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Research Summaries: Sources of Economic Growth

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International Monetary Fund. Research Dept.
Published Date:
October 2002
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Abdel Senhadji

In the vast empirical growth literature, research on the sources of economic growth, based on the growth accounting framework, has received particular attention since the widely publicized papers of Alwyn Young and Paul Krugman in the mid-1990s.1 These authors generated a heated debate on the sources of real GDP growth in East Asian countries, by asserting that the “Asian Miracle” was a myth because the engine that drove the spectacular growth in the region came essentially from capital accumulation and not growth in total factor productivity (TFP). Why does the source of growth matter? The answer hinges on the important assumption of diminishing returns in physical capital in the neoclassical growth mode, which implies that capital accumulation cannot sustain long-term growth while TFP can. Thus, the source of growth is crucial to the long-term outlook of a country. This article provides a brief overview of recent IMF research on sources of growth using the growth accounting framework.

Since the mid-1990s, there has been an abundant literature extending Young’s growth accounting exercise to more countries and/or refining his methodology. The growth accounting framework was first presented in Solow (1957).2 It is based on an aggregate production function and decomposes real GDP growth in terms of contributions from factor inputs and total factor productivity (TFP). Therefore, the results of the growth accounting exercise depend on the specification of the production function.

Several IMF studies have contributed to the debate on sources of growth in East Asia. Using internationally comparable data and factor shares, based on the industrial structure, and the level of development of economies, Sarel (1997) finds, contrary to Young, that the TFP growth has been impressive in Singapore, Thailand, and Malaysia.3 These results are corroborated by Crafts (1999), using different data sets, and Iwata, Khan, and Murao (2002), using nonparametric methods for estimating a very general production function.4

Numerous other studies have focused on other regions. Hu and Khan (1997) find that the contribution of TFP in China’s growth has been increasing, especially during the reform period.5 El-Erian and Helbling (1997) argue that growth in the Arab countries region was overly reliant on volatile external sources of funding and TFP growth was too low. The importance of market-friendly institutions are emphasized, in Dhonte, Bhattacharya, Yousef (2000), in absorbing the demographic explosion in the Middle East and sustaining adequate growth in GDP per capita.6 Ghura (1997) finds empirical evidence of increasing returns to scale for the aggregate production function for Cameroon stemming from positive externalities in physical and human capital.7 Hugo (1999) shows that despite a large investment-GDP ratio in Honduras, growth has been hampered by low TFP due to deficient levels of human capital and inadequate composition of investment.8 According to De Broek and Koen (2000), the severe contractions in Russia, the Baltics and the other countries of the former Soviet Union reflected not only collapsing investment and shrinking employment but also sharp declines in productivity because of the transition to a market economy.9 Even after correcting for factor utilization during the transition process, Dolinskaya (2001) finds a similar result for Russia.10 Cerisola and Chan-Lau (2000) find that investment-specific technical change is the major underlying cause of the pickup in productivity in Canada and narrowing of the productivity gap with the United States.11 Calderon (2001) finds that the differential in productivity growth across OECD countries could be accounted for, to a large extent, by measurement errors.12 Cardarelli (2002) shows that most of the divergence in income per capita between Australia and New Zealand is the result of lower capital accumulation, and to a lesser extent, lower TFP growth in New Zealand.13

IMF Staff Papers

Volume 49, Issue 3

The Impact of Banking Crises on Money Demand and Price Stability

Maria Soledad Martinez Peria

Inflation Targeting in the Context of IMF-Supported Adjustment Programs

Mario I. Blejer, Alfredo M. Leone, Pau Rabanal, and Gerd Schwartz

Wage Inequality in the United Kingdom, 1975–99

Eswar S. Prasad

Centripedal Forces in China’s Economic Takeoff

Anuradha Dayal-Gulati and Aasim M. Husain

What Caused the 1991 Currency Crisis in India?

Valerie Cerra and Sweta Chaman Saxena

Technology and Epidemics

Alberto Chong and Luisa Zanforlin

A Prudent Central Banker

Francisco J. Ruge-Murcia

Early Ideas on Sovereign Bankruptcy Reorganization: A Survey

Kenneth Rogoff and Jeromin Zettelmeyer

IMF Staff Papers, the IMF’s scholarly journal, edited by Robert Flood, publishes selected high-quality research produced by IMF staff and invited guests on a variety of topics of interest to a broad audience, including academics and policymakers in IMF member countries. The papers selected for publication in the journal are subject to a rigorous review process using both internal and external referees. The journal and its contents (including an archive of articles from past issues) are available online at the Research at the IMF website at http://www.imf.org/research.

While the basic growth accounting exercise which decomposes real GDP growth into contributions from factor inputs and TFP is a useful initial exercise, it does not, however, explain why certain countries enjoy faster TFP growth than others. Some of the empirical literature on sources of growth has explored the determinants of TFP. Bayoumi, Coe, and Helpman (1996) show that a country can raise its TFP not only by investing in research and development (R&D) but also by trading with countries with high levels of R&D.14 Similarly, Coe, Helpman, and Hoffmaister (1997) find empirical evidence to support that developing countries could boost their TFP growth through R&D spillovers by increasing trade with industrial countries and, in particular, by importing intermediate products and capital equipment embodying foreign knowledge.15 Hakura and Jaumotte (1999) find that this spillover is stronger through intra-rather than inter-industry trade because countries are likely to absorb foreign technologies more easily if they produce products similar to the imported goods.16 Senhadji (2000), using econometric estimates of factor shares for a large sample of countries, finds that initial conditions, institutional factors, and macroeconomic policy variables explain most of the cross-country differences in TFP levels.17 Salgado (2002) finds that the effects of structural reforms on TFP in the OECD countries are weakly positive, or even negative, in the short run but significantly positive in the long run.18 Jonsson and Subramanian (2001) find econometric evidence for a positive relationship between trade and TFP growth both over time and across sectors in South Africa.19

The growth accounting framework has also been used to compute potential output. Jonsson (2001) stresses the importance of TFP for sustaining growth in Thailand and recommends measures for stimulating TFP growth.20 Ma (2001) argues that higher TFP growth from structural reforms is also essential in Korea in order to sustain growth close to historical levels.21 Senhadji (2002) develops a framework based on growth accounting for analyzing alternative scenarios of poverty reduction in Bangladesh.

More recently, the growth accounting methodology has been used to analyze the TFP acceleration in some countries, particularly in the United States, which enjoyed strong growth with low inflation and robust labor productivity growth during the second half of the 1990s. The acceleration in labor productivity in the United States—which coincided with increasing production and use of information and communication technologies (ICT)—has spurred a growing empirical literature aimed at identifying the sources of this acceleration, its longevity, and the potential for diffusion across sectors and across countries.

While the large number of empirical studies for the United States suggests that there is a positive link between investment in ICT and TFP growth, there is, however, no clear evidence that the acceleration is permanent. De Masi (2000) provides a survey of this literature.22 Acceleration of TFP and labor productivity growth in the second half of the 1990s has been more pronounced in the United States than in Europe, partly because the ICT sector share in GDP is generally lower in European countries. De Masi, Estevâo, and Kodres (2001) provide an excellent summary of the evidence for Canada, France, Germany, the United Kingdom and the United States.23 In Finland, where the ICT sector plays a dominant role, Wagner (2001) documents a significant acceleration of TFP and a substantial contribution of the ICT sector to GDP growth.24 Finally, Cardarelli (2001) shows that the rapid accumulation of ICT capital over the last two decades has played a significant role in explaining the impressive acceleration in productivity in Australia since 1995.

Books from the IMF January–June, 2002

Can the Poor Influence Policy?

Participatory Assessments in the Developing World

Caroline M. Robb

Macroeconomic Management: Programs and Policies

Mohsin S. Khan, Saleh M. Nsouli, Chorng-Huey Wong

Kosovo: Institutions and Policies for Reconstruction and Growth

Dimitrios G. Demekas, Johannes Herderschee, Davina F. Jacobs

Full-text versions (or, in some cases, detailed summaries) of books published by the IMF are available online at the Research at the IMF website at http://www.imf.org/research. Follow the link to IMF Publications.

Paul Krugman, “The Myth of Asia’s Miracle,” Foreign Affairs, Vol. 73 (Nov–Dec 1994), pp. 62–78; Alwyn Young,” The Tyranny of Numbers: Confronting the Statistical Realities of the East Asian Growth Experience,” Quarterly Journal of Economics, Vol. 110 (August), pp. 641–80.

Robert Solow, “Technical Change and the Aggregate Production Function,” Review of Economics and Statistics, Vol. 39 (August 1957), pp. 312–20.

Michael Sarel, “Growth and Productivity in ASEAN countries,” IMF Working Paper 97/97, 1997.

Nicholas Crafts, “East Asian Growth Before and After the Crisis,” IMF Staff Papers, Vol. 46, No. 2 (1999), pp.139–66; Shigeru Iwata, Mohsin S. Khan, and Hiroshi Murao, “Sources of Economic Growth in East Asia: A Nonparametric Assessment,” IMF Working Paper 02/13, 2002.

Zuliu Hu and Mohsin S. Khan, “Why Is China Growing So Fast?” IMF Staff Papers, Vol. 44 (March 1997), pp. 103–31.

Amer Bisat, Mohamed El-Erian, and Thomas Helbling, “Growth, Investment, and Saving in the Arab Countries,” IMF Working Paper 97/85, 1997; Pierre Dhonte, Rina Bhattacharya, and Tarik Yousef, “Demographic Transition in the Middle East: Implications for Growth, Employment, and Housing,” IMF Working Paper 00/41, 2000.

