Cross-country Growth Research Articles

Three Decades of Economic Development in Central and Eastern Europe. A Bayesian Approach to Quantifying Relevant Growth Factors

ABSTRACT With 30 years passing in the transition of the Central and Eastern European countries toward market-based economies, this paper proposes a cross-country growth analysis to observe the most important factors contributing to these unique and historical developments. Specifically, we apply two cross-country growth models based on Bayesian Model Averaging methodology. The analysis outlines the importance of the labor force and the negative correlation between government spending and economic growth in the analyzed countries. These results have interesting implications for decision makers regarding potential policies aimed at promoting economic growth in the region.

Growth drivers in emerging capitalist economies: building blocks for a post-Keynesian analysis and an empirical exploration of the years before and after the Global Financial Crisis

This paper contributes to the growth models debate by expanding the concept of growth drivers to emerging capitalist economies (ECEs). Conceptually, the paper synthesizes growth drivers with a growth model operationalization based on GDP growth contributions and financial sector balances. Drawing on post-Keynesian and structuralist economics, as well as, empirical studies, seven growth drivers for ECEs are reviewed: income distribution, price and non-price competitiveness, commodity prices, private debt, foreign direct investment (FDI) and fiscal policy. Descriptive data for these drivers are presented for 19 regionally grouped ECEs between 2000 and 2019. On average, Asian ECEs exhibit higher growth rates, stable real exchange rates, high and increasing non-price competitiveness and high private debt levels. Latin American countries show comparatively lower growth rates, high but decreasing income inequality, unstable exchange rates and relatively expansionary fiscal policy after the Global Financial Crisis (GFC). Central and Eastern European countries generally display medium to high growth rates, lower income inequality, high non-price competitiveness, a substantial FDI stock and, after the GFC, real depreciations and contractionary fiscal policy. The assessment of cross-country growth drivers via bivariate coefficients reveals limited robust results, except for non-price competitiveness, which emerges as a significant driver. Additionally, we find indications that private debt and expansionary fiscal policy became more important for growth in ECEs after the GFC. This is in line with the emergence of domestic demand- and private debt-led growth models in ECEs following the GFC in the course of private deleveraging and austerity policies in developed capitalist economies.

Employment rate and economic growth: The case of transition countries

This paper investigates the effects of the employment rate on economic growth during the transition process. We start with the mainstream growth econometrics approach that controls for convergence and, in order to control for heterogeneity of countries in our sample, we control our estimates for transition-specific indicators such as initial conditions (pre-transition history), governance quality, privatisation methods as well as various indicators of institutional development. We use a wide range of model specifications using fixed effects as well as Bayesian averaging to address the problem of model uncertainty in 24 countries during the 1995-2019 period. Contrary to the neoclassical growth model assumptions, we find that the employment rate is one of the most important growth factors even after three decades. Results also indicate that convergence (initial level of development) robustly explains a part of cross-country growth rate differentials, while the effects of the initial conditions (pre-transition history) are robust, but fade out after the first decade. We do not find evidence that physical capital and population growth explain the growth in our sample.

Short T dynamic panel data models with individual, time and interactive effects

SummaryThis paper proposes a transformed quasi‐maximum likelihood (TQML) estimator for short dynamic fixed effects panel data models allowing for interactive effects through a multifactor error structure. The proposed estimator is robust to the heterogeneity of the initial values and common unobserved effects, while at the same time allowing for standard fixed and time effects. It is applicable to both stationary and unit root cases. The order condition for identification of the number of interactive effects is established, and conditions are derived under which the parameters are locally identified. It is shown that global identification in the presence of the lagged dependent variable cannot be guaranteed. The TQML estimator is proven to be consistent and asymptotically normally distributed. A sequential multiple testing likelihood ratio procedure is also proposed for estimation of the number of factors which is shown to be consistent. Finite sample results obtained from Monte Carlo simulations show that the proposed procedure for determining the number of factors performs very well, and the TQML estimator has small bias and root mean square error (RMSE) and correct empirical size in most settings. The practical use of the TQML approach is demonstrated by means of two empirical illustrations from the literature on cross county crime rates and cross country growth regressions.

Growth accounting, development accounting and cross-country growth regressions: A conceptual review essay

Background: This review article sets out to identify certain critiques of growth accounting, development accounting and cross-country growth regressions. These critiques provide insights relevant to the usefulness and policy relevance of these methods.Aim: The aim of this article was to critically review literature and to provide a synthesis of this literature, deriving certain arguments to contribute to further research.Method: This article takes the form of a critical review essay.Results: Growth accounting, development accounting and cross-country growth regressions all have some limitations and knowledge of their strengths and weaknesses may be helpful for those who are undertaking transdisciplinary social science research using these methods. These methods seem to suffer from similar criticisms levelled at neoclassical thinking, which need to be considered more seriously in the literature.Conclusion: Further research should explore how such methods might complement each other to improve validity of research findings.

The empirics of economic growth over time and across nations: a unified growth perspective

This research develops an expanded unified growth theory that incorporates the endogenous accumulation of physical capital, population, human capital, and technology. The model incorporates a complementarity between physical capital and human capital and can be extended to a multi-country setting with international technology diffusion. The analytical characterization of the mechanisms behind the observed patterns of long-run growth and comparative development delivers a consistent explanation for a large set of seemingly unrelated empirical facts. A quantitative multi-country version of the model matches various empirical regularities of long-run growth dynamics and comparative development patterns that have previously been studied in isolation. The findings also shed new light on the role of the demographic transition for convergence patterns, the specification of cross-country growth regressions, technology spillovers, and the secular stagnation debate.

(2021) Volume 2, Issue 4 Cultural Implications of China Pakistan Economic Corridor (CPEC Authors: Dr. Unsa Jamshed Amar Jahangir Anbrin Khawaja Abstract: This study is an attempt to highlight the cultural implication of CPEC on Pak-China relations, how it will align two nations culturally, and what steps were taken by the governments of two states to bring the people closer.

(2021) Volume 2, Issue 4 Cultural Implications of China Pakistan Economic Corridor (CPEC Authors: Dr. Unsa Jamshed Amar Jahangir Anbrin Khawaja Abstract: This study is an attempt to highlight the cultural implication of CPEC on Pak-China relations, how it will align two nations culturally, and what steps were taken by the governments of two states to bring the people closer.

Imported Intermediate Goods and Economic Growth

Purpose - This research aims to provide empirical evidence that highlights the importance of imported intermediate goods in long-term economic growth. To this end, this paper develops an index that measures the productivity gains associated with a country’s intermediate goods imports using highly disaggregated trade data. Design/methodology - The basic hypothesis is that countries sourcing higher-productivity (or higher-quality) inputs from developed economies derive a larger benefit from foreign R&D. To explore this hypothesis, standard cross-country growth regressions are performed using the highly disaggregated data from the United Nations (UN) Commodity Trade Statistics Database (COMTRADE). To address the endogeneity issue, I apply an instrumental variable (IV) approach. Findings - The results of this study demonstrate that the index predicts subsequent economic growth in middle- and low-income countries. This finding is consistent with previous studies that have argued that developing countries can achieve substantial productivity gains by importing intermediate inputs from developed countries. By contrast, there is no evidence of a significant association between the index and economic growth in high-income countries. Originality/value - This paper contributes to our understanding of the causal relationship between international trade and economic growth. From an economic policy perspective, the results suggest that developing countries with limited technology endowment can boost growth from input-tariff liberalization.

Multi-Asset Value Payoff: Is Recent Underperformance Cyclical?

Recent value factor underperformance has called into question whether the value factor payoff is cyclically low, or if there are more structural challenges. We use a new approach to explore a link between the well-known macroeconomic exposures of traditional asset classes and those of value premia in a multi-asset context, focusing on country equities, bonds, and currencies in developed markets. Taking advantage of the cross-country inflation and growth expectations implicit in every value portfolio, we derive the net inflation and real growth characteristics embedded in each asset class carry portfolio at each point in time. Our analysis provides several insights: (1) Multi-asset value payoff is only weakly related to the global business cycle. (2) However, we find that the payoff to value portfolios is strongly linked to relative growth and inflation expectations across countries. (3) Over the last decade, we find that cheaper assets have had much lower net relative macro exposures compared to earlier time periods. This characteristic coincides with the period of unconventional central bank policies designed to lift global growth after the Global Financial Crisis (GFC).

Revisiting the Solow growth model: new empirical evidence on the convergence debate

