A stylized fact of growth and development
accounting is that our knowledge of the determinants of
growth is limited since factor inputs explain, at most,
about half the observed variation in the growth rate. The
remainder, the Solow residual, is attributed to the growth
in Technical Progress (TP). However, the Solow residual
is also a measure of our ignorance of the determinants
of growth since it is not known what factors determine
TP.
Therefore, theoretical and empirical research
has been directed at understanding the determinants of
TP. The endogenous growth models of Romer (1986), Lucas
(1988), and Barro (1991 and 1999) have found that human
capital, R&D and social infrastructure are also important
determinants of growth. These factors are multidimensional,
and empirical studies based on the endogenous growth models
have used different approaches to measure them.
An alternative line of research by Mankiw et
al. (1992) and Young (1995) extended the Solow model
by broadening the measurement of inputs, e.g., the need
to adjust employment for improvements in skills (human
capital) and showed that factor accumulation can explain
as much as 80% variation in the growth rate. A similar
approach is advocated by Casseli (2004) to improve the
measurement of capital. These are known as the chopping-off
strategies, because they chop-off the size of Solow residual.
However, the chopping-off strategy is not beyond controversy;
see, for example, Klenow and Rodriguez-Clare (1997) and
Hall and Jones (1999). |
