Summary of WP/92/106
  • 1 https://isni.org/isni/0000000404811396, International Monetary Fund
  • | 2 https://isni.org/isni/0000000404811396, International Monetary Fund
  • | 3 https://isni.org/isni/0000000404811396, International Monetary Fund

The IMF Working Papers series is designed to make IMF staff research available to a wide audience. Almost 300 Working Papers are released each year, covering a wide range of theoretical and analytical topics, including balance of payments, monetary and fiscal issues, global liquidity, and national and international economic developments.

Abstract

The IMF Working Papers series is designed to make IMF staff research available to a wide audience. Almost 300 Working Papers are released each year, covering a wide range of theoretical and analytical topics, including balance of payments, monetary and fiscal issues, global liquidity, and national and international economic developments.

Summary of WP/92/106

“Testing the Neoclassical Theory of Economic Growth: A Panel Data Approach” by Malcolm Knight. Norman Loayza. and Delano Villanueva

The basic model of Solow (1956) and Swan (1956) has been the workhorse of growth theorists for the past three and a half decades. It predicts that the steady-state level of per capita income is determined by the prevailing technology, the rate of saving, and the rates of population growth and technical progress. Allowing for country differences in steady states, the model predicts “conditional” convergence across countries; that is, the lower a country’s initial level of per capita income relative to its steady-state value, the higher its subsequent growth rate.

In response to recent criticism of this model by the new growth theorists, Mankiw, Romer, and Weil (1992) show that the predictions of the Solo-Swan model for the effects of the differences in saving rates and population growth on output growth are consistent with evidence from a cross section of countries. They also find evidence of conditional convergence at about the rate predicted by the model, once cross-country differences in saving and population growth rates are taken into account.

This paper extends Mankiw, Romer, and Weil’s model in two directions. First, it employs a panel of time-series cross-sectional data to determine the significance of country-specific effects, which are ignored in standard empirical studies that employ cross-sectional data only. To exploit the additional information contained in panel data, the paper extends the econometric technique by applying an estimation procedure outlined in Chamberlain (1984). Second, labor-augmenting technical change is assumed to be influenced by the extent of openness to international trade and the level of public infrastructure.

The paper’s empirical findings imply, first, that the estimated effects of country-specific factors on economic growth result in a faster estimated rate of conditional convergence than that implied by the work of Mankiw, Romer, and Weil and Barro (1991). This difference occurs because the present study accounts for the correlation between country-specific effects and the independent variables in the growth process. Second, investment in physical capital has been less productive for developing countries with lower initial stocks of human capital and social infrastructure and higher rates of effective protection, all of which tended to reduce the overall efficiency of physical investment. Third, overall economic efficiency is influenced significantly and positively by the extent of a country’s openness to international trade and by the level of social infrastructure in the domestic economy. Fourth, when openness and public infrastructure are taken into account, investment in physical and human capital becomes more quantitatively important in the growth process. These results corroborate the widespread view that openness and growth are positively related and provide empirical support for the policy advice that argues that countries that pursue outward-oriented policies are likely to enjoy higher growth.

Working Paper Summaries (WP/92/49 - WP/92/112)
Author: International Monetary Fund