Cross-country Growth Research Articles

Experiments in Financial Democracy: Corporate Governance and Financial Development in Brazil, 1882 – 1950

Experiments in Financial Democracy: Corporate Governance and Financial Development in Brazil, 1882 – 1950

A note on modelling economic growth determinants in the Dominican Republic

The article models economic growth determinants in the Dominican Republic. The exercise considers a panel of 25 candidate explanatory variables observed during the last three decades of the twentieth century. The time series are selected on the basis of economic theory and previous findings in the cross-country empirical growth literature. The modelling reveals that the annual growth rate of real gross domestic product per capita is, on average, inversely associated to a proxy for market distortions, and positively related to government expenditure, economic growth in the United States of America, and an index of globalization comprising international trade and migration variables.

ECONOMETRICS FOR GRUMBLERS: A NEW LOOK AT THE LITERATURE ON CROSS-COUNTRY GROWTH EMPIRICS

Abstract Since the seminal contribution of N. Gregory Mankiw, David Romer and David N. Weil in 1992 the growth empirics literature has used increasingly sophisticated methods to select relevant growth determinants in estimating cross-section growth regressions. The vast majority of empirical approaches, however, limit cross-country heterogeneity in production technology to the specification of total factor productivity, the ‘measure of our ignorance’. In this survey, we present two general empirical frameworks for cross-country growth and productivity analysis and demonstrate that they encompass the various approaches in the growth empirics literature of the past two decades. We then develop our central argument, that cross-country heterogeneity in the impact of observables and unobservables on output as well as the time-series properties of the data are important for reliable empirical analysis.

Cross-Country Growth Empirics and Model Uncertainty: An Overview

The aim of this paper is to provide an overview of empirical cross-country growth literature. The paper begins with describing the basic framework used in recent empirical cross-country growth research. Even though this literature was mainly inspired by endogenous growth theories, the neoclassical growth model is still the workhorse for cross-country growth empirics. The second part of the paper emphasises model uncertainty, which is indeed immense but generally neglected in the empirical cross-country growth literature. The most outstanding feature of the literature is that a large number of factors have been suggested as fundamental growth determinants. Together with the small sample property, this leads to an important problem: model uncertainty. The questions which factors are more fundamental in explaining growth dynamics and hence growth differences are still the subject of academic research. Recent attempts based on general-to-specific modeling or model averaging are promising but have their own limits. Finally, the paper highlights the implications of model uncertainty for policy evaluation.

Global Shocks and Their Impact on Low-Income Countries: Lessons from the global Financial Crisis

This paper investigates the short-run effects of the 2007-09 global financial crisis on growth in (mainly non-fuel exporting) low-income countries (LICs). Four conclusions stand out. First, for many individual LICs, 2009 was not extraordinarily calamitous; however, aggregate LIC output declined sharply because LICs were unusually synchronized. Second, the growth declines are on average well explained by the decline in export demand. Third, if the external environment facing LICs improves as forecast, their growth should rebound sharply. Finally, and contrary to received wisdom, there are few robust relationships between the cross-country growth variation and the policy and structural environment; the main exceptions are reserve coverage and labor-market flexibility.

Variable Selection and Functional Form Uncertainty in Cross-Country Growth Regressions

Regression analyses of cross-country economic growth data are complicated by two main forms of model uncertainty: the uncertainty in selecting explanatory variables and the uncertainty in specifying the functional form of the regression function. Most discussions in the literature address these problems independently, yet a joint treatment is essential. We perform this joint treatment by extending the linear model to allow for multiple-regime parameter heterogeneity of the type suggested by new growth theory, while addressing the variable selection problem by means of Bayesian model averaging. Controlling for variable selection uncertainty, we confirm the evidence in favor of new growth theory presented in several earlier studies. However, controlling for functional form uncertainty, we find that the effects of many of the explanatory variables identified in the literature are not robust across countries and variable selections.

