Thursday 29 May 2008

Developing country growth models should look outwards

Just finished reading another paper on growth theory. The conclusion of the paper was that growth is unpredictable in developing countries and the classical descriptors of growth - capital accumulation, labour accumulation, education accumulation - are very poor at predicting rapid economic expansion.

The conclusion is familiar from other papers. The interpretation on results is often that growth is due to idiosyncratic or unknowable causes. This deduction is related to the idea that the missing features of growth lie primarily within economies, since if the causes were international then idiosyncracy would be improbable. The "within economy" hypothesis uses the same theoretical approach, if not the identical variables, to the classical model which the papers themselves find to be empirically inadequate.

The within economy hypothesis is in itself inadequate to explain one of the salient facts of economic growth's history, that developed countries grew far slower than today's fastest growing developing countries when they were in comparable "within country" states. The observation in one of my earlier posts about the instability of the lagged term coefficients across countries is empirical demonstration of the fact.

Both of these observations could be explained if the presence of today's developed countries is responsible for much of the faster growth rates for developing countries. The explanation is the obvious one, is compatible with core economic theory, and has early empirical support in the significance of variables such as openness and technology transfer in models which bother to include them.

Growth models should no longer look inwards, but outwards.

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