Drivers of Economic Growth in Developing Countries

Abstract

This paper examines the impact of the drivers of economic growth in developing countries. We modify the conventional neoclassical growth model to account for the impact of the increase in the number of people working relative to the total population and that of the increase in the value added per worker over time. Based on data from the World Bank for the 1995-2010 period and a sample of thirty-eight developing economies we find that the growth rate of per capita GDP is linearly dependent on technological progress, gross capital formation, the initial level of output per capita, and labour productivity growth, measured as the growth rate of the value added per worker, as well as human capital formation, measured as the growth rate of the average number of years of formal schooling among all persons aged 15 and above. We observe that all coefficient estimates except one have their expected sign and these explanatory variables except one are found to be statistically significant. We note that the increase in the number of people working, relative to the total population does not help explain cross-country differences in per capita GDP growth in developing economies. Statistical results of such empirical examination will assist governments in developing countries identify policy fundamentals that are essential for economic growth.

Notes

1 The sample consists of the following countries: Argentina, Bangladesh, Bolivia, Brazil, Bulgaria, Chile, China, Colombia, Costa Rica, Croatia, Czech Republic, Dominican Republic, Ecuador, El Salvador, Estonia, Honduras, Hungary, India, Indonesia, Latvia, Lithuania, Mauritius, Mexico, Pakistan, Panama, Paraguay, Peru, Philippines, Poland, Portugal, Romania, Slovak Republic, Slovenia, Sri Lanka, Thailand, Turkey, Uruguay, and Vietnam.

2 Following a reviewer’s comments we include trade openness measured as exports and imports as a percentage of GDP and the share of net FDI in the GDP as explanatory variables but find them to be statistically significant and thus remove them from the statistical model.

3 We are indebted to a reviewer for providing a possible explanation for the negative sign of the coefficient estimate of the increase in the employed population as a share of the total population. It might be the case that in developing countries with high unemployment and fast growing populations increased labour force participation is unimportant for growth. This participation is only important in countries like China where unemployment is low and population growth slow.

4 We are also indebted to a reviewer for pointing out that the education variable has the wrong sign possibly because it measures an input into education rather than an output. He/she argues that children may spend longer at school but gain little from extra years. Following his/her suggestions we try to include the primary completion rate and the literacy rate but find that these variables are not statistically significant in explaining cross-country differences in growth rates.