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Discussion Paper Series, 15(1): 1-22 Determinants of economic growth: the view of the
Paschalis Arvanitidis Lecturer, Department of Economics
University of Thessaly, Korai str. 43, 38333, Volos, e-mail: email@example.com
Sotiris Pavleas Ph.D. Candidate, Department of Planning and Regional Development
George Petrakos Professor, Department of Planning and Regional Development
Abstract The paper draws on a questionnaire survey addressed to various experts worldwide, to identify which factors either support or inhibit growth potential and to assess their degree of significance. A number of points emerge. First, alongside conventional determinants, the political and legal aspects play a substantial role in advancing growth dynamics. Second, determinants influence at a different degree each economy depending on the level of development exhibited. As such, policy priorities should be different between developed and developing countries. Third, there seems to be some factors which are essential to economic growth independent of the level of development achieved.
Key words: economic growth, economic dynamism, determinants, experts views
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Discussion Paper Series, 2009, 15(1)
Introduction Over the last decades the issue of economic growth has attracted increasing attention in both theoretical and empirical research. Yet, the process underlying economic performance and growth is poorly understood (Easterly 2001), something, which can be partly attributed to the lack of a unifying economic theory and the reductionistic way mainstream economics approach the issue (Artelaris et al. 2006).
Despite the lack of a unifying theory, there are several partial theories that discuss the role of various factors in determining economic performance and growth. Two mainstream strands can be distinguished: the neoclassical, formalised by Solow (1956), which emphasises the importance of capital accumulation and, the more recent, theory of endogenous growth, pioneered by Romer (1986, 1990) and Lucas (1988), which has drawn attention to human capital and innovation capacity. Furthermore, important insights on the issues of economic growth have been provided by the New Economic Geography which pays due respect to the spatial characteristics of development. In addition, other explanations have highlighted the significant role non-economic (in the conventional sense) factors play on economic performance. These developments gave rise to a discussion that distinguishes between proximate and fundamental (or ultimate) sources of growth (Rodrik 2003; Snowdon 2003; Acemoglu et al. 2005). The former refers to issues such as capital accumulation, labour and technology while the latter to institutions, political systems, socio-cultural factors, demography and geography.
Theoretical developments have been accompanied by a growing number of empirical studies. Initially research focused on the issue of economic convergence/divergence, since this could provide a test of validity between the two main growth theories (i.e. the neoclassical and the endogenous growth theory). Eventually, focus shifted to factors determining economic growth. Seminal studies in this field are conducted by Kormendi and Meguire (1985), Grier and Tullock (1989) and, especially, Barro (1991). This second wave of empirical studies has been facilitated by the development of larger and richer databases (such as the Penn World Tables) and more advanced statistical and econometric techniques (mainly cross-sectional and panel-data), which enabled the identification of determinants of economic growth with higher precision and confidence. Finally, it is worth emphasising that due to the lack of a unifying theory on economic growth, a substantial volume of empirical research has multi-theoretical bases. This means that studies draw on several theoretical frameworks and examine factors highlighted by several sources. As a result findings are often contradictory and conclusions far from established.
This paper draws on a questionnaire survey addressed to various experts worldwide (regional scientists, policy makers and business people), to explore their views on the factors underlying economic dynamism. Economic dynamism refers to the potential an
4 Paschalis Arvanitidis, Sotiris Pavleas, George Petrakos
UNIVERSITY OF THESSALY, Department of Planning and Regional Development
area has for generating and maintaining high rates of economic performance. In particular the research has set the following objectives:
1. to identify dynamic regions in a global scale,
2. to identify the main determinants of economic dynamism,
3. to identify the strength of influence of determinants, and
4. to discuss optimum mix of characteristics pertaining to growth.
The results of this research are expected to assist assessment of our current knowledgebase, to identify misconceptions and knowledge gaps and to indicate direction for further research on the issue of economic growth and development.
The structure of the paper is as follows. The next section briefly presents the main economic growth theories and summarizes the most important determinants of economic growth that have been identified in the literature. Then, an overview of the employed research method is provided. The fourth section discusses the results of the survey providing answers to the research questions set above, and the final section concludes the paper summarising the key findings.
I. Main theories and determinants of economic growth
A. Theoretical perspectives
The neoclassical growth theory was introduced by Ramsey (1928) but it was Solow (1956) who put forth its most popular model. Assuming exogenous technological change, constant returns to scale, substitutability between capital and labour and diminishing marginal productivity of capital, the neoclassical growth models have made three important claims. First, increase in the capital-to-labour ratio (i.e. investment and savings ratio) is the key source of economic growth. Second, economies will eventually reach a state at which no new increase in capital will create economic growth (steady-state), unless there are technological improvements to enable production with fewer resources. Third, for the same amount of capital available, the less advanced economies would grow faster than the more advanced ones until steady state is reached, and as such economic convergence is to be achieved.
In contrast to the neoclassical perspective, the endogenous growth theories, pioneered by Romer (1986, 1990) and Lucas (1988), indicate that the introduction of new accumulation factors, such as knowledge and innovation, will induce self-sustained economic growth, leading to divergent growth patterns1. The crucial property of these
1 As a result, and in contrast to the neoclassical counterpart, policies are deemed to play a substantial role in advancing growth on a long-run basis.
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models is constant or increasing returns to capital, caused by the endogenous character of production technology. Work within this framework highlighted three significant sources of growth: new knowledge (Romer 1990; Grossman and Helpman 1991), innovation (Aghion and Howitt 1992) and public infrastructure (Barro 1990).
From a different perspective, another recent strand of economic analysis known as New Economic Geography (NEG) asserts that economic growth tends to be an unbalance process favouring the initially advantaged economies (Krugman 1991; Fujita et al. 1999). Developing a formalised system of explanations which places explicit emphasis on the compound effects of increasing returns to scale, imperfect competition and non-zero transportation costs, these studies have argued that economic activity tends to agglomerate in specific (urban) areas characterised by large local demand. This process is deemed to be self-reinforcing, due to increased (positive) externalities, backward and forward linkages between firms and scaled economies. Although negative externalities, transport costs and intensification of competition can give rise to centrifugal effects and the dispersion of activities, these forces are unlikely to induce a balanced pattern of growth. Therefore, economic policy has to come into play to alleviate inequalities. It is fair to say that the NEG is mainly concerned with the location of economic activity, agglomeration and specialization at a regional scale, rather that with economic growth per ce. However, growth outcomes can be inferred from its models.
From a macro perspective, other theoretical approached have emphasised the significant role non-economic (in the conventional sense) factors play on economic performance. Thus, new institutional economics has underlined the substantial role of institutions (Matthews 1986; North 1990; Shirley 2005), economic sociology stressed the importance of socio-cultural factors (Granovetter 1985; Knack and Keefer 1997), political science focused its explanation on political determinants (Lipset 1959; Brunetti 1997) and others shed light on role played by geography (Gallup et al. 1999) and demography (Brander and Dowrick 1994; Kalemli-Ozcan 2002).
B. Determinants of economic perfo