1

THE SOLOW GROWTH MODEL

skα

kα

k

δkStationary state

Production per worker

Gross investment per worker

Depreciation

2

CONVERGENCE: GRAPHICAL APPROACH

-1-.5

0.5

1

4 6 8 10 12lggdppc1980

GDP per cap real growth 1980-1990 Fitted values

Testing for convergence graphically:Put initial level on horizontal axis (here, income per capita)Put average growth rate over subsequent period on vertical axis

Convergence implies negative slope, divergence positive slope

3

TESTING FOR CONVERGENCE IN A GROWTH EQUATION

-10

12

3

4 6 8 10 12lggdppc2000

GDP per cap real growth 2000-2010 Fitted values

0 1 ,sample start 2 3-

i i i i ig Y I H u

0 1 ,sample starti i ig Y u -

Absolute convergence: typically, no… but

Conditional convergence: typically yes

4

Growth-accounting equation

TOTAL FACTOR PRODUCTIVITY GROWTH & THE EAST ASIAN MIRACLE

1

ln

ln

ln

ln

ˆˆ ˆ

it it it it

it it

it it

it it

it it

it it it it it

it it it it it

it it it it

Y t K L H

y Y

k K

L

h Hy k h u

e y k he e e TFPG

TFPG moy., 1970-90 (%

par an)Taiwan 3.76Hong-Kong 3.64Corée 3.10Japon 3.48Thailande 2.49Singapour 1.19Malaisie 1.07

Am. lat. 0.13Afr. sub-sah. -0.99

5

Crude measure: (X + M)/GDP, biased by country size etcResidual measure (Leamer)

MEASURING OPENNESS

The Sachs-Warner (1995) measure of country openness

A country is «closed» if any of the following 5 criteria is met:

1. Average tariff above 40%2. Coverage ratio of non-tariff barriers (quotas, prohibitions etc.) above 40%3. Black-market premium on foreign exchange above 20% for a decade in a row4. Export monopoly (typically on a commodity export like cocoa, coffee)5. Socialist economy

0 1 2 3

predicted openness

residual

...

ˆ

i ii i i i

i

i ii i

i

X M POP LL REMOTENESS uGDP

X Mo eGDP

iX β

iX β

6

Significantly higher growth performance for open economies

SACHS-WARNER CLASSIC RESULT

7

But… Rodriguez/Rodrik critique suggests it’s not trade policy that did the trick

RODRIGUEZ-RODRIK CRITIQUE

8

HOW CROSS-SECTIONAL DATA CAN OBFUSCATE CAUSAL LINKS

Year Opening Growth Opening Growth1 0 0.3 1 1.52 1 5.1 1 2.1Average 0.5 2.7 1 1.8

Country 1 Country 2

0

0.5

1

1.5

2

2.5

3

0 0.5 1Opening

Grow

th

Data

Representation

0

1

2

3

4

5

6

0 0.5 1Opening

Grow

th

Time averages “Panel”

9

Wacziarg-Welsh use factual information about trade-policy changes

WACZIARG-WELSH 2008: USING PANEL DATA

10

PANEL RESULTS ARE ROBUST

11

WACZIARG WELSH: GROWTH BEFORE & AFTER LIBERLIZATION

12

EXPLAINING THE GROWTH ACCELERATION: INVESTMENT