Researchers have sought to determine the relative historical importance of two broad categories of proximate sources of economic growth: factor accumulation and increases in total factor
productivity. Factor accumulation refers to growth in physical and human capital per worker. As you will learn in Chapter 4, physical capital accumulation was considered the key to eco- nomic growth in the 1940s and 1950s, and human capital accumulation began attracting attention in the 1960s.
Total factor productivity (TFP) growthis a catch-all category that includes all the other sources of productivity growth suggested above. It is defined as the portion of the rate of growth in aggregate labor productivity that cannot be explained as the result of increases in physical or human capital. When researchersfirst began studying TFP growth in the 1960s, they interpreted it primarily as the result of technical change, but researchers increasingly recognize that it also encompasses reductions in inefficiency and waste.
Over the last five decades, many researchers have employed the methods of growth accounting and development accounting in assessing the relative importance of factor accumulation and TFP growth. Growth accounting studies, which werefirst developed in the 1960s, seek to identify the shares of historical growth (in one or more countries) that can be attributed to factor accumulation versus TFP growth. They are based on highly simplified assumptions regarding the process through which a country’s GDP is produced, which allow researchers to estimate how much of observed growth in GDP per capita may be explained by observed rates of growth in physical and human capital per worker and then to use the portion of growth that remains unex- plained as an estimate of TFP growth. Box 3.1 offers an overview of growth accounting methods. Early applications of growth accounting methods focused on the developed countries, where studies tended tofind an even split between the portions of growth attributable to factor accumulation and the portions attributable to TFP growth. Subsequent studies have examined growth in a wider variety of countries. In a few countries in Latin America and East Asia, factor accumulation appears to play a significantly larger role (relative to TFP growth) than in developed countries, but many studies continue tofind a nearly even split between factor accumulation and TFP growth for explaining historical growth (see Easterly and Levine, 2001).
Development accounting exercises are similar to growth accounting exercises. Rather than examining differences in GDP per capita over time within individual countries, they examine differences in average incomes across countries at the same time. Such differences in income levels shed light on the proximate sources of growth, because they are the result of differing growth rates over long periods of time. Such studies choose a base country (usually the United States) and measure for each country the percentage differences in average income, physical capital per worker, and human capital per worker relative to the U.S. levels. The studies then ask: How much of the overall variation in GDP per capita across countries at one point in time is attributable to differences in physical or human capital per worker and to differences in TFP? These studies tend tofind that differences in physical and human capital per worker explain about half of the cross-country productivity differences, and differences in TFP explain the other half (Caselli, 2005). That is:
The results of many growth accounting and development accounting exercises support the broad conclusion that both factor accumulation and total factor productivity growth have contributed significantly to historical economic growth.
Growth and development accounting exercises have been useful for drawing attention to TFP growth as well as factor accumulation as important proximate sources of economic growth, but they are subject to several profound limitations and should thus be interpreted with caution. First, they offer no insight into the relative importance of the highly diverse ways TFP might grow (as described earlier).
Second, they are based on simplified assumptions regarding the nature of production rela- tions in the economy. If the underlying assumptions are incorrect, the methods can yield misleading results. Caselli (2005) finds that some of the standard results disappear when less-restrictive
assumptions about the functional form of the aggregate production function are employed. Third, these methods require estimates of critical quantities that are difficult to estimate, especially the growth rate of human capital per worker and the parameter describing the country’s production technology.
Fourth, even if the assumptions on which these methods are based were valid, and the measures employed were accurate, the results would at best describe past growth or present income differences. They need not be good predictors of what will be the most important sources of growth in the future.
Finally, even if they accurately revealed the most promising proximate sources of future growth, growth accounting and development accounting exercises provide no insight into what sorts of policies might be required to achieve those promises. It might be the case, for example, that policies promoting technical change would be required to motivate investors to accumulate