One s laws virgin chapter 101 raw

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The promotion of sustainable economic growth is one of the principal objectives of ESAF-supported programs. This chapter examines the pattern of growth in ESAF countries over the past 10–15 years, drawing comparisons with other developing countries, and seeking to explain differences in growth outcomes among countries and over time. The chapter begins with a brief outline of the stylized facts. It then presents a general overview of the methodology used to examine the empirical behavior of long-term growth and surveys the extensive literature on this subject to identify the various policy-related and other factors that have been found to influence growth. An equation relating growth to these factors is estimated on data for 84 low- and middle-income countries, and it is used to compare the growth performance of ESAF countries with that of other developing countries (information on the data and results is reported in an appendix). A more detailed analysis focuses on the impact of structural policies on growth in ESAF countries. The chapter concludes with a summary of its findings.

Partly in response to this limitation and partly inspired by the development of the theory of endogenous growth, a second, more eclectic approach was developed in which growth is viewed as a function of factor accumulation and other conditioning variables, the latter typically proxying the effects of economic policies. One problem with this approach, as noted by

Since the major focus of this chapter is on identifying policy variables and other influences that help to distinguish the growth outcomes of ESAF countries from those in other developing countries, the methodology adopted here focuses on the first of the three regressions in the last approach described above—that is, one in which pooled cross-sectional and time-series analysis is used to examine directly the influence of policies and other factors on growth. Under the maintained hypothesis that growth, capital accumulation, and factor productivity are influenced by policies (as well as by exogenous shocks and initial conditions), the growth equation estimated here can be interpreted as a reduced-form equation.

The first and most widely examined issue is the one of “convergence” between richer and poorer countries. An important implication of the neoclassical growth model is that incomes in poorer countries will, over time, approach real incomes in rich countries, in part because of the closing of the technology gap. Most evidence on growth rates contradicts this prediction—poor countries typically also have the lowest growth rates. Ample evidence, however, supports the notion of “conditional convergence”—that is, once account is taken of other growth determinants, including policies, there is evidence that poor countries do grow more rapidly than richer ones. This hypothesis is tested in empirical growth models by including, as an explanatory viable, initial-period real GDP levels or the gap between a country’s initial-period GDP and that of a benchmark country, typically the United States.

Another widely examined implication of the recent advances in growth theory is that human capital accumulation is a key determinant of growth. The important feature of the new growth theory that gives rise to the implication that policies can affect growth rates is that of nondiminishing returns to capital accumulation. The question of explaining growth is thus one of determining whether diminishing returns are really a constraint, and, if not, how they can be overcome. One possibility is that “knowledge” or human capital accumulation eliminates diminishing returns to capital, implying that labor inputs should be proxied not simply by population or labor force growth but rather by a combination of that and “knowledge.” Empirical studies have included various proxies to capture the accumulation of knowledge, including school enrollment ratios and other more sophisticated measures of schooling (

The abrupt contraction of domestic absorption resulting from a crisis typically felt heavily on investment—public and private—and gave little time to sustain output by switching resources to tradables. Several countries experienced a “pause” in private investment that lasted two to four years after the adoption of improved macroeconomic policies and structural reforms, reflecting the negative influence on investment of uncertainty and instability. The implementation of mutually consistent policies—an integral component of which is a sustainable medium-term fiscal position—was essential to promote more rapid resource switching and to reduce lags in the response of investment.

One widely used proxy for structural distortions is the black market exchange rate premium, which is typically interpreted as a crude indicator of overall distortions, a measure of the appropriateness of the exchange rate, and a more general indicator of policy uncertainties.

The effect of financial sector development on growth is another subject that has recently witnessed a resurgence in interest. Early proponents of financial sector liberalization as a factor influencing growth were

The regressions also included three types of exogenous supply shocks: the change in the terms of trade lagged one year

Two issues remain open to judgment. The first is whether the rate of capital accumulation (proxied by the rate of investment) should be included as an explanatory variable. Omitting the investment rate from the equation raises the possibility of an omitted-variables bias in the estimated coefficients. On the other hand, including it involves the potential for a simultaneity bias in the estimate, given that growth itself can have an important effect on investment. Since the purpose of this chapter is to examine the influence of policy and exogenous variables on growth, and the estimated equation is intended to be interpreted as a reduced form (see the earlier discussion on methodology), it was decided to exclude the rate of investment from the specification. A Hausman specification test suggests that—after controlling for other influences on growth—investment is not exogenous in the growth equation (