Applied Economics 8703 Lecture #21 Empirical Studies of Economic Growth I. Introduction There is very convincing evidence that economic growth is needed to increase the quality of life in developing countries. Yet there is less agreement on what economic policies lead to economic growth. In recent decades, many economists have used cross- country regressions (regression analysis where countries are the units of observation) to investigate the determinants of economic growth, and the impact of economic growth on indicators of the quality of life. The recent increase in analysis reflects a big increase in the availability of data as well as the growing realization that economic growth is crucial to improve the quality of life in developing countries. This lecture examines several recent studies to give you an idea of what people have done, and how convincing the evidence is. Note that many people (including me) are skeptical that much can be learned, due to serious econometric problems, yet careful analysis of cross-country data may be useful for answering at least some questions. 1
II. Growth Econometrics (Durlauf, Johnson and Temple, 2005) The authors begin by presenting some stylized facts: 1. Most countries had positive growth rates in output per worker from 1960 to 2000, but there is a wide variation in growth rates (including some negative ones), and output per worker in 1960 has no (unconditional) predictive power for subsequent growth rates. 2. The correlation in decade average growth rates is increasing over time, suggesting that distinct “winners” and “losers” are emerging over time. 3. The lowest growth (on average) is in Sub- Saharan Africa, and Latin America is also weak. East Asia is the strongest. 4. For most countries, economic growth rates from 1980 to 2000 were lower than the 1960 to 1980 rates. Two important exceptions: China & India. Growth Theory Before examining theoretical models, the basic variables must be defined (country i at time t): 2
Y i,t total output L i,t = L i,0 e n i t total labor (which grows at rate n i ) y i,t = Y i,t /L i,t output per worker A i,t = A i,0 e g i t level of (labor augmenting) technological progress y i, E t = Y i,t /(L i,t A i,t ) output per “efficiency unit of labor” Consider y i, E t , which may appear odd at first glance. “Efficiency units of labor”, L i,t A i,t , is the amount of labor at time t measured in terms of labor efficiency at time zero . For example, if there are 100 workers at time zero and 100 workers at time t, and technical change has made labor 30% more efficient, then there are 130 efficiency units of labor at time t. Efficiency units of labor grow at the rate n i + g i , so that L i,t A i,t = L i,0 A i,0 e (n i + g i )t . Dividing total output by efficiency units of labor gives y i, E t , output per efficiency unit of labor. In general, as long as there is some kind of technical change output per capita, y i,t , will grow even when the economy is in equilibrium.
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