Do all countries grow alike? No, they don't!
In the first ‘FEB Publication of the Month’ we pay attention to the research of dr. Michael Koetter, who investigated the driving forces of growth in 77 countries during the period 1970-2000. ‘This paper focuses on a very simple question: Do all countries grow alike?’, says Koetter. ‘And of course our answer to this question is: No, they don’t!’. Koetter and his colleagues published their results in the topjournal Journal of Development Economics.
‘Economists emphasize a lot the cross-sectional differences between countries to understand why countries grow at different pace’, says Koetter. ‘We challenge the underlying, implicit assumption that you can compare for example the United States with Thailand at par. Intuitively, it seems a strong assumption that these two countries could attain the same technologies. We challenge that they could in principle grow equally fast, if they had the same economic structure. We think that it doesn’t make sense to put all countries in one bucket and than compare their growth experiences.’
Let the data speak
‘We attempt to make a suggestion how we can deal with this, and come up with a latent class model. In plain English: we don’t know who belongs into which club. So we will not run the risk of pre imposing an implicit or explicit assumption of who belong together and who doesn’t. This is the latent part of the model: we basically suggest a way to look at the characteristics of the countries and then let the data speak to come up with the grouping.’
‘During our research we found that there are three very distinct technology regimes in the world. The mature regime, to which many European countries and the US belong. Growth of these countries is primarily driven by factor accumulation. You can describe this regime as ‘a fat cat’: growth is driven by using more factors, such as capital or labor. Then there is the technological regime, to which a lot of Asian countries belong. Overall growth of these countries is primarily driven by pure technological change. The third regime is the developing regime. This regime contains some of the BRIC-countries (e.g. Brazil and China) plus a number of African countries, which are notoriously hard to unlock from this regime.’
‘Once you realise there are different regimes, you’ve to think differently about the convergence-idea, which is still quit central to many empirical growth studies. If we accept that there are different groups, we should be aware of the fact that there might be convergence to different steady states at different rates. Not all countries have to converge to one steady state level, but each group might have it’s own steady state. And in fact we might find that some clubs don’t converge at all: some countries do not catch-up, not even in their group. They do not make it to their group’s frontier.’
Koetter gives a striking example to illustrate the consequences of the differences between the three different growth regimes. ‘Think of it as football: you can try to be the top player of your league; but you can also try to promote yourself to the Premier League, if you’re playing in the second league right now. If we can identify different growth clubs, we might not only think of how can I get closer of my group frontier, but what are the factors that can help me to promote from the third league to the second or even the first league?’
‘Or vice versa: why are some of these countries notoriously stock in reverse and why can’t they get any further? We have some indications in this paper which factors could be responsible for both blocking promotion or facilitating it. On this point future research is required, but in my view a policy implication from these results is that development strategies of a ‘one size fits all’ type are ineffective.’
Koetter: ‘We find that some countries within the developing regime, a club of poor countries with low levels of pro capita income, do not seem to converge to the same steady state as the rich clubs. What we identify there as a economically significant factor is what we call macro economic inefficiency. That is a frontier that constitutes the theoretically maximum a country could achieve. This poor club is way below its potential; they waste basically a whole lot of their factors simply because of an inefficient resource allocation. Our results imply that it would not help a whole lot to dump a factory on Botswana, or it wouldn’t help to bring IT and engineers to Nigeria. The policy implication may be that it’s worthwhile to think about ways how to reduce your inefficiency. How can we reduce this waste of resources and thereby first help exploit what you already have, before we come and tell where you should go with fancy new technologies.’
Do all countries grow alike?
Journal of Development Economics (2010), 91, 113-127.
J.W.B. Bos, C. Economidou, M. Koetter, J.W. Kolari
Contact: Dr. Michael Koetter
Full article: Journal of Development Economics (RUG-only)
|Last modified:||06 February 2014 10.07 a.m.|