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Bias correction in a dynamic panel data model of economic growth: The African dummy re-examined

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  • Stan du Plessis

    ()
    (Department of Economics, Stellenbosch University)

  • Sonja Keller

    ()
    (Nuffield College, Oxford)

Abstract

The discrepancy between the observed and expected growth rates of African economies in cross-country or panel growth regressions is often summarised in a significant African dummy. However, the existence of this dummy may be an artifact of the panel data techniques used. The standard LSDV (least squares dummy variable) method produces a large bias in the estimate of the coefficient on the lagged dependent variable, which could generate the observed African dummy. The lagged dependent variable in a growth model is used to calculate the cross-country rate of convergence. If, however, the convergence rate is overestimated, then the Africa dummy would result due to the clustering of African economies at the lower end of the world cross-country income distribution. Correcting for the bias - using Kiviet’s (1995) algorithm - allows a fresh look at the apparent systematic underperformance of African countries relative to their growth predictions. Little evidence remains of such underperformance by African economies once the relevant bias in the dynamic panel has been accounted for.

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File URL: http://www.ekon.sun.ac.za/wpapers/2002/wp042002/wp-04-2002.pdf
File Function: First version, 2002
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Bibliographic Info

Paper provided by Stellenbosch University, Department of Economics in its series Working Papers with number 04/2002.

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Date of creation: 2002
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Handle: RePEc:sza:wpaper:wpapers4

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Keywords: growth regressions; dynamic panels; African dummy;

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References

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  1. Stephen Knack & Philip Keefer, 1995. "Institutions And Economic Performance: Cross-Country Tests Using Alternative Institutional Measures," Economics and Politics, Wiley Blackwell, Wiley Blackwell, vol. 7(3), pages 207-227, November.
  2. Robert J. Barro & Jong-Wha Lee, 2000. "International Data on Educational Attainment Updates and Implications," NBER Working Papers, National Bureau of Economic Research, Inc 7911, National Bureau of Economic Research, Inc.
  3. Jeffrey D. Sachs & Andrew M. Warner, 1995. "Economic Convergence and Economic Policies," NBER Working Papers, National Bureau of Economic Research, Inc 5039, National Bureau of Economic Research, Inc.
  4. Sachs, J-D & Warner, A-M, 1996. "Sources of Slow Growth in African Economies," Papers, Harvard - Institute for International Development 545, Harvard - Institute for International Development.
  5. Xavier X. Sala-i-Martin, 1997. "I Just Ran Four Million Regressions," NBER Working Papers, National Bureau of Economic Research, Inc 6252, National Bureau of Economic Research, Inc.
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  7. Jonathan Temple, 1999. "The New Growth Evidence," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 37(1), pages 112-156, March.
  8. Pesaran, M. Hashem & Smith, Ron, 1995. "Estimating long-run relationships from dynamic heterogeneous panels," Journal of Econometrics, Elsevier, Elsevier, vol. 68(1), pages 79-113, July.
  9. Anke E. Hoeffler, 2000. "The Augmented Solow Model and the African Growth Debate," CID Working Papers, Center for International Development at Harvard University 36, Center for International Development at Harvard University.
  10. Nickell, Stephen J, 1981. "Biases in Dynamic Models with Fixed Effects," Econometrica, Econometric Society, Econometric Society, vol. 49(6), pages 1417-26, November.
  11. Arellano, Manuel & Bond, Stephen, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 58(2), pages 277-97, April.
  12. Kevin Lee & M. Hashem Pesaran & Ron Smith, 1998. "Growth Empirics: A Panel Data Approach- A Comment," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 113(1), pages 319-323, February.
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Cited by:
  1. Knedlik, Tobias & Reinowski, Eva, 2008. "The African Growth Gap and the Realization of the MDGs," Proceedings of the German Development Economics Conference, Zurich 2008, Verein für Socialpolitik, Research Committee Development Economics 23, Verein für Socialpolitik, Research Committee Development Economics.

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