Growth theory's predictive limitations

In several major papers on economic growth, the estimates of convergence to steady states vary between two percent and eight percent each year. That means that every year, the difference between current and potential income reduces by between two percent and eight percent, where economic potential is determined by capital per person and education per person. At two percent narrowing every year, within forty years the difference should have halved, while at eight percent, the difference will halve within a decade.

The potential for many developing countries is also estimated to be higher than developed countries since their savings rate can be much higher (which provides an estimate of capital, at least once the country reaches its steady state). So why are these developing countries not already far richer than the West? They have generally had at least a decade of capitalist growth, but are still generally quite poor.

Part of the problem is with omitted variables, which account for much of the growth. Misspecification in assuming a country constant and constant autoregressive parameter in the growth equation when the true autoregressive parameter is variable across countries leads to overestimates of growth at low levels of income and underestimates at high levels, as demonstrated in one of my earlier posts. And standard estimation methods based on GMM tend to overstate growth generally in misspecified AR(1) models.