Journal

of Monetary

Economics

24 (1989) 259-276.

North-Holland

AN EMPIRICAL ANALYSIS OF CROSS-NATIONAL ECONOMIC GROWTH, 195140 Kevin B. GRIER

George Mason Unioersit,v, Fairfax, VA 22030, USA

Gordon
Unruersity of Arizona, Received

TULLOCK
Tucson, AZ 85721, USA

May 1988, final version received May 1989

Using pooled cross-section/time-series data on 113 countries. we investigate empirical regularities in post-war economic growth. We find that coefficient values vary widely across identifiable groups of countries. with evidence supporting the convergence hypothesis apparent only in the OECD country sample. Among other results, we find that the growth of government consumption is significantly negatively correlated with the economic growth in three of four subsamples, including the OECD, and that political repression is negatively correlated with growth in Africa and Central and South America.

1. Introduction Recent perceptions of relatively poor U.S. economic performance have led to a renewed interest in the causes of secular economic growth. Existing empirical research has tended towards specialized topics, mainly the size or growth of government and the importance of initial conditions for subsequent growth. While these are important considerations, they are far from the sole causal factors of economic growth. A welcome exception to this pattern is the more general empirical model provided by Kormendi and Mequire (1985) hereafter K-M, who examine a wide range of interesting macroeconomic hypotheses about growth. In this paper we further generalize K-M by considering a larger country sample and using an experimental design that allows testing of both the temporal and cross-country stability of the model coefficients.
*We thank R.C. Kormendi, M.C. Munger, and an anonymous referee for helpful comments acknowledge financial support from the Center for Study of Public Choice. There is also a large growth accounting literature that attributes factor inputs. See Maddison (1987) for a recent survey. economic growth and

to various

0304-3932/89/$3.500

1989, Elsevier Science Publishers

B.V. (North-Holland)

260

K. B. Crier and G. Tullock, Cross-national economic growth

Specifically, we use annual data on 113 countries to construct a pooled cross-section/time-series data set and examine the effects of seven variables on economic growth. These variables are (1) initial per-capita real GDP, (2) the growth of governments share of GDP, (3) the standard deviation of GDP growth, (4) population growth, (5) inflation, (6) the change in inflation, and (7) the standard deviation of inflation. We do not present or test a comprehensive theory of secular economic growth. The econometric results reported below cannot be interpreted as structural estimates of a well-defined model. Rather, we are investigating empirical regularities in these data, with emphasis on the stability of coefficients over time and across countries. This empirical exercise is especially relevant now given the recent development of endogenous growth models. Romer (1986), Lucas (1987) and Barre (1988) work with growth models that, in various ways, remove the standard assumption of diminishing returns and allow the possibility of persistently different growth patterns across countries. 2 Our results can give evidence on the empirical support for the standard model and point out regularities that may aid in the further refinement of endogenous growth models. We find that the effects of the macro variables listed above differ greatly across countries in the sample, providing a relatively good fit for developed (OECD) countries, but working less well for developing nations. In fact, several standard stylized facts about the neoclassical growth process cannot be confirmed by the data from African or Asian countries. Our results imply that social and political institutions may be important factors in the growth process, at least over a twenty- to thirty-year horizon. Two results in this paper illustrate the importance of institutional factors: we find significant negative correlation between the growth of government consumption and GDP growth in three of the four groups of countries in the sample, and a similar effect from a measure of political repression in the African and non-OECD western hemisphere samples.

2. Data and empirical design The data used here come from Summers and Heston (1984) who have compiled internationally comparable annual figures on output and its composition, prices, and exchange rates for 115 market economics from 1950 to
*In standard growth models with diminishing returns, permanent economic growth comes from population growth or exogenous technological change. The papers cited allow for endogenously determined permanent growth by assuming constant or increasing returns to some reproducible factor. Romer works with increasing social returns to knowledge, Lucas mainly with human capital. Barros model relates to government as is discussed in footnote 7 below. Besides allowing for nonconvergence, endogenous growth models allow institutional factors that affect investment incentives to help determine long-run growth.

K.B. Grier and G. Tullock, Cross-natlonal

economic growth

261

1981.3 There are several ways to organize this data, ranging from estimating individual time-series equations for each country to averaging each countrys experience into one data point and estimating a single cross-section. Since we are interested in secular growth patterns, some amount of averaging is required to net out cyclical fluctuations. Here we use five-year average data. Further averaging is avoided because it can destroy information contained in the sample. Averaging over the entire sample period eliminates the information contained in the sample about the effect of changing conditions on growth in individual countries and allows only cross-country variation to inform the estimates. Given repeated observations on a wide range of countries it is important to test the validity of pooling all the data into a single equation. In the estimations that follow, we test for temporal coefficient stability and the appropriateness of pooling a wide variety of countries into a single sample. Specifically, we first divide the sample into the OECD countries and the rest of the world (ROW), then further divide the ROW by continent to test the validity of a pooled sample.4 In contrast to this approach, K-M have 28 years of data on 47 countries. They average each countrys time-series experience into a single data point and estimate a cross-section of 47 observations using no information about the variance in any one countrys performance over time and providing no evidence about the advisability of equating coefficients across their sample countries. K-M do recognize that moving to decade, five-year, or even annual data, one could exploit a pooled structure in which more refined and potentially more powerful tests may be possible.5 With 30 years of data on all the 24 OECD countries and 20 years on the 89 ROW countries, five-year averaging produces 500 total observations for analysis. 3. Hypotheses and variables

