Why The Already Difficult Task of Identifying Sources of Growth Has Become Even More Challenging?

Introduction

In a survey chapter as this, it is hard to detail all the important issues that growth and development economists face in their daily professional routine. Nonetheless, we summarize some important points that might be of interest to those working on growth topics, particularly for growth and development policy. It is noted that in light of the confusion in the empirical growth literature, growth economists and policy makers alike are unclear about the specific growth enhancing factors that might increase the steady-state growth rate of output. This is because, a clear explanation to the sources of growth is yet to be forthcoming. Factors such as trade openness, human capital and R&D, amongst others, have been identified to be growth enhancing. Recently, contribution from information and communications technology (ITC) seems to be significant for developed and some developing economies (see Keely and Quah, 1998). However, the empirics of growth has either supported or rejected these factors on the basis of personal proliferation, (un)complicated econometric techniques and the use of right or wrong specifications, in time series and cross-sectional studies alike. Consequently a non-exhaustive list of growth enhancing factors has been proposed, most of which have led to further confusion than answers to the century-old question in the growth theory - the sources of economic growth.

Recall the well-known Sala-I-Martin’s (1997) experiment with two million regressions - the conclusions of which surprised many. A summary of the top ten growth factors in his work is in Berg (2001). In a recent survey of cross-country studies Durlauf, Johnson and Temple (2005) indicate that in various empirical works, the potential growth factors total one hundred and forty five. More recently, Durlauf, Kourtellos, and Tan (2008) have summarised them into six broad categories, viz, (i) economic institutions (ii) legal and political systems (iii) climate (iv) geographical isolation (v) ethnic fractionalization and (vi) culture. It is not surprising that there are endless debates on growth policy; see for example, Bosworth and Collins (2003) and Durlauf, Johnson and Temple (2005). Pritchett (2006) evaluates the usefulness of growth models for policy, particularly for developing countries. He argues that the first generation endogenous models which propagate incentives for innovative technology and are based on the long run (which in calendar years could be close to a generation’s lifespan) are of little use for policy in economies whose main interest is to manage the short-to-medium term fluctuations in their growth rates. Rao and Cooray (2008a) provide some guidelines on how to narrow the gap between the implications of growth models and the need to develop practical policies for developing economies. They take the view that the potential of the Solow (1956) model and its variants such as the Mankiw, Romer and Weil (1992) has not been explored adequately to capture the effects of factors on varying time horizons that might be of use for policy in these economies¹.

This chapter briefly explains how the empirical literature on growth has made identifying sources of growth even more challenging. It is organized as follows: In the next section, we discuss the lessons learnt over the last 50 years or so in growth theory and identify the recent additions to growth literature. Section 3 summarizes issues in empirical growth literature while in section 4, we discuss why Solow is correct in saying that the growth theory has not advanced much since his own contributions despite the new insights obtained from both theoretical and empirical research. Section 5 concludes.