share of the differences in long-run growth rates among the DCs.

II. Methodology

The paper will test for the existence of country effects on growth rates by regressing the pooled sample of their growth rates on dummy variables for the various countries. If the country characteristics explain growth differences, the country dummies ought to have statistically significant coefficients that explain an important portion of the differences in growth rates. On the other hand, if the country dummies are not statistically significant, this suggests that country characteristics are not important for long-run growth. This is the test that was run.

The test uses the data from Maddison [1991]. Maddison provides the raw data for annual estimates of real per capita product (in purchasing power of currency terms) for 16 DCs from 1870-1989 (with some missing values in the early years). OECD data [OECD, various years] were used to extend Maddison's data to 1990.(1) The Maddison sample is basically the same set of countries used by Kuznets in Economic Growth of Nations [Kuznets, 1971]. Kuznets's sample is 14 countries, while Maddison's 16 is the same 14 plus New Zealand and Finland. Kuznets indicates he only excludes New Zealand due to lack of data.

It is sometimes contended that this fairly standard sample of "developed countries" is a biased sub-sample of the countries which would have been considered developed in 1900 or 1870 [De Long, 1988]. The argument is that these are simply the DCs of that earlier date which maintained their growth. Most frequently suggested, as additional members of the turn of the century DC club, are the "Southern Cone" countries of South America - Argentina, Chile, and Uruguay. They would qualify on the basis of per capita product. …

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