This study has examined an influential view that there is a large gap between the needs of policy makers of the developing countries and the existing theoretical and empirical growth literature. While growth theory and empirical work have focused on the long term growth effects, policy makers of the developing countries wish to know the short and medium term consequences of policy on the growth rate. It is suggested, therefore, there is a need to distinguish between the short and long rum effects of policies. We have shown that how the Solow (1956) model can be extended and used to examine the dynamic growth effects of policies both in the short and long runs. We estimated the extended Solow model with data from Singapore, Malaysia and
Thailand to examine the growth effects of certain policy measures viz., the investment ratio, trade openness, the ratio of government expenditure to GDP and human capital formation. We concentrated on the effects of the investment ratio and found that it has significant short run growth effects which persist for about 10 years. These short run effects, though transient, are much larger than the long run effects. Because this distinction is not possible in cross country empirical work these seem to have overestimated the long run growth effects of variables like the investment ratio. A finding that is of interest concerning the growth rates in the East Asian countries is that their high growth rates seem to be due to the relatively large transitory growth effects of variables like the investment ratio and that their long run growth rates or the
SSGRs seem to be modest. Our finding that the long run growth effects of investment ratio are small is consistent with the general view (based on cross country studies) that there may be a few more fundamental variables that may have larger effects on the long run growth. For example Acemoglu, Johnson, Robinson and Thaicharoen (2003) have found that institutions are more powerful than macro policies in explaining long
run growth. Nevertheless, our paper suggested that macro policies are likely to be useful to increase the growth rates in the short to medium terms. Such policies are attractive and meet the immediate needs of the policy makers of the developing countries. Further, these policies, if successful, offer opportunities to the policy makers to implement the more difficult long run growth policies such as institutional reforms.
There are some limitations in our paper. Firstly, our empirical results should be interpreted with caution because we have selected only four key growth enhancing variables in comparison to more than a hundred such potential variables examined by the empirical works. However, our framework can be easily extended to include additional variables subject to the availability of data. In particular inclusion of variables that proxy the quality of institutions may reduce the significance of the variables we have selected. But it is likely that the variances in the institutions variables will be small in the country specific time series data compared to cross country data.25 Secondly, we have selected only Singapore to conduct the dynamic simulation exercise. It is desirable to perform this with data from other countries. However, this simulation exercise is demanding and our example may encourage others to fill this gap. Thirdly, we have neglected the time series econometrics and used GETS and classical methods of estimation. Nevertheless, the t-ratios of the preferred equations for Singapore and Malaysia exceed the critical values of Ericsson and McKinnon (2002) for cointegration. The equation for Thailand, however, fails this test.
In spite of these limitations we believe that our framework is well suited to meet the short and medium term needs of the policy makers of the developing countries.
Hopefully other investigators will further narrow the gap between the academic nature of growth research and the needs of policy makers in the developing countries.
*****************
25
Furthermore, changes in the institutional structure are usually sudden after a war, an upheaval and at the time of independence of a country; see Frankel (2003).
34
References
Acemoglu, D, Johnson S, Robinson J and Thaicharoen Y (2003). Institutional Causes, Macroeconomic Symptoms: Volatility, Crises and Growth, Journal of Monetary Economics 50(1): 49–123.
Albelo C and Manresa A (2005). Internal Learning by Doing and Economic Growth. Journal of Economic Development 30: 1-23
Barro R (1990). Government Spending in a Simple Model of Endogenous Growth. Journal of Political Economy 98: S103-S125
Bosworth B P and Collins S M (2003). The Empirics of Growth: An Update. Brookings Papers on Economic Activity 2: 113-206
Cooley T, Greenwood J and Yorukoglu M (1997). The Replacement Problem. Journal of Monetary Economics 40: 457-499
De Long B and Summers L (1991). Equipment Investment and Economic Growth. Quarterly Journal of Economics 106: 445-502
Durlauf S, Kourtellos A and Tan C (2008). Are Any Growth Theories Robust? Economic Journal 118: 329-346
Durlauf S, Johnson P and Temple J (2005). Growth Econometrics: Handbook of Economic Growth in Aghion P and Durlauf S (eds.) Volume 1 Chpter 8. pp555-677
Easterly W, Levine R and Roodman D (2004). New Data, New Doubts: Revisiting Aid Policies and Growth: Centre for Global Development Working Paper No: 26
Frankel, J A (2003). Comments on the Empirics of Growth: An Update. Brookings Papers on Economic Activity 2: 113-206
35
Greenwood J and Krusell P (1997). Growth Accounting with Investment Specific Technological Progress: A Discussion of Two Approaches, Journal of Monetary Economics 54: 1300-1310
Greiner A, Semmler W and Gong G (2005). The Forces of Economic Growth – A Time Series Perspective: Princeton University Press, Princeton
Greiner A and Semmler W (2002). Externalities of Investment, Education and Economic Growth. Economic Modelling 19: 709-724
Hendry D (2000). Econometrics Techniques: General Discussion in Backhouse R and Salanti A (eds.) Macroeconomics and the Real World. Oxford University Press. Oxford, pp239-242
Hendry D and Krolzig H (2005) The Properties of Automatic GETS Modelling. Economic Journal 115: C32-C61
Hicks J (1965). Capital and Growth. Oxford.
Jones C (1995). R&D Based Models for Economic Growth. Journal of Political Economy 103: 759-784
Levine R and Renelt D (1992). A Sensitivity Analysis of Cross Country Growth Regressions. American Economic Review LXXXII: 942-963
Lucas R (1988). On the Mechanics of Economic Development. Journal of Monetary Economics 22: 3-42
Luintel K, Khan M, Arestis P and Theodoridis K (2008). Financial Structure and Economic Growth. Journal of Development Economics 86: 181-200
Mankiw N G, Romer D and Weil D (1992). A Contribution to the Empirics of Economic Growth. Quarterly Journal of Economics 2: 407-437.
Parente (2001). The Failure of Endogenous Growth. Knowledge, Technology and Policy 13: 49-58
Pritchett L (2006). The Quest Continues. Finance and Development 43.1
Ramsey F P (1928). A Mathematical Theory of Saving, Economic Journal, 38: 543-59
Rao, B. B. (2006). Investment Ratio and Growth, ICFAI Journal of Applied Economics 3: 68-72.
Rao, B. B., Singh, R. and Kumar, S. (2008) Do We Need Time Series Econometrics? forthcoming, Applied Economics Letters
Romer M (1986). Increasing Returns and Long Run Growth. Journal of Political Economy 94: 1002-1037
Romer P (1990). Endogenous Technological Change. Journal of Political Economy 98: S71-S102
Sala-i-Martin X (1997). I Just Ran Two Million Regressions. American Economic Review 87: 178-183
Sato R (1963). Fiscal Policy in a Neo-Classical Growth Model: An Analysis of Time Required for Equilibrium Adjustment. Review of Economic Studies 30: 16-23
Senhadji A (2000). Sources of Economic Growth: An Extensive Growth Accounting Exercise. IMF Staff Papers 47: 129-157
Solow R (1956). A Contribution to the Theory of Economic Growth. Quarterly Journal of Economics 70: 65-94
Solow R (2000). Toward a Macroeconomics of the Medium Run. Journal of Economic Perspectives 14: 151-158
Uzawa H (1968). Market Allocation and Optimum Growth. Australian Economic Papers 17: 17-27