A Contribution to the Empirics of Economic Growth

This 1992 Quarterly Journal of Economics paper by Mankiw, Romer, and Weil tests whether Robert Solow’s (1956) neoclassical growth model, augmented to include accumulation of human as well as physical capital, can account for the enormous cross-country variation in income per capita. Using Summers-Heston national accounts data for three samples of countries (98 non-oil countries, a 75-country intermediate sample excluding low-data-quality and very small countries, and 22 OECD countries) over 1960-1985, the authors first show that the textbook Solow model (with only physical capital) gets the signs of the effects of the investment rate and population growth right and explains a majority of cross-country income variation, but implies an unrealistically high capital share of income – roughly 0.6-0.8 in the estimated regressions rather than the roughly one-third value implied by independent data on factor shares. Adding a proxy for human-capital investment (the fraction of the working-age population enrolled in secondary school) to the regression raises the explained variance to about 80 percent and brings the implied capital and human-capital shares close to their independently known values of about one-third each, without rejecting the restriction that the model’s coefficients should sum to zero. The paper further argues that the well-documented absence of unconditional convergence across countries does not contradict the Solow model, because the model predicts only “conditional convergence” – convergence toward each country’s own steady state, determined by its own saving, population growth, and human-capital investment rates – and the data show a statistically and economically significant conditional convergence at a rate, implying a roughly 35-year half-life to steady state, reasonably close to what the augmented model predicts. Finally, the paper argues that apparently puzzling patterns in international interest-rate differentials and capital flows (the Feldstein-Horioka finding that capital does not flow from high-saving to low-saving countries) do not straightforwardly contradict the model once one allows for imperfect capital markets and expropriation risk, and that direct evidence on profit rates and returns to schooling is, if anything, consistent with the Solow model’s prediction of higher returns to capital in poorer countries. The authors are careful to note that this defense of the Solow model does not make it a complete theory of growth, since it still treats saving rates, population growth, and worldwide technological change as exogenous, and that endogenous-growth models may still be needed to explain those more fundamental determinants.

David Romer | Macro Paper Warehouse

A Contribution to the Empirics of Economic Growth