PurposeThis paper investigates income convergence using different convergence concepts and methodologies for 72 countries over the period between 1960 and 2010.Design/methodology/approachThis study applies beta (β), sigma (s), stochastic and club convergence approaches. For β-convergence analysis, it derives the cross-country growth regressions of the Solow growth model under the basic and augmented Cobb–Douglass (CD) production functions and estimates them using cross-section and panel data estimators. While it employs both the widely used coefficient of variation and recently developed weak s-convergence approaches for s-convergence, it applies three different unit root tests for stochastic convergence. To test club convergence, it estimates the log-t regression.FindingsThe results reveal that (1) there exists conditional β-convergence, meaning that poorer countries grow faster than richer countries; (2) income per worker is not (weakly) s-converging, and cross-sectional variation does not tend to fall over the years; (3) stochastic convergence is not found and (4) countries in the sample do not converge to the unique equilibrium, and there exist five distinctive convergence clubs.Research limitations/implicationsThe results clearly show that heavily relying on one of the convergence techniques might lead researchers to obtain misleading results regarding the existence of convergence. Therefore, to draw reliable inferences, the results should be checked using different convergence concepts and methodologies.Originality/valueContrary to the previous literature, which is generally restricted to testing the existence of absolute and conditional β-convergence between countries, to the best of the author’s knowledge, this is the first study to consider and compare all originally and recently developed fundamental concepts of convergence altogether. Besides, it uses the Penn World Table (PWT) 9.1 and extends the period to 2010. From this point of view, this study is believed to provide the most up-to-date empirical evidence.

Revisiting the natural resource curse: A cross-country growth study

This paper revisits the original natural resource curse study conducted by Sachs and Warner to investigate the relationship between natural resource dependence and per capita growth in recent data consisting of 68 developing countries that includes 14 Middle East & North Africa (MENA) and 6 Gulf Cooperative Council (GCC) countries between 1994–2014. Using a cross-country data and modeling we find robust evidence of a negative association between per capita growth and natural resource dependence. This negative affect is especially prominent in oil-rich MENA countries. The presence of a natural resource curse presents challenges to policymakers especially in countries who have been taking measures to diversify their income-base.

Taxation and growth: Why does it matter and how can it be analysed?

AbstractThe growth impact of tax reforms is probably one of the most controversial issues in economic policy discussions, reflecting deep beliefs in the way economic agents are expected to react to policy changes. The optimal tax theory literature provides a wide array of arguments to identify the mechanisms through which tax reforms might influence growth, depending on the tax category considered and the circumstances under which tax reforms are implemented. The empirical literature has relied on the use of cross-country growth regressions and provided general results leading to normative conclusions on the desirability of specific tax reform options. However, recent research has shown that this approach yields inconclusive results, notably due to identification and endogeneity issues, and the difficulty to account for the true determinants of governments' actions. The dynamic scoring approach combining microsimulation and macro models proves more useful in this respect, especially in order to draw policy recommendations while accounting for the second-round effects of tax reforms. I illustrate these arguments by analysing the growth impact of a hypothetical change from the current flat personal income tax (PIT) rates to progressive taxes in Central and Eastern European (CEE) countries. I find that the estimated impact of such a reform would be rather small but positive when using the dynamic scoring method, while the less-reliable traditional growth regressions would suggest adverse growth effects.

Introduction: special issue on the environment, resources and pollution – new challenges for economic development

AbstractThis special issue contains a selection of six articles in the field of environmental and resource economics, which were presented in INFER workshops and supported events over the last two years. The topics include the effects of income inequality and freedom of the press on environmental stringency; the trade-environment nexus in China; the behavior of cross-country growth rates with respect to resource abundance and dependence; a stochastic frontier analysis to show that technological change is biased more towards energy rather than labor; how recycling and environmental taxes can affect the imbalances between the availability of and the demand for rare earth elements; and the interaction between demographic features and environmental constraints in Caribbean small island developing states. The papers include three empirical contributions and three methodological approaches, which help to improve our understanding of these topics.

The Rise of Services and Balanced Growth in Theory and Data

We investigate the effect of structural transformation on the process of economic growth. Using a two-sector growth model we show that, in addition to Baumol’s cost disease, structural transformation from goods to services generates other predictions that are in line with cross-country growth facts: an increase in the real investment rate, a decline in the real interest rate and the marginal product of capital, and an acceleration of investment-specific technological change as the share of services increases. The model calibrated to US data can account for the elasticity of real investment rates to the share of services measured in cross-country data. (JEL E22, E23, E43, L16, O33, O41, O47)

Institutional Quality and Growth in West Africa: What Happened after the Great Recession?

This paper examines the impact of institutional quality on economic growth in West Africa after the Great Recession using a panel of 13 countries. In addition to the traditional institutional variables documented in the Worldwide Governance Indicators, such as government effectiveness, control of corruption, rule of law, regulatory quality, political stability, voice and accountability, and absence of violence/terrorism, the paper also derived an institutional-quality variable from the Freedom House database. To address the methodological shortcomings in the extant literature, the study used region-specific variables and adopted both the system generalized method of moments and the panel two-stage least squares estimation techniques under the framework of a cross-country growth model. The results predominantly showed a significant negative relationship between institutional quality and growth in West Africa. Specifically, corruption, government ineffectiveness, weak regulatory quality, political instability, lack of rule of law and absence of accountability were found to hinder growth in the sub-region. However, the empirical findings also showed an initial level of gross domestic product per capita, capital, labour and foreign direct investment as important drivers of growth in the sub-region. Therefore, the study concludes that the sub-region needs improved institutions that can attract higher levels of investment to promote sustained economic growth and development.

