LESSONS FROM PREVIOUS RESEARCH

Studies of why growth rates differ between countries may roughly be divided in three groups: (a) "catch-up" analysis, (b) "growth accounting" and (c) "production-function" studies. Let us consider these approaches' one at a time1•

1 The purpose of the following is to discuss some main characteristics of post-war research in this field, not to give a complete survey. For survey articles covering the whole or parts of this field, the reader is referred to Chenery(1986), Choi(1983), Kendrick(1981a), Maddison(1987), and Nel~on(1981).

(a) "Catch-up" analysis

The idea that differences in economic growth between countries are related to differences in the scope for imitation is normally attributed to Veblen(1915). Since then, several economic historians have analysed problems related to industrialization and growth from this perspective2•

More recently, Abramovitz(1979, 1986) and Maddison (1979, 1982, 1984, 1987) have applied this perspective to the differing growth

performance of a large sample ofzyxwvutsrqponmlkjihgfedcbaZYXWVUTSRQPONMLKJIHGFEDCBALnd u strLa Li.z e d countries.

According to these writers, large di.f fc renc e a in productivity levels between countries (technological gaps) tend to occur from time to time, mainly for historical reasons (wars etc). When a technological gap is established, this opens the possibility for countries on a lower level of economic and technological development to "catch up" by imitating the more productive technologies of the leader country. Since these writers hold technological progress to be partly capital embodied, they point to investment as a critical factor for successful "catch up".

They also stress the role of demand factors, since demand is assumed to interact in various ways with investment and the pace of structural change in the economy. For instance, the deceleration of productivity growth in the last decade is partly explained in this way. They mention the importance of 2 See, for instance, the works by Gerschenkron(1962) and Landes(1969).

institutions7- but do not discuss this in detail, because of the methodological difficulties that are involved.

The works by Abramovitz and Maddison are to a large degree descriptive, and as such they are very useful. They convincingly support their arguments by comparing data for productivity levels and economic growth/productivity growth across countries, and these comparisons are sometimes supplemented by descriptive statistics/simple statistical tests. Other scholars working in this tradition have extended these tests in various ways and reached similar results (Singer and Reynolds(1975), Cornwall(1976,1977». However, they all concentrate on diffusion processes and ignore innovation aspects. As pointed out already by Ames and Rosenberg(1963), writers in t~is tradition have great difficulties in analysing phenomena such as developments in leader countries3, changes of leadership4 and the existence of

"laggards".

(b) "Growth accounting"

For many years, Kuznets and his colleagues devoted much effort to the construction of historical time series for GOP and its major components (national accounts). Post-War "Growth accounting"

studies grew to some extent naturally out of this work. While 3 " • •the forces animating growth in the lead countries are more mysterious and autonomous than in the follower countries, • • "

(Maddison(1982), p.29)

4 See, however, Abramovitz' instructive, but inconclusive discussion of possible factors influencing change of leadership in Abramovitz(1986),p.396-405.

national azyxwvutsrqponmlkjihgfedcbaZYXWVUTSRQPONMLKJIHGFEDCBAc'co u n t.a presented decompositions of GOP, growth accounts attempted to decompose the growth of GOP. The first Post-War analysis of this type was carried out by Abramovitz(1956) in a historical study of the US. What he did was to sum up the growth of inputs (capital and labour), using

"prices" or factor shares as weights, and compare the result with the growth of output as conventionally measured. The result, that about one half of actual growth5 could not be explained in this way, and had to be classified as unexplained total factor productivity growth, surprised many, including Abramovitz himself:

"This result is surprising • • • Sinc2 we know little about the causes of productivity increase, the indicated importance of this element may be taken to be some sort of measure of our ignorance about the causes of economic growth." (Abramovitz(1956),p.11)

Abramovitz discussed briefly possible explanatory factors behind this large residual, emphasizing research, education, learning by doing and economies of scale. From this, researchers have followed different paths in "squeezing down the residual", as Nelson(1981) puts it. One has been to embody as much as possible of technological progress into the factors themselves, as suggested by Jorgensen and Griliches(1967)6. Another, following

5 According to the numbers presented by Abramovitz, US NNP-growth over the periodzyxwvutsrqponmlkjihgfedcbaZYXWVUTSRQPONMLKJIHGFEDCBA1 8 6 9 / 7 8 to 1 9 4 4 / 5 3 equaled 3.5 %, of which 1.8% could be attributed to growth of inputs, and 1.7% was left

dS unexplained. Similar, if not identical, results were reported by Solow(1957), Kendrick(1961) and Oenison(1962).

