How useful is Growth Literature for Policies in the Developing Countries?

Rao, B. Bhaskara and Cooray, Arusha (2009): How useful is Growth Literature for Policies in the Developing Countries?

Abstract

This paper examines the growing gap between the theoretical and empirical growth literature and the policy needs of the developing economies. Growth literature has focussed mainly on the long term growth outcomes, but policy makers of the developing economies need rapid improvements in the short to medium term growth rates; see Pritchett (2006). This paper argues that this gap can be reduced by distinguishing between the short to medium term dynamic effects of policies from their long run equilibrium effects. With data on Singapore, Malaysia and Thailand we show that an extended version of the Solow (1956) model is well suited for this purpose. This is despite the common belief that the Solow model has no use for policy and is not applicable to the developing countries. We find that the short to medium term growth effects of the investment ratio are quite significant and they may persist for up to 10 years.

• Item Type: MPRA Paper
• Language: English
• Keywords: Solow Growth Model, Endogenous Growth, Dynamic Growth Effects of Investment Ratio, Policies for Developing Countries
• Subjects: O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O11 - Macroeconomic Analyses of Economic Development

References

Acemoglu, D, Johnson S, Robinson J and Thaicharoen Y (2003). Institutional Causes, Macroeconomic Symptoms: Volatility, Crises and Growth, Journal of Monetary Economics 50: 49–123.

Albelo C and Manresa A (2005). Internal Learning by Doing and Economic Growth. Journal of Economic Development 30: 1-23

Barro R (1990). Government Spending in a Simple Model of Endogenous Growth. Journal of Political Economy 98: S103-S125

Bosworth B P and Collins S M (2003). The Empirics of Growth: An Update. Brookings Papers on Economic Activity 2: 113-206

Cooley T, Greenwood J and Yorukoglu M (1997). The Replacement Problem. Journal of Monetary Economics 40: 457-499

De Long B and Summers L (1991). Equipment Investment and Economic Growth. Quarterly Journal of Economics 106: 445-502

Durlauf S, Kourtellos A and Tan C (2008). Are Any Growth Theories Robust? Economic Journal 118: 329-346

Durlauf S, Johnson P and Temple J (2005). Growth Econometrics: Handbook of Economic Growth in Aghion P and Durlauf S (eds.) Volume 1 Chpter 8. pp555-677

Easterly W, Levine R and Roodman D (2004). New Data, New Doubts: Revisiting Aid Policies and Growth: Centre for Global Development Working Paper No: 26.

Ericsson N and MacKinnon J (2002) Distributions of Error Correction Tests for Cointegration. Econometrics Journal 5: 285-318. Frankel, J A (2003). Comments on the Empirics of Growth: An Update. Brookings Papers on Economic Activity 2: 113-206.

Greenwood J and Krusell P (1997). Growth Accounting with Investment Specific Technological Progress: A Discussion of Two Approaches, Journal of Monetary Economics 54: 1300-1310

Greiner A, Semmler W and Gong G (2005). The Forces of Economic Growth – A Time Series Perspective: Princeton University Press, Princeton.

Greiner A and Semmler W (2002). Externalities of Investment, Education and Economic Growth. Economic Modelling 19: 709-724.

Hendry D (2000). Econometrics Techniques: General Discussion in Backhouse R and Salanti A (eds.) Macroeconomics and the Real World. Oxford University Press. Oxford, pp239-242

Hendry D and Krolzig H (2005) The Properties of Automatic GETS Modelling. Economic Journal 115: C32-C61.

Hicks J (1965). Capital and Growth. Oxford University Press, Oxford.

Jones C (1995). R&D Based Models for Economic Growth. Journal of Political Economy 103: 759-784.

Levine R and Renelt D (1992). A Sensitivity Analysis of Cross Country Growth Regressions. American Economic Review LXXXII: 942-963.

Levine R and Zervos S (1998) Stock Markets, Banks and Economic Growth. American Economic Review, 88, 537-558.

Lucas R (1988). On the Mechanics of Economic Development. Journal of Monetary Economics 22: 3-42

Luintel K, Khan M, Arestis P and Theodoridis K (2008). Financial Structure and Economic Growth. Journal of Development Economics 86: 181-200

Mankiw N G, Romer D and Weil D (1992). A Contribution to the Empirics of Economic Growth. Quarterly Journal of Economics 2: 407-437.

Parente (2001). The Failure of Endogenous Growth. Knowledge, Technology and Policy 13: 49-58

Pritchett L (2006). The Quest Continues. Finance and Development 43.1

Ramsey F P (1928). A Mathematical Theory of Saving, Economic Journal, 38: 543-59

Rao, B. B. (2006). Investment Ratio and Growth, ICFAI Journal of Applied Economics 3: 68-72.

Rao, B. B., Singh, R. and Kumar, S. (2008) Do We Need Time Series Econometrics? forthcoming, Applied Economics Letters

Romer M (1986). Increasing Returns and Long Run Growth. Journal of Political Economy 94: 1002-1037.

Romer P (1990). Endogenous Technological Change. Journal of Political Economy 98: S71-S102.

Sala-i-Martin X (1997). I Just Ran Two Million Regressions. American Economic Review 87: 178-183

Sato R (1963). Fiscal Policy in a Neo-Classical Growth Model: An Analysis of Time Required for Equilibrium Adjustment. Review of Economic Studies 30: 16-23

Senhadji A (2000). Sources of Economic Growth: An Extensive Growth Accounting Exercise. IMF Staff Papers 47: 129-157.

Solow R (1956). A Contribution to the Theory of Economic Growth. Quarterly Journal of Economics 70: 65-94.

Solow R (2000). Toward a Macroeconomics of the Medium Run. Journal of Economic Perspectives 14: 151-158.

Uzawa H (1968). Market Allocation and Optimum Growth. Australian Economic Papers 17: 17-27.