Threshold regressions for the resource curse

AbstractThis paper analyzes the behavior of cross-country growth rates with respect to resource abundance and dependence. We reject the linear model that is commonly used in growth regressions in favor of a multiple-regime alternative. Using a formal sample-splitting method, we find that countries exhibit different behaviors with respect to natural resources depending on their initial level of development. In high-income countries, natural resources play only a minor role in explaining the differences in national growth rates. On the contrary, in low-income countries, abundance seems to be a blessing but dependence restricts growth.

Revisiting intangible capital and labour productivity growth, 2000–2015

PurposeThis paper aims to revisit the relationship between intangible capital and labour productivity growth using the largest, up-to-date macro database (2000–2015) available to corroborate the econometric findings of earlier work and to generate novel econometric evidence by accounting for times of crisis (2008–2013) and economic recovery (2014–2015).Design/methodology/approachTo achieve these aims, this paper employs a cross-country growth accounting econometric estimation approach using the largest, up-to-date database available encompassing 16 EU countries over the period 2000–2015. The paper accounts for times of crisis (2008–2013) and of economic recovery (2014–2015). It separately estimates the contribution of three distinct dimensions of intangible capital: (1) computerized information, (2) innovative property and (3) economic competencies.FindingsFirst, when accounting for intangibles, the paper finds that these intangibles have become the dominant source of labour productivity growth in the EU, explaining up to 66 percent of growth. Second, when accounting for times of crisis (2008–2013), in contrast to tangible capital, the paper detects a solid positive relationship between intangibles and labour productivity growth. Third, when accounting for the economic recovery (2014–2015), the paper finds a highly significant and remarkably strong relationship between intangible capital and labour productivity growth.Originality/valueThis paper corroborates the importance of intangibles for labour productivity growth and thereby underlines the necessity to incorporate intangibles into today's national accounting frameworks in order to correctly depict the levels of capital investment being made in European economies. These levels are significantly higher than those currently reflected in the official statistics.

What Remains of Cross-Country Convergence?

We examine the record of cross-country growth over the past fifty years and ask if developing countries have made progress on closing the income gap between their per capita incomes and those in the advanced economies. We conclude that, as a group, they have not and then survey the literature on absolute convergence with particular emphasis on that from the last decade or so. That literature supports our conclusion of a lack of progress in closing the income gap between countries. We close with a brief examination of the recent literature on cross-individual distribution of income, which finds that despite the lack of progress on cross country convergence, global inequality has tended to fall since 2000. ( JEL E01, E13, O11, O47, F41, F62)

Short T Dynamic Panel Data Models with Individual and Interactive Time Effects

This paper proposes a transformed quasi maximum likelihood (TQML) estimator for short T dynamic fixed effects panel data models allowing for interactive effects through a multi-factor error structure. The proposed estimator is robust to the heterogeneity of the initial values and common unobserved effects, whilst at the same time allowing for standard fixed and time effects. It is applicable to both stationary and unit root cases. The order condition for identification of the number of interactive effects is established, and conditions are derived under which the parameters are almost surely locally identified. It is shown that global identification in the presence of the lagged dependent variable cannot be guaranteed. The TQML estimator is proven to be consistent and asymptotically normally distributed. A sequential multiple testing likelihood ratio procedure is also proposed for estimation of the number of factors which is shown to be consistent. Finite sample results obtained from Monte Carlo simulations show that the proposed procedure for determining the number of factors performs very well and the TQML estimator has small bias and RMSE, and correct empirical size in most settings. The practical use of the TQML approach is demonstrated by means of two empirical illustrations from the literature on cross county crime rates and cross country growth regressions.

Determinants of economic growth: Different time different answer?

Almost all studies that use Bayesian model averaging to identify robust growth determinants focus on the growth period between 1960 and the 1990s. We apply Bayesian Model Averaging to a rolling time window of 20 and 35 years using a newly compiled dataset with 37 growth determinants for the years 1960 to 2010. Our findings indicate instabilities in the inferences on growth determinants across growth periods. In line with prior research, we find support for robust ambiguity in early growth periods, that is, cross-country growth regressions provide little support for some growth determinants being more important than others. However, determinants related to demography, education, trade, investment and to some extent religion seem to matter in the subsequent growth periods with education and demography being most important in recent growth periods.