Are Any Growth Theories Robust?

Abstract

This article investigates the strength of empirical evidence for various growth theories when there is model uncertainty with respect to the correct growth model. Using model averaging methods, we find little evidence that so-called fundamental growth theories play an important role in explaining aggregate growth. In contrast, we find strong evidence for macroeconomic policy effects and a role for unexplained regional heterogeneity, as well as some evidence of parameter heterogeneity in the aggregate production function. We conclude that the ability of cross-country growth regressions to adjudicate the relative importance of alternative growth theories is limited. Despite the vast amount of empirical research generated by new growth theories, there is remarkably little consensus on which mechanisms are most salient in explaining cross-country differences. This article is designed to provide some evidence on this question by examining the robustness of empirical support for different growth the ories as determinants of both aggregate growth and its underlying components: total factor productivity (TFP) growth, and physical and human capital accumulation. One reason for the lack of empirical consensus on growth determinants is that the main statistical tool in empirical studies, cross-country growth regressions, provides very different answers depending on how the regression is specified, which for this context typically amounts to the choice of control variables. Individual papers typically employ regressions that include modest subsets of the body of regressors that have been pro posed in the literature as a whole. Others employ a 'kitchen sink' approach to evaluate the relative evidentiary support of competing growth theories. In such an exercise, a large number of variables are included in a regression and those variables that prove to be significant are then declared to be the important determinants of growth while the others are dismissed as unimportant (Rodrik et al, 2002; Sachs, 2003).