Nonlinearities and Robustness in Growth Regressions

Abstract

Much economic growth research has been devoted to determining the explanatory variables that explain cross-country variation in growth rates. A frequently cited problem with this literature is that the number of potential growth regressors is vast, potentially exceeding the number of countries available for study. Thus, researchers are faced with the task of arbitrarily specifying which explanatory variables to include in their growth regressions, raising concerns about how confident we can be in their results. These concerns were magnified by the influential paper of Ross Levine and David Renelt (1992), in which they employ a variation of Edward E. Leamer’s (1983) extreme bounds analysis to test the robustness of conventional growth regression coefficients to changes in the set of conditioning variables. They conclude that the results of this literature are extremely fragile, with the only robust determinants of growth being physical capital investment, initial income, and secondary school enrollment. In contrast, they demonstrate the fragility of a host of fiscal, monetary, and trade policy variables, as well as measures of political and economic stability and economic distortions. There have been two main responses to their findings. The pessimistic response has been to conclude, given the lack of a reliable statistical relationship between conventional macroeconomic indicators and growth, that cross-country growth regressions cannot tell us anything about growth. The more optimistic response has been to argue that the extreme bounds analysis Growth, Education, and invEstmEnt in childrEn †