In this section we outline the hypotheses motivating our regressors, noting previous results where applicable. (1) Initial conditions. Simply stated, there is a widely held belief that, from any starting point, countries that are behind in technology will grow faster relative to more advanced countries, due to diminishing returns to investment in a given technology. Baumol (1986) summarizes this convergence phenomenon for 16 industrialized nations since 1890, In a related paper
In our work, we exclude Malta and Cyprus from the sample Heston also provide some data on centrally planned economies. (see footnote 4). Summers and

4The OECD is the Organization for Economic Development and Cooperation. The appendix lists the OECD countries and the other countries in our sample by continent. Malta and Cyprus were deleted because they are the only European countries in the sample that are not OECD members. 5K-M (1985, p, 143).

262

K.B. Grrer md G. Tullock, Cross-national economic growth

Abramowitz (1986) points out that convergence should not be considered a mechanistic inevitability, arguing that the physical or social infrastructure necessary to absorb technology may not exist in all countries. Endogenous growth models generally do not predict convergence because they allow for permanent nondiminishing returns. While Baumol and Abramowitz mainly look at the convergence of productivity levels, we examine convergence of per-capita income by including initial per-capita GDP as a variable explaining subsequent GDP growth. Here convergence means that higher initial wealth implies lower future growth compared to other countries, due to diminished returns to additional investment in any given technology. (2) Population growth. As K-M note, neoclassical growth theory implies that labor force growth has a one-to-one effect on income growth. Here we only have data on population growth, which should have a positive effect on growth, but may be different from one-to-one due to trends in labor-force participation or lagging capital accumulation. (3,4) Inflation. Older Phillips curve models that imply a permanent, or long lasting, trade-off between inflation and output predict a positive coefficient on inflation. The Tobin-Mundell hypotheses that anticipated inflation causes portfolio adjustments that lower the real rate of interest and raise investment also implies a positive coefficient. Conversely, in economies with cash-inadvance constraints [e.g., Stockman (1981)], anticipated inflation reduces capital accumulation and growth, implying a negative coefficient. Finally, in developing countries, inflation is often caused by political crises that depress growth. We use both the level and first difference of inflation as regressors in our analysis. (5) Standard deuiation of inflation. Hayek (1944) and Friedman (1977) argue that variable inflation interferes with the information content of market prices, reducing economic activity. Time-series studies of the U.S. have found the variability of inflation negatively correlated with GNP growth [Levi and Makin (1980) Mullineaux (1979)]. (6) Standard deviation of income growth. As K-M point out, the theory of saving under income uncertainty [Sandmo (1971)] implies that more variable income streams lead to higher savings, and therefore a positive association between this variance and average income growth. Alternatively, there may be an aggregate risk-return trade-off in technology [Black (1979)], which also implies a positive effect for income growth variability on average growth rates. (7) Gouernment. As noted above, there is a large and controversial literature on the effects of government on economic growth. Several studies have focused exclusively on this issue, and Barth, Keleher, and Russek (1987) provide an exhaustive survey of these studies. The problem here is defining the relevant type of government activity to put in the equation. Government production of basic valuable public goods (e.g., roads, property rights) clearly will be growth-enhancing. Government regulation of economic activity (e.g., mandat-

K.B. Grier und G. Tullock, Cross-national economic growth

263

ing performance standards, forcing new procedures on entrepreneurs, environmental regulation) will probably slow down economic growth.6 For example, Denison (1985) provides some evidence on the negative effect of U.S. govemment regulation on economic growth. Our data is limited to the share of government consumption of GDP. This variable nets out government investment and transfers. Since these are among the obvious government activities that may enhance growth, we expect the consumption variable to have a negative coefficient. We use the growth rate of this government share as our variable representing the effect of government size on economic growth. Using the growth rate rather than the level of government reflects our belief that increased government activity will temporarily affect growth as production patterns or transaction requirements or investment procedures are altered. Using the level of government activity implies that a one-time change in government intervention will permanently change economic growth and create, ceteris paribus, increasing wealth differences across countries. We can claim no innovations in this list of variables. Convergence and the effect of government have been widely examined, and our other regressors are used by K-M (except they use the standard deviation of money surprises rather than inflation). We are refining and extending the K-M analysis by using a data set with considerably more countries and by using multiple observations on each country. 4. Econometric 4. I. Summary We have six five-year average observations for each of the 24 OECD countries and four on each of the 89 other countries. Table 1 contains the results of estimating our model for the OECD, while the ROW results are presented in table 2. When these two data sets are concatenated and constrained to have the same slope coefficients, the F-statistic testing the appro60f course, regulatory activities growth with social welfare. can provide significant benefits and we are not equating GDP

