Economia

Determinants of Economic Growth (Panel Data Approach)

Edwin Dewan Shajehan Hussein

Working Paper 01/04

May 2001

Economics Department Reserve Bank of Fiji Suva Fiji

The views expressed herein are those of the authors and do not necessarily reflect those of the Reserve Bank of Fiji. The authors are grateful to Steven Morling for his valuable comments in the earlier drafts, FoziaNisha for her contribution in the literature review and Finau Soqo for helping in data collection.

Abstract
This paper uses a sample of 41 middle-income developing countries, including Fiji, to develop an empirical model for growth. Both crosscountry and time variation specifics were used in an attempt to explain determinants for sustained economic growth in developing countries. This paper alsopresents a wide-ranging examination of both theoretical and empirical evidence on the many ways macroeconomic policies affect growth. Most studies have shown that a macroeconomic policy framework conducive to growth is a necessity. Countries with strong macroeconomic fundamentals tend to grow faster than those without them, though there are many individual cases, of both developing and developedcountries, that suggest that satisfying only some of these conditions does not result in faster growth. However, it is important to recognise that the direction of causation is somewhat ambiguous: whether good macroeconomic policies are conducive to growth or whether strong growth is conducive to good macroeconomic policies. The results suggest that apart from growth in the labour force, investmentin both physical and human capital, as well as low inflation and open trade polices (less trade barriers), are necessary for economic growth. Furthermore, the ability to adopt technological changes in order to increase efficiency is also important. Since many developing countries have a large agricultural sector, adverse supply shocks in this sector was found to have a negative impact on growth.1.0

Introduction
Like many developing countries, the primary focus of policies in

Fiji is to have high and sustainable growth. However, to achieve and maintain a high growth rate, policy makers need to understand the determinants of growth as well as how policies affect growth. Since World War II, the trend growth of real GDP has become a key policy objective in almost all countries(See Crafts 2000). Numerous studies have been carried out to find the long-run growth path. The earliest studies were conducted by Solow (1956) and Swan (1956) based on the neoclassical theory. Its simple structure and assumptions - a well behaved neoclassical production function, a single homogenous good, exogenous labour-augmenting technical progress, full employment and exogenous labour forcegrowth - has been used by economists for the past four decades. The Solow-Swan growth model predicts that in steady-state equilibrium the level of GDP per capita will be determined by the prevailing technology and the exogenous rates of saving, population growth and technical progress. They conclude that different saving rates and population growth rates might affect different countries’ steady-statelevels of per capita income. That is, other things being equal, countries that have higher saving rates tend to have higher levels of per capita income, and vice versa. However, recent growth theorists dismiss the Solow-Swan model in favour of an endogenous growth model that assumes constant and increasing returns to capital. The critics allege that the standard
2

neoclassical model fails toexplain the observed difference in per capita income across countries. The different implications of exogenous and endogenous growth models have led to renewed empirical work in recent years. convergence.
1

One of the major concerns has been the issue of

Recent studies have shown that a macroeconomic policy framework conducive to growth is a necessity. There seems to be a broad consensus...