Deep determinants of economic growth: institutions, geography and openness to trade

Abstract

In our first progress report, Bloch and Tang (2001), we examined the importance of the ‘Solow residual’, or total factor productivity growth (TFPG), in the process of economic growth, particularly in the context of the East Asian economic growth ‘miracle’. We demonstrated that while TFPG has been less important in explaining growth in East Asia than in the advanced industrial economies, it still has played an important role in the susceptibility of some of these economies to shocks, particularly the crisis of 1997 (see Tang, 2002, for application to a broader set of countries). In our second report, Bloch and Tang (2003), we focused on the role of financial development and its link to capital accumulation and economic growth. We concluded that while financial development is clearly an essential part of the growth process, it has not been demonstrated, particularly in the context of East Asian growth, that such development is a precondition for economic growth. We are left with a view that both TFPG and financial development are important to economic growth, but that neither is necessary. More importantly, we are left without an explanation of the underlying forces behind economic growth and development. Knowledge of the process of economic growth and development has evolved substantially over the past five decades. In particular, there is now a general view that the neoclassical model of growth that emerged in the 1950s, particularly Solow’s (1956 and 1957) path-breaking contributions, offers neither an explanation of the experience of the Third World countries nor practical guidance for sustained economic development. The main problem is that the neoclassical model focuses on the ‘proximate determinants’ of growth that appear in the neoclassical growth equation, particularly capital accumulation and TFPG. We learn little from the model about what drives TFPG and how to improve it. Moreover, the same problems