results

This point is not considered in most studies of the effect of government on growth. Empirically, Barth et al. note that the level of government is both used more often and is more significant than the growth rate. Barre (1988) derives a nonlinear relationship between the size of government and economic growth in a growth model where production exhibits constant returns to scale in private capital and public-sector inputs taken together, but diminishing returns to private capital alone. Government is financed by a flat-rate income tax and, at low levels of tax rates, increasing government spending raises the growth rate. Eventually, the corresponding higher tax rates cause increased spending to start lowering the equilibrium growth rate. Assuming all governments maximize citizen utility, the only sources of cross-country variations in the size of government would be differing preferences or technology.

264

K. B. Crier and G. Tullock, Cross-national economic growth

priateness of combining the data is 4.25, which is significant at the 0.01 level and strongly rejects pooling the two groups of countries in a single sample. A comparison of the two tables reveals the following major differences: (1) In the OECD, initial per-capita income has a negative and significant coefficient, confirming the convergence hypotheses. In the ROW, the coefficient is positive and significant, indicating that here richer countries grow faster. (2) Population growth is positive and significant in both samples. However, the OECD coefficient is within one standard deviation of 1.00, while the ROW coefficient is two standard deviations below 1.0. (3) Average inflation has no effect on the growth rates of OECD countries, but is negative and significant in the ROW. Government growth is negative and significant in both samples, as is the standard deviation of inflation, while the standard deviation of GDP growth is positive and significant in both equations. The OECD regression explains 63 percent of the variation in the dependent variable, while the ROW regression explains only 13 percent. The two major differences between these results and K-Ms are the finding that the OECD differs significantly from the other countries (with 47 observations K-M did not test for this possibility) and that government growth is a significant negative factor in determining GDP growth. We now examine the results for the OECD in more detail, then further subdivide the ROW sample by continent.

4.2. OECD results To test the temporal stability of the OECD coefficients in table 1, we split the sample into halves (1951-1965 and 1966-1980) estimate separate equations, and compare the fit of this unrestricted model with table 1, which constrains the slope coefficients to be constant over time. The F-statistic testing the null hypothesis of stable coefficients is 0.24, which does not reject the null at any meaningful level. These countries display a significant convergence effect over this sample period. A one standard deviation increase in per-capita GDP (around $1000 in 1950) implies a 0.83 percentage point decline in average growth. Population growth has a significant coefficient of 0.883. Actual population growth varies widely in this sample, from Turkey (2.63%) to Austria (0.26%), and a one standard deviation increase in population growth is estimated to increase growth by 0.59 percentage points. The variability of GDP growth is also positive and significant, indicating there is a modest historical aggregate trade-off between risk and return. A one standard deviation increase in the standard deviation of GDP growth is associated with an additional 0.17 percentage point of average growth. These results are similar to those reported by K-M.

K.B. Crier and G. Tuliock, Cross-naiional economic growth Table 1 Pooled regressions Variable Intercept Initial per-capita real GDP Mean growth of government share of GDP Mean population growth Std. deviation of real GDP growth Mean inflation rate Mean change in inflation Std. deviation of inflation Dummy for 1956-1960 Dummy for 1961-1965 Dummy for 1966-1970 Dummy for 1971-1975 Dummy for 1976-1980 N = 144, R* = 0.635, F,,,,,, = 19.04. on five-year averaged data for 24 OECD countries, Coefficient 5.903 - 0.00083 - 0.320 0.870 0.170 0.014 - 0.042 - 0.114 - 0.896 0.978 1.435 1.069 1.562 1951-1980.

265

t-statistic 13.46 8.61 6.88 5.53 2.48 0.21 0.90 4.00 2.25 2.65 3.42 1.91 3.25

Table 2 Pooled regression Variable Intercept Initial per-capital real GDP Mean growth of government share of GDP Mean population growth Std. deviation of real GDP growth Mean inflation rate Mean change in inflation Std. deviation of inflation Dummy for 1966-1970 Dummy for 1971-1975 Dummy for 1976-1980 Dummy for Africa Dummy for the Americas N = 356, R2 = 0.130, F,3.343 = 4.37 on five-year averaged data for 89 ROW countries, Coefficient 4.156 0.00057 - 0.064 0.669 0.097 -0.159 0.041 - 0.081 - 0.099 0.595 - 0.349 - 1.373 - 1.312 1961-1980.a t-statistic 4.22 1.89 1.91 2.56 2.06 3.42 0.82 2.49 0.19 1.10 0.66 2.98 2.50

The other regressors provide information about the effect of government on economic growth. Both the average level and first difference of inflation are completely neutral in the OECD over this period, but the variability of inflation does have a negative and significant effect. A one standard deviation increase in inflation variability is associated with a 0.35 percentage point decline in average growth. These results provide no support for Mundell-Tobin
K-M use the average change in the rate of inflation and find that variable negative and significant. They also use the variance of unanticipated money growth instead of the variance of inflation.

JMon

266

K. B. Grier and G. Tullock, Cross-national economic growth

notions of the benefits of inflation for growth, but do support Friedmans argument about the harmful effect of erratic inflation. We also find a strong negative effect of the growth of government consumption as a fraction of GDP. The coefficient of -0.32 is highly significant and, taken literally, it implies that as one standard deviation increase in government growth reduces average GDP growth by 0.39 percentage points. This result is not found by K-M who use the same variable definition, but a different country sample and data source. K-M also only use one average observation per country. While our testing indicates that it is inappropriate to pool OECD and ROW countries, we can average our data over the full sample and allow only cross-country differences to determine the model coefficients. The result of this exercise is reported below in eq. (l), where the variables are the same as those in table 2 but are averaged over 30 years (r-statistics in parentheses), Real GDP% = 5.16 (6.16) 0.0099 (3.52) Initial Real GDP

0.348 (2.42) 0.290 (1.60) 0.061 (0.97)

Government

%+

1.047 (3.52) 0.114 (0.58)

Population

u Real GDP % +

Inflation

A Inflation

0.107 (1.33)

u Inflation,

(I)

N=24,

R2 = 0.82,

F8,16 10.90. =

The coefficients in this fully averaged regression have the same sign and general magnitudes as those in table 1, along with the smaller t-statistics to be expected when the variances of the explanatory variables are reduced. Specifically, the coefficient on government growth changes by - 0.028 to - 0.348 and its significance level falls to 0.05 (t-statistic = 2.42). The result that changes the most when time is eliminated is the effect of variable inflation. The t-statistic falls from 4.0 in table 1 to 1.3 in eq. (1). While the slope coefficients are stable over the full 30-year sample, there are substantial changes in the intercept as shown by the time-period dummy variables in table 1. Except for the 1956-60 period, the average OECD growth rate, holding our other variables constant, is significantly higher in all cases than the 1951-1955 level, with some indication of an upward trend. Replacing the dummy variables with a trend variable produces the following result

K. B. Crier and G. Tullock, Cross-national economic growth

261

(t-statistics

in parentheses): 5.44 (12.82) 0.279 (5.77) 0.135 (1.91) 0.035 (0.87) 0.428 (4.49) 0.00087 (8.72) Government Initial Real GDP

Real GDP % =

%+

0.886 (5.39) 0.009 (0.24)

Population

u Real GDP % +

Inflation

A Inflation

0.132 (4.54)

u Inflation

Trend,

(2)

N = 144,

R2 = 0.58,

F9. 135= 21.86

This model can shed some light on the statistical sources of growth differentials across OECD countries. Besides the U.S. and Japan (considered in detail below), Canada, Australia, the U.K., Ireland, and Turkey are the countries whose growth rates diverge the most from what might be predicted from initial conditions. Table 3 details the estimated effects the other independent variables have on these countries growth patterns. The higher-than-expected growth in Canada and Australia is due to higher-than-average population growth and more stable inflation. The lower-than-expected growth in the U.K. and Ireland is partly due to low population growth, but is mostly unexplained by our model. Turkey displays extreme values of all the independent variables.

Table 3 GDP growth in Canada, Canada Deviation of growth from convergence prediction Due lo: Population growth Government growth Std. deviation of GDP growth Std. deviation of inflation Residual + 0.80 -0.11 0.00 + 0.22 + 0.22 + 0.83 - 0.26 + 0.07 +0.38 - 0.44 -0.56 +0.16 +0.17 + 0.03 - 1.47 -0.54 - 0.06 -0.12 ~ 0.04 - 1.12 + 1.47 - 0.73 + 0.44 -1.13 + 0.75 Australia, Australia U.K., Ireland, and Turkey. Ireland Turkey

U.K.

+ 1.13

+osg

- 1.67

- 1.88

+ 0.79

268

K. B. Grier und G. Tullock, Cross-nafionul

economic growth

Its higher than expected growth comes from high population growth and variable income growth. However, in our model this prediction is offset by high government growth and unstable inflation. A structural interpretation of our coefficients implies that Turkey would have surpassed Japan as the fastest growing country in the sample except for these governmental factors. 4.3. The U.S. and Japan Over this 1951-1980 sample, the average U.S. growth rate is 3.27, which is 1.17 points below the average of the OECD countries. The single largest factor explaining this below-average U.S. showing is convergence. In 1950 the U.S. per-capita output was about twice the OECD mean level. Combining this difference with the negative coefficient on initial wealth from table 1 gives the prediction that U.S. growth will be 1.9 percentage points below the OECD mean. The U.S. growth rate on average is 0.73 percentage points larger than what is predicted by initial conditions. This is attributed partly to higherthan-average population growth ( + 0.26) and lower-than-average inflation variability (+0.38). The other 0.10 percentage point of extra growth is unexplained by the model. Now consider the change in U.S. growth from the 1960s to the 1970s. From 1961 to 1970 U.S. growth averaged 3.79 percent. In the next decade, average growth falls to 2.88 percent, a decline of 0.91 percentage points. In our model this decline is attributed to convergence (- 1.19 points) and lower population growth ( - 0.40 points), along with an increase in inflation variability (-0.14 points). However, this is partly offset by a fall in the growth of government consumption (+ 0.32 points) and a rise in the variability of output growth (+0.19 points). On the whole, U.S. growth fell less than what is predicted by convergence and 0.30 less than what is predicted by our full model. It appears that America is not going down without a fight. We can also examine the Japan-U.S. growth gap with the model. The $3700 larger 1950 per-capita income in the U.S. implies that Japan should grow, on average, 3.07 percentage points faster than the U.S. The actual average difference is 4.88 points. In our model the extra 1.9 points of Japanese growth is attributed to slower government growth in Japan (+ 2.3 percentage points). Over the sample, our measure of the share of government consumption in Japans GDP falls dramatically from 0.20 to about 0.07. The fact that Japan is a large positive outlier in GDP growth and a large negative outlier in government growth made us wonder if the significant negative association between these two variables is driven mainly by the six observations on Japan. However, this is not the case. We dropped Japan from the sample and re-estimated eq. (1) finding that while the coefficient on government growth to -0.25, it was still significant at the 0.01 level dropped from -0.32 (t-statistic = 5.45). None of the other coefficients were affected.

K.B. Crier and G. Tullock, Cross-nationul

economic growth

269

We are not arguing that slashing government growth in the U.S. would close the U.S.-Japan growth gap. As noted above, our model is not structural; it is not derived from any basis that can be used to make predictions about the effect of policy shifts on growth rates. Such simulations would run aground on Lucass classic warning about predicting the effects of policy changes from nonstructural models when the behavior of the public is not invariant to policymakers actions. Strictly, it is no more correct to argue reductions in government growth will raise output than it is to argue that erratic fiscal policies that increase the variability of output or a government-enforced doubling of the birth rate would raise average growth rates. The most we can say is that controlling for initial wealth, population growth, and the variability of GDP and inflation, there is a strong, significant negative association between government growth and output growth in these data.

4.4. Subdividing the ROW To investigate the appropriateness of pooling the 89 ROW countries in a single sample, we estimate separate equations for Africa, the Americas, and Asia. These regressions are reported in table 4. The F-statistic testing the null hypothesis that our slope coefficients are constant across continents is 4.25, which strongly rejects the aggregate model in table 2 in favor of the separate regressions in table 4. We then split each continent data set in half (1961-1970 and 1971-1980) testing the temporal stability of the continent-specific slope coefficients. The F-statistics are 1.32, 1.43, and 0.83, and the null hypothesis that the model coefficients are stable over time is not rejected, even at the 0.10 level, in any case. The model coefficients vary dramatically across the three subsamples. Population growth is positive and significant in the Americas, but insignificant in Africa and Asia. The coefficient on initial per-capita wealth is positive and significant in Africa and Asia (0.10 level) and insignificant in the Americas. Average inflation is negative and significant in Africa and insignificant elsewhere, while the change in inflation is always insignificant. Government growth is negative and significant in Africa and the Americas, but positive and significant in Asia. The standard deviation of GDP growth is only positive and significant in Africa, and the standard deviation of inflation is negative and significant in the Americas and Asia. The most interesting findings here are the lack of convergence effects on growth and the one case (Asia) of a positive government growth coefficient. The coefficients on initial per-capita income in Africa and Asia are consistent
The countries in each subsample are listed in the appendix. The Americas sample is North, Central, and South America minus OECD members. The Asia sample includes Fiji, Indonesia, and New Guinea.

270

K. B. Grier and G. Tullock, Cross-national economic growth Table 4

Pooled

regression on five-year American countries,

averaged data for 43 African countries, 24 Central and 22 Asian and Far Eastern countries, 1961-1980.a Africa 2.030 (1.46) Americas 4.047 (3.26) - o.Oc019 (0.53) - 0.126 (2.08) 0.849 (2.91) - 0.051 (0.59) 0.135 (1.59) - 0.095 (0.86) - 0.095 (1.89) 0.520 (0.77) - 0.395 (0.60) - 0.361 (0.53) 96 0.292 3.61

and

South

Variable Intercept Initial per-capita real GDP share of GDP

Asia 6.396 (2.74) 0.00098 (1.79) 0.113 (1.99) 0.252 (0.32) -0.133 (1.15) - 0.107 (0.97) - 0.006 (0.06) - 0.148 (2.58) - 0.903 (0.82) 0.748 (0.60) - 0.892 (0.74) 88 0.213 2.40

0.00099 (1.74) - 0.207 (3.57) 0.502 (1.19) 0.152 (2.38) - 0.276 (4.17) 0.087 (1.18) 0.016 (0.28) 0.160 (0.19) 1.173 (1.43) - 0.222 (0.25) 172 0.223 4.65

Mean growth

of government growth

Mean population Std. deviation Mean inflation Mean change Std. deviation Dummy Dummy Dummy N R2 F Numbers

of real GDP growth rate in inflation of inflation

for 1966-1970 for 1971-1975 for 1976-1980

in parentheses

are t-statistics.

with the proposition that there are increasing returns to technology at low initial conditions and the relatively rich countries get even relatively richer. In Africa and Asia, average per-capita income in 1960 was about one-third the average 1950 level in the OECD. The coefficients imply that a one standard deviation increase in initial income produces a 0.32 percentage point increase in growth for African countries and a 0.93 increase for Asian countries. Though the regression coefficient for the Americas is insignificant, the crosscorrelation coefficient between initial wealth and growth is -0.38, which is significant at the 0.10 level. This should serve as a warning about looking at simple correlations to draw inferences about the strength of convergence patterns across countries. Also in contrast with the OECD results, none of the

K.B. Grier and G. Tullock, Cross-national economic growth

271

time-period dummy variables are significant in these ROW regressions. There is no evidence of a rising average growth rate, holding other factors constant. There are significant cross-continent differences in the intercept, with Asias growth rate estimated to be three times larger than Africas holding our macro variables constant. In Africa and the Americas, government growth is significantly negatively correlated with GDP growth, and though the coefficients are smaller than what we observe for the OECD, government growth is more variable in these countries so that a one standard deviation increase in government growth reduces GDP growth by 0.58 points in Africa and 0.25 points in the Americas. In Asia, a one standard deviation increase in government growth corresponds to a 0.38 percentage point increase in the real GDP growth. These three equations have no coefficients that have the same sign and are significant in each case, nor are all coefficients significant in any one equation. The equations explain between 20 and 30 percent of the variation in real GDP growth, compared to the 0.63 R2 in the OECD equation. Our findings for these 89 countries are mainly negative. Coefficients do not pool across continents; variables often do not retain significance from equation to equation; the specification that explains a large part of the OECD growth experience does not work nearly as well in the rest of the world. One thing the ROW data do clearly show is that economic convergence is not a ubiquitous phenomenon. Rather, we find a pattern of divergence, where the rich grow relatively richer. When combined with the result that, in Africa and Asia, population growth has no effect on economic growth, a bleak picture of growth prospects in these poorest countries emerges.

4.5. OPEC,

freedom, and the ROW

We can investigate, at least on a crude level, some factors that may influence these results. The first possibility is oil wealth. There are eight OPEC members in the sample, and it is possible that either the divergence or noneffect of population results are produced by superior economic growth in these oilexporting countries. The other factor is a proxy for the political infrastructure of these countries. Freedom House provides a ranking of civil liberties around the world that is explained by Gastil(1978) investigated by Bilson (1982) and used by K-M. K-M use a dummy variable defining countries in the two highest

Just as Japan had a very high growth rate and low government consumption growth in the OECD sample, Hong Kong has a very high growth rate for both GDP and government consumption. Deleting Hong Kong from the sample slightly lowers the government growth coefficient and lowers the significance level to 0.10.

212

K. B. Grier and G. Tullock, Cross-national economic growth Table 5 Controlling for civil liberties and OPEC in the ROW regressions, Africa 3.570 (2.47) real GDP share of GDP 0.00006 (0.10) - 0.225 (4.08) 0.394 (0.95) 0.100 (1.64) - 0.287 (4.53) 0.090 (1.28) 0.029 (0.53) 4.156 (3.58) - 1.480 (2.83) 172 0.307 5.87 Time-period dummies 1961-1980.a Asia 6.383 (2.65) 0.00095 (1.67) 0.110 (1.90) 0.254 (0.31) - 0.125 (0.98) -0.114 (1.00) - 0.005 (0.05) - 0.125 (2.55) 0.383 (0.33) - 0.213 (0.20) 88 0.214 2.10 in these regres-

Variable Intercept Initial per-capita Mean growth

Americas 4.849 (3.55) - 0.00039 (0.95) -0.118 (1.97) 0.661 (2.03) - 0.069 (0.81) 0.135 (1.61) - 0.077 (0.70) - 0.074 (1.39) 0.205 (0.77) - 1.668 (1.88) 96 0.321 3.47 were estimated

of government growth

Mean population Std. deviation Mean inflation Mean change Std. deviation Dummy Dummy N R2 F

of real GDP growth rate in inflation of inflation

for OPEC membership for lack of civil liberties

Numbers in parentheses are r-statistics. sions but not reported above.

civil liberty classes of the seven categories given by Freedom House. Here we use a dummy variable that includes countries in the two most repressive categories. In table 5 we add these dummy variables to the regressions for Africa, the Americas, and Asia. The effects are most dramatic in Africa. Ceteris paribus, the OPEC countries (Algeria, Gabon, and Nigeria) grew 4 percentage points faster and severely repressive countries 1.5 points slower. These variables increase the fit of the equation by 50 percent and knock out the significant divergence effect on the African continent, though population growth remains completely insignificant. In the Americas, the OPEC countries are not significantly different, but the repressive countries have, on average, a growth rate 1.7 percentage points lower than the other countries. In the Asia sample, neither variable is signifi-

K.B. Crier and G. Tullock, Cross-national economic growth

213

cant, the coefficient on population is still insignificant and the coefficient on initial wealth is still positive and significant. However, five OPEC countries that belong in this sample are not in the Summers-Heston data. As with all the ROW results, the effects of OPEC and political repression vary significantly across continents. Neither of these variables apply to the OECD, which contains no members of OPEC and no countries below the third rank of civil liberty in the Freedom House index.

4.6. Population weighted regressions The above results give each country equal weight in determining coefficients regardless of their relative size. For example, Belgium and the U.S. in the

Table 6 Population-weighted Variable Intercept Initial per-capita real GDP Mean growth government of GDP of share regressions for the OECD, Africa, Americas, Africa 2.621 (1.87) - 0.00042 (0.89) -0.113 (2.37) 0.943 (2.08) - 0.065 (1.13) -0.216 (4.19) 0.098 (1.34) - 0.008 (0.20) 2.746 (4.39) - 1.515 (3.40) 172 0.306 5.85 Time-period dummies and Asia subsamples. Americas 2.587 (1.44) - 0.00060 (1.48) - 0.296 (4.11) 1.334 (3.12) - 0.044 (0.36) 0.228 (1.91) - 0.306 (2.58) - 0.098 (2.24) - 0.819 (0.91) - 1.637 (1.92) 96 0.538 8.05 were estimated Asia 3.950 (1.67) 0.0016 (2.08) 0.164 (2.39) 0.250 (0.28) - 0.399 (3.35) - 0.009 (0.11) -0.100 (0.84) 0.015 (0.37) 1.351 (1.74) 0.228 (0.21) 88 0.336 3.26 in these regres-

OECD 1.225 (14.08) - 0.0010 (11.26) - 0.310 (7.36) 1.261 (5.83) 0.155 (1.78) 0.060 (0.89) in of - 0.080 (1.68) -0.189 (5.42) _

Mean population growth Std. deviation of real GDP growth Mean inflation rate Mean change inflation Std. deviation inflation

Dummy for OPEC membership Dummy for lack of civil liberties N R2 F

_
144 0.747 32.24

Numbers in parentheses are r-statistics. sions but not reported above.

214

K. B. G&r and G. Tullock, Cross-national

economic growth

OECD and Sri Lanka and India in Asia have an equal opportunity to influence the results despite their staggering population differentials. As a check on the stability of our results, table 6 reports population-weighted regressions for the four subsamples. This will show whether the results are driven by small countries. Table 6 shows that the basic flavor of our results carries through to the population-weighted regressions. In the OECD and the Americas, the convergence effect is slightly stronger, population growth has a bigger coefficient, and the first difference of inflation is now negative and significant. In Africa, population growth becomes positive and significant for the first time. In the Asia sample, the standard deviation of GDP growth becomes negative and significant. Otherwise the results are largely the same.

5. Summary

and conclusions

We use the Summers and Heston data to extend K-Ms empirical model of cross-country growth. For OECD countries we find a strong convergence effect and a persistent negative correlation between the growth of governments share in GDP and economic growth. We find no positive association between inflation and growth and a significant negative relationship between inflation variability and growth. In the specific case of the U.S., our results indicate that, while U.S. growth is lower than the OECD average and declining from the 1960s to the 1970s, these effects are less than what simple convergence or our complete model predict. Since we cannot pool the countries in the ROW and the OECD or even across continents in the ROW, we estimate separate equations for Africa, the Americas, and Asia. Here we find no evidence for the convergence hypotheses. In fact, for Africa and Asia, the relatively advanced countries grow faster. There is still no positive association between inflation and growth (for Africa, inflation is a negative and significant influence), but the negative effect of inflation variability only shows up (at the 0.10 level) in the Americas. Government growth is negative and significant in Africa and the Americas, but has a positive coefficient in Asia. Finally, we note the Malthusian result that population growth has no positive effect on output growth in either Africa or Asia (except for the population-weighted coefficient for Africa). These results demonstrate that we do not have a single empirical model of secular growth that applies around the world. Idiosyncratic variations, what Abramowitz calls social capabilities, are much more important than can be inferred from the highly aggregated results presented by K-M. Much more research is needed on the causes of economic growth in less advanced countries.

K. B. Grier and G. Tullock, Cross-naiional economic growth

275

Appendix: Division of countries in the sample A.l. OECD (24) Greece Iceland Ireland Italy Japan Luxembourg Netherlands Norway New Zealand Portugal Spain Sweden Switzerland Turkey United Kingdom United States

Australia Austria Belgium Canada Denmark Finland France Germany A.2. ROW

(F.R.G.)

A.2. I. Africa (43) Algeria, l2 Angola12 Benin 2 Botswana Burundi12 Cameroon Central African Chad Congoi Egypt Ethiopia Gabon11-2 Gambia Ghana Guinea12 A.2.2. Americas (24) Argentina Barbados Bolivia Brazil Chile Columbia Costa Rica Dom. Republic Ecuador El Salvador Guatemala Guyana Haiti12 Honduras Jamaica Mexico Nicaragua Panama Paraguay Peru Surinam Trinidad & Tobago Uruguay Venezuelai
Qatar, Saudi Arabia,

Republic

Ivory Coast Kenya Lesotho Liberia Madagascar Malawi Malii Mauritania12 Mauritius Morocco Mozambique12 Niger12 Nigeria Rwanda

Senegal Sierra Leone Somalial South Africa12 Sudan Swaziland Tanzania12 Togd2 Tunisia Uganda12 Upper Volta Zaire12 Zambia Zimbabwe

OPEC member: note that the Arab OPEC countries of Kuwait, Libya, and the United Arab Emirates are not in the Summers-Heston data set. Country with low civil liberties (Freedom House index of 6 or greater).

216

K.B. Crier and G. Tullock, Cross-national economic growth

A.2.3. Asia (22)

Afghanistan* Bangladesh Burma* Fiji India Indonesia Iran Iraqi**

References

Israel Jordan12 Hong Kong South Korea Malaysia Nepal New Guinea Pakistan

Philippines Singapore Sri Lanka Syria * Taiwan Thailand

Abramowitz. Moses, 1985, Catching up, forging ahead, and falling behind, Journal of Economic History 66, 385-406. Barro, Robert J., 1988, Government spending in a simple model of endogenous growth, Mimeo. (Harvard University. Cambridge, MA). Barth, James, Robert Keleher. and Frank Russek, 1987, The scale of government and economic activity, Mimeo. Baumol, William, 1986, Productivity growth, convergence, and welfare, American Economic Review 76. 1072-1085. Bilson, J.F., 1982, Civil liberty - an econometric investigation, Kyklos 35. 94-114. Black, Fisher, 1979, Business cycles in general equilibrium, Working paper (MIT, Cambridge, MA). De&on, E.F., 1979, Accounting for slower economic growth: The United States in the 1970s (The Brookings Institution, Washington, DC). Denison, E.F.. 1985, Trends in American economic growth: 1929-82 (The Brookings Institution, Washington, DC). Friedman, Milton, 1977, Inflation and unemployment, Journal of Political Economy 85, 451-472. Gastil, R.D., 1978, Freedom in the world: Political rights and civil liberties (Freedom House, New York, NY). Hayek, F.A., 1944, The road to serfdom (University of Chicago Press, Chicago, IL). Kormendi, R.C. and P.G. Mequire, 1985, Macroeconomic determinants of growth: Cross-country evidence, Journal of Monetary Economics 16,141-163. Levi, Maurice and John Makin, 1980, Inflation uncertainty and the Phillips curve: Some empirical evidence, American Economic Review 70, 1022-1027. Lucas, R.E.. 1987. On the mechanics of economic development, Journal of Monetary Economics 22,43-70. Maddison. Angus, 1987, Growth and slowdown in advanced capitalist economics: Techniques of qualitative assessment, Journal of Economic Literature 25, 649-698. Mullineaux, Donald, 1980, Unemployment, industrial production and inflation uncertainty, Review of Economics and Statistics 62, 163-168. Romer, Paul M., 1986. Increasing returns and long-run growth, Journal of Political Economy 94, 1002-1037. Sandmo, Agnar, 1970, The effect of uncertainty on saving, Review of Economic Studies 37, 353-360. Stockman. Alan, 1981, Anticipated inflation and the capital stock in a cash-in-advance economy, Journal of Monetary Economics 8, 387-393. _ Summers, Robert and Alan Heston, 1984, Improved international estimates of real product and its composition: 1950-1980, Review of Income and Wealth 30, 207-262.