Dhaneshwar Ghura, “Private Investment and Endogenous Growth—Evidence from Cameroon,” IMF Working Paper 97/165, 1997.

Hugo Juan-Ramon, “Honduras’ Growth Performance During 197097,” IMF Policy Discussion Paper 99/1, 1999.

Mark De Broek and Vincent Koen, “The Great Contractions in Russia, the Baltics and the Other Countries of the Former Soviet Union: A View from the Supply Side,” IMF Working Paper 00/32, 2000.

Irena Dolinskaya, “Explaining Russia’s Output Collapse: Aggregate Sources and Regional Evidence,” IMF Working Paper 01/16, 2001.

Martin Cerisola and Chan-Lau Jorge, “Tales from Two Neighbors: Productivity Growth in Canada and the United States,” IMF Working Paper 00/169, 2000.

César Calderón, “Productivity in the OECD Countries: A Critical Appraisal of the Evidence,” IMF Working Paper 01/89, 2001.

Roberto Cardarelli, “An Exploration into the Income Divergence Between New Zealand and Australia,” in New Zealand: Selected Issues, IMF Staff Country Report 02/02, 2002.

Tamim Bayoumi, David Coe, and Elhanan Helpman “R&D Spillovers and Global Growth,” IMF Working Paper 96/47, 1996. Also published in Journal of International Economics, Vol. 47 (April), 1999.

David Coe, Elhanan Helpman, and Alexander Hoffmaister, “North-South R&D Spillovers,” The Economic Journal, Vol. 107 (January 1997), pp. 134–49.

Dalia Hakura and Florence Jaumotte, “The Role of Inter- and Intra-industry Trade for Technology Diffusion,” IMF Working Paper 99/58, 1999.

Abdelhak Senhadji, “Sources of Economic Growth: An Extensive Growth Exercise,” IMF Staff Papers, Vol. 47, No. 1 (2000), pp. 12957.

Ranil Salgado, “The Impact of Structural Reforms on Productivity Growth in Industrial Countries,” IMF Working Paper 02/10, 2002.

Gunnar Jonsson and Arvind Subramanian, “Dynamic Gains from Trade: Evidence from South Africa,” IMF Staff Papers, Vol. 48, No. 1 (2001), pp. 197–224.

Gunnar Jonsson, “Growth Accounting and the Medium-Term Outlook in Thailand,” in Thailand: Selected Issues, IMF Staff Country Report 01/07, 2001.

Henry Ma, “Potential Output, the Output Gap, and Inflation in Korea,” in Republic of Korea: Selected Issues, IMF Staff Country Report 01/01, 2001.

Paula De Masi,” Does the Pickup in Productivity Growth Mean There Is a ‘New Economy’?” in The United States: Selected Issues, IMF Staff Country Report 00/6, 2000.

Paula De Masi, Marcello Estevâo, and Laura Kodres, “Who Has a New Economy,” Finance and Development, Vol. 38 (June), 2001. For detailed results, see Marcello Estevâo and Joaquim Levy, “The New Economy in France: Developments and Prospects,” in France: Selected Issues, IMF Staff Country Report 00/10, 2000; Laura Kodres, “Prospects for the ‘New Economy’ in Germany,” in Germany: Selected Issues, IMF Staff Country Report 00/10, 2000; and Laura Kodres, “The ‘New Economy’ in the United Kingdom,” in United Kingdom: Selected Issues, IMF Staff Country Report 01/02, 2001.

Nancy Wagner, “A Note on Finland’s New Economy,” in Finland: Selected Issues, IMF Staff Country Report 01/11, 2001.

IMF Occasional Papers

IMF Occasional Paper No. 211

Capital Account Liberalization and Financial Sector Stability

By a Staff Team led by Shogo Ishii and Karl Habermeier

IMF Occasional Paper No. 212

Financial Soundness Indicators: Analytical Aspects and Country Practices

V. Sundararajan, Charles Enoch, Armida San Jose, Paul Hilbers, Russell Krueger, Marina Moretti, and Graham Slack

IMF Occasional Paper No. 213

The Baltic Countries: Medium-Term Fiscal Issues Related to EU and NATO Accession

Johannes Mueller, Christian Beddies, Robert Burgess, Vitali Kramarenko, and Joannes Mongardini

IMF Occasional Paper No. 214

Advanced Country Experiences with Capital Account Liberalization

Age Bakker and Bryan Chapple

IMF Occasional Paper No. 215

Improving Large Taxpayers’ Compliance: A Review of Country Experience

Katherine Baer, Olivier Benon, and Juan Toro

IMF Occasional Paper No. 216

Is the PRGF Living Up to Expectations?: An Assessment of Program Design

Sanjeev Gupta, Mark Plant, Benedict Clements, Thomas Dorsey, Emanuele Baldacci, Gabriela Inchauste, Shamsuddin Tareq, and Nita Thacker

Details contents of IMF Occasional Papers are available at the Research at the IMF website: http://www.imf.org/research.

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