CORRUPTION AND GROWTH UNDER WEAK IDENTIFICATION

I. INTRODUCTION The purpose of this paper is to revisit Mauro (1995) and re-examine his results as a consequence of recent research that cautions against making traditional types of inference in the presence of weak instruments. Early work done by Nelson and Startz (1990a, 1990b) demonstrates that the distribution of the two-stage least squares (2SLS) estimator and the t-statistic is poorly approximated by the asymptotic representation when instruments are weak. More formally, Staiger and Stock (1997) model the coefficients on the instruments in the first-stage equation in the [n.sup.-1/2] neighborhood of zero in which they show that the 2SLS estimator loses consistency resulting in a nonstandard distribution for the t-statistic. In fact, they show that under the local-to-zero framework, the distribution of the t-statistic depends on the level of endogeneity, strength, and the number of instruments. Thus, the true size of the t-statistic can differ substantially from its perceived size when instruments are weak. Therefore, 95% confidence intervals based on asymptotic approximations, such as [??] [+ or -] 1.96se([??]) are no longer reliable. As a rough rule of thumb, Staiger and Stock (1997) suggest a first-stage F-stat of 10 on the excluded instruments as an indication of acceptable instruments. In terms of point estimation, Bound, Jaeger, and Baker (1995) show that the 2SLS estimator is biased in the same direction as the ordinary least squares (OLS) when using irrelevant instruments. Hahn and Hausman (2002) illustrate a detailed expression for the 2SLS bias showing that it is monotonically decreasing in the instrument strength while monotonically increasing in the degree of endogeneity. Cruz and Moreira (2005) verify these results through Monte Carlo simulations also showing that the classic bias corrected 2SLS estimator of Nagar (1959) provides a poor correction when instruments are very weak. Given that the theory and techniques mentioned above were discovered and developed after Mauro wrote his QJE paper, we attempt to reproduce his results and analyze them in light of these recent findings. From the early work of Left (1964) and Huntington (1968), corruption in government has been of great interest to economists. These studies argue that corruption could be positively correlated with economic performance in the presence of a thick and cumbersome bureaucracy. Corruption in this view greases the wheels of bureaucracy, thus increasing the efficiency in which transactions occur, leading to a positive effect on the economic performance of a country. On the other hand, Rose-Ackerman (1978), Murphy, Shleifer, and Vishny (1991, 1993), and Shleifer and Vishny (1993) provide theoretical arguments that corruption deteriorates economic growth through the misallocation of talent and other resources. Mauro (1995), being the first to introduce instrumental variables (IVs) in the cross-country growth literature, contributes to this debate by examining empirically the relationship between two measures of corruption and investment and economic growth. His results suggest that corruption has a negative impact on investment and economic growth. The significance of his results varies with model specifications but the results appear to be robust when correcting for the endogeneity of corruption. Using the ethnolinguistic fractionalization (ELF) index as an IV, he employs 2SLS estimation to correct for endogeneity created by the two measures of corruption. Mauro (1995)'s work has been of great value in the corruption literature and has had profound influence on the direction of policy making. The paper is one of the most cited papers not just in the literature on corruption but in economics in general. (1) Given the impact that the paper has undoubtedly had on the direction of research, we find it necessary and relevant to revisit the paper in light of the recent developments in the field of econometrics. …

Global Shocks and their Impacton Low-Income Countries: Lessons From theglobal Financial Crisis

This paper investigates the short-run effects of the 2007-09 global financial crisis on growth in (mainly non-fuel exporting) low-income countries (LICs). Four conclusions stand out. First, for many individual LICs, 2009 was not extraordinarily calamitous; however, aggregate LIC output declined sharply because LICs were unusually synchronized. Second, the growth declines are on average well explained by the decline in export demand. Third, if the external environment facing LICs improves as forecast, their growth should rebound sharply. Finally, and contrary to received wisdom, there are few robust relationships between the cross-country growth variation and the policy and structural environment; the main exceptions are reserve coverage and labor-market flexibility.

The Costs of Illiteracy in South Africa

In South Africa there has been a surge in publicly funded adult literacy education in recent years. There is a recognition that for the effective monitoring of adult literacy, direct measures of literacy are required. Grade attainment, self-reported ability to read and behavioural variables relating to, for instance, reading habits produce vastly different measures of adult literacy in South Africa. It is noteworthy that self-reported values change over time as people’s perceptions of what constitutes literacy shifts. A 75% literacy rate is arguably a plausible figure, though the absence of a direct measure is problematic. An education production function suggests that literacy-related parent behaviour, independently of parent years of education, influences performance of learners in school. In a multivariate employment model, self-reported literacy is a statistically significant predictor of being employed. In a cross-country growth model, poor quality schooling emerges as the variable requiring the most urgent policy attention to sustain and improve South Africa’s economic development. Both microeconomic and macroeconomic estimates suggest that with a more typical level of school performance South Africa’s GDP would be 23% to 30% higher than it currently is.

Did globalization drive convergence? Identifying cross-country growth regimes in the long run

This paper is the first to apply a finite mixture model to a sample of 64 nations to endogenously analyze the cross-country growth behavior over the period 1870–2003. Results show that growth patterns were segmented in two worldwide regimes, the one characterized by convergence in per capita income, and the other by divergence. Interestingly, when three historical epochs are distinctly analyzed, in order to investigate the empirical link between globalization and convergence, the dynamics which dominated over the whole period seem to have emerged only during the post-1950 years. In contrast, the First Global Wave was marked by persistent heterogeneities.

Sub-Saharan Growth Surprises: Being Heterogeneous, Inland and Close to the Equator Does not Slow Growth Within Africa

We use two types of cross-country growth regression models to revisit explanations of slow growth in Africa looking at growth rate variation among African countries only. Both sets of models produce results that are surprising given conclusions based on global sample: within Africa, we find a greater coastal population negatively and greater ethnic heterogeneity positively associated with growth, while distance from the equator is at first negatively and only later positively associated with growth. Our results suggest also that institutional and policy variables are endogenous to geographical and historical factors including the colonising power and the religious and ethnic make-up of the country.

Tourism Policies and Cross-Country Growth: A Disaggregated Analysis

Using recent cross-country data for over a hundred nations, this paper examines the effects of various disaggregated tourism policy measures on economic growth. Based on standard growth theory, the model uniquely incorporates tourism variables disaggregated across various dimensions of tourism policy, tourism infrastructure and human resources. Both standard growth models and endogenous growth models are estimated. The authors find that, among a wide set of tourism policies, strengthened tourism safety regulations and government prioritization of the tourism industry boost economic growth, while some tourism initiatives and infrastructure investments seem to have perverse growth effects. All else being equal, economic growth is higher in transition nations.

Is Newer Better? Penn World Table Revisions and Their Impact on Growth Estimates

This paper sheds light on two problems in the Penn World Table (PWT) GDP estimates. First, we show that these estimates vary substantially across different versions of the PWT despite being derived from very similar underlying data and using almost identical methodologies; that this variability is systematic; and that it is intrinsic to the methodology deployed by the PWT to estimate growth rates. Moreover, this variability matters for the cross-country growth literature. While growth studies that use low-frequency data remain robust to data revisions, studies that use annual data are less robust. Second, the PWT methodology leads to GDP estimates that are not valued at purchasing power parity (PPP) prices. This is surprising because the raison d’etre of the PWT is to adjust national estimates of GDP by valuing output at common international (PPP) prices so that the resulting PPP-adjusted estimates of GDP are comparable across countries. We propose an approach to address these two problems of variability and valuation.

Resource abundance vs. resource dependence in cross-country growth regressions

Having analysed the macroeconomic performance of large oil exporters, I found that, in many cases, rents from natural resources have been successfully used to enhance economic growth. Nevertheless, adherents of the ‘resource curse’ seem to have found ample evidence suggesting that resource-abundant countries grow slower than resource-poor countries. A review of empirical research on the ‘resource curse’ reveals that the variables used were usually proxies for resource dependence. These variables introduce a bias, making less developed economies per se more resource ‘abundant’ than developed economies. As a consequence, a new variable, not containing any information on a country's stage of development, was introduced. Comparing the variables on resource dependence and resource abundance in a model by Sachs and Warner, resource abundance was not significant. In a new model, resource abundance was even positively correlated with growth.

How different is Africa? A comment on Masanjala and Papageorgiou

Masanjala and Papageorgiou (Rough and lonely road to prosperity: a reexamination of the sources of growth in Africa using Bayesian model averaging, Journal of Applied Econometrics 2008; 23(5):671-682) use Bayesian model averaging to evaluate the existence of parameter heterogeneity between African and non-African countries in the framework of cross-country growth regressions. We show that their results are not robust to the use of a prior over the model space that respects the strong heredity principle put forward by Chipman for models including interaction terms.

FDI Flows to Low-Income Countries: Global Drivers and Growth Implications

What accounts for variations in FDI flows from advanced to developing countries? How have FDI inflows explained cross-country growth experiences? In this paper we tackle both these questions empirically for a large sample of middle and low-income countries. Two key results emerge: (i) lower borrowing costs and positive real-side external factors were increasingly important drivers of FDI outflows to low-income countries in the pre-crisis period; (ii) economic fundamentals, the strength of economic reforms, and commitment to macroeconomic discipline are crucial determinants of the growth dividends of FDI. Our paper suggests that low-income countries can turn to domestic policy solutions to mitigate the adverse effects of a potential decline in FDI in the post-crisis world.

Why Run a Million Regressions? Endogenous Policy and Cross-Country Growth Empirics

This paper analyzes the link between long-run economic growth and policy that depends on important economic fundamentals. In simple growth regressions the measured policy effects would then generally be biased. Using a widely quoted theoretical model, the signs of the biases are derived. It is shown that the usually reported effects on growth of tax-rate variables related to GDP - the ratio of public to total investment and that of redistributive transfers to GDP - would generally be biased downwards. The signed biases provide a theory-based lens through which some empirical, yet theoretically puzzling, results can be viewed and subsequently discussed.

Do Natural Resources Depress Income Per Capita?

Most evidence for the resource curse comes from cross-country growth regressions suffers from a bias originating from the high and ever-evolving volatility in commodity prices. This paper addresses these issues by providing new cross-country empirical evidence for the effect of resources in income per capita. Natural resource dependence (resource exports) has a significant negative effect on income per capita, especially in countries with bad rule of law or bad policies, but these results weaken substantially once we allow for endogeneity. However, the more exogenous measure of resource abundance (stock of natural capital) has a significant negative effect on income per capita even after controlling for geography, rule of law and de facto or de jure trade openness. Furthermore, this effect is more severe for countries that have little de jure trade openness. These results are robust to using alternative measures of institutional quality (expropriation and corruption instead of rule of law).

FOREIGN DIRECT INVESTMENT AND URBAN CONCENTRATIONS: UNBUNDLING SPATIAL LAGS

Cross-country regressions suggest that urbanization and FDI are important drivers of growth. However, it is not clear that primacy eventually hurts growth performance. Since it is notoriously difficult to interpret cross-country growth regressions, we provide detailed evidence on the determinants of outward FDI from the US. FDI is higher in countries that are close to the US and have good institutions, well developed financial systems, a high road density, a high income per capita and substantial natural resource exports. Countries also attract more FDI if they have more medium-sized cities and primacy is not too large. We unbundle spatial lags and show that good institutions in neighbouring countries are important drivers of FDI, but primacy, the number of cities, openness and high income per capita in surrounding countries depress FDI. We tentatively conclude that cities are important drivers of FDI and growth. Robustness of our results is verified by re-estimating our regressions with fixed effects and for the sample of OECD countries.

Achieving Rapid Growth in the Transition Economies of Central Europe

This paper describes ways that the CEEs can speed their convergence with the EU by emulating the growth strategies of the very fast growing economies. In Section II, we introduce the VFGEs, and discuss some of the sources of their superior growth performance. In Section III, we demonstrate the role of key policy variables in the context of cross-country growth equations. In Section IV, we examine how the CEEs can emulate key aspects of the economic policies of the VFGEs, in order to raise their growth in the coming years.