6 Jorgensen and Griliches originally claimed that the residual could be eliminated altogether, but later retreated from this position. See the debate between them and Oenison(Oenison(1969), Jorgensen and Griliches(1972» on this

Abramovitz '0g- suggestions, has been to add other explanatory variables, thereby reducing the unexplained part of the residual, which, following Solow(1957), is normally attributed to technical change.

Denison was the first to apply this latter methodology to the study of why growth rates differ between countries(Denison(1967), Denison and Chung(1976»7. Regarding technology, Denison's works rest on a view very similar to the one which characterizes most

"catch-up" analysis. For instance, differences in innovation between countries are completely ignored8• But his interpretation of the sources of Post-War growth differs to some extent from Abramowitz and Maddison. Some of Denison's main results are

summarized in table 1 below.

subject.

7 The study by Damar earlier{1964), did not take growth in capital and labor.

8 Cf. for instance the following programmatic remark by Denison: "Because know Iedge is an inte rnational commodity, I should expect the contribution of knowledge - as distinct from the change in the lag - to be of about the same size in all the countries examined in this study." (Denison(1967),p.282)

et al., publ ished a few years into account other factors than

TABLE 1. "WHY GROWTH RATES DIFFER" (DENISON)

1950zyxwvutsrqponmlkjihgfedcbaZYXWVUTSRQPONMLKJIHGFEDCBA

-

US Western Italy Japan Europe(l)

Growth(2) 3.4 4.7 6.0 8.1

Of which:

Labour 1.1 0.8 1.0 1.9

Capital 0.8 0.9 0.7 1.6

Residual(TFP) 1.4 3.0 4.3 4.6

of which:

Technology 0.8 1.3 1.7 1.4

Resource

allocation 0.3 0.7 1.4 1.1

Scale factors 0.4 0.9 1.1 2.0

For comparison:

National income per

person employed(3) 100 59 40 55

(1) Belgium, Denmark, France, Germany, Netherlands, Norway and United Kingdom.

(2) The columns do not always add up because of rounding errors and other minor adjustments not reported here.

(3) In 1960 US prices (except Japan 1970)

Sources: Denison(1967), ch. 21, and Denison and Chung(1976), ch.

4 and 11.

As is apparent from table 1, the results indicate a close connection between the .ize of the residual and the level of development. This could of course be interpreted in support of the catch-up approach. But Denison attributes about 2/3 of the differences in residuals between the United states and the rest of the countries covered by his investigation to other factors

(improvements in resource allocation and the exploitation of economies of scale). In fact, when these factors are adjusted

for, only France and Germany among the Western European countries seem to catch up in terms of technology. In his 1967 study, he therefore concludes9:

"On the surface, to reduce the gap greatly would not seem very difficult if the businessmen, workers and governments of a country really wished and were determined to do so.( • • ) In contrast to this a priori impression of possibilities, the historical record up to the early 1960's, at least, suggests that either the desire is lacking or imitation is a very difficult thing; most countries seem to have made

little progress." (Denison(1967), p. 340)

However, when Denison discusses the contribution from increased exploitation of economies of scale, what he mainly refers to is increased aggregate productivity caused bv increased productivity in the production of durable consumer goods. But where does the technology used to produce consumer dur~bles come from, if not from the United States? In fact, the 1950s and 1960s are exactly the periods when the production of consumer durables spreads from the United states to Europe and Japan. A similar argument can be made for structural changes. without the growth of new industries based on imported technology, such as, for instance, consumer durables, would these changes have taken place to the same extent? Thus we will argue that Denison's conclusions rest on rather shaky assumption~, and that it is quite probable that he

9 However, 1n his 1976 study of Japan, he acknowledges that in this case, "There was, in other words, a major element of

"catching up" • • "(Denison and Chung(1976),p.49)

seriously understates the importance of diffusion of technology