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The Channels of Economic Growth: A Channel Decomposition Exercise

This paper formally introduces channel decomposition, a method that systematically decomposes the channels through which the determinants of growth operate, into the analysis of economic growth. Under channel decomposition, the determinants could affect economic growth through physical capital accumulation, through human capital acquisition, and/or through growth in total factor productivity. Thus, by examining the outcomes of the decomposition, we can test alternative models, as different models often imply different channels of operation for the determinants. Methodologically, channel decomposition combines growth accounting with regression analysis, rather than regarding them as alternative approaches. With this method, it becomes clear that technological catch-up, not factor accumulation, accounts for the widely documented phenomenon of conditional convergence. This finding turns out to be extremely robust. In effect, this finding puts the final nails in the coffin of the Neoclassical growth model, as the model can neither explain cross-country growth, nor can it explain conditional convergence. The method also shows that both rich and poor countries converge mainly through technological catch-up, although richer countries converge much faster than the poor.

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File URL: http://www.fas.nus.edu.sg/ecs/pub/wp/wp0101.pdf
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Paper provided by National University of Singapore, Department of Economics in its series Departmental Working Papers with number wp0101.

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Length: 39 pages
Date of creation: Oct 2001
Date of revision:
Handle: RePEc:nus:nusewp:wp0101
Contact details of provider: Web page: http://www.fas.nus.edu.sg/ecs/index.html

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  1. Jeffrey Sachs & Andrew Warner, 1995. "Economic Reform and the Progress of Global Integration," Harvard Institute of Economic Research Working Papers 1733, Harvard - Institute of Economic Research.
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  13. Michael Bruno & William Easterly, 1995. "Inflation Crises and Long-Run Growth," NBER Working Papers 5209, National Bureau of Economic Research, Inc.
  14. Peter Klenow & Andrés Rodríguez-Clare, 1997. "The Neoclassical Revival in Growth Economics: Has It Gone Too Far?," NBER Chapters, in: NBER Macroeconomics Annual 1997, Volume 12, pages 73-114 National Bureau of Economic Research, Inc.
  15. Bosworth, B. & Collins, S.M. & Chen, Y.C., 1995. "Accounting for Differences in Economic Growth," Papers 115, Brookings Institution - Working Papers.
  16. David H. Romer & Jeffrey A. Frankel, 1999. "Does Trade Cause Growth?," American Economic Review, American Economic Association, vol. 89(3), pages 379-399, June.
  17. Francisco Rodriguez & Dani Rodrik, 1999. "Trade Policy and Economic Growth: A Skeptic's Guide to Cross-National Evidence," NBER Working Papers 7081, National Bureau of Economic Research, Inc.
  18. Persson, Torsten & Tabellini, Guido, 1994. "Is Inequality Harmful for Growth?," American Economic Review, American Economic Association, vol. 84(3), pages 600-621, June.
  19. Davidson, Russell & MacKinnon, James G., 1993. "Estimation and Inference in Econometrics," OUP Catalogue, Oxford University Press, number 9780195060119, March.
  20. Bernard, Andrew B & Jones, Charles I, 1996. "Technology and Convergence," Economic Journal, Royal Economic Society, vol. 106(437), pages 1037-44, July.
  21. Psacharopoulos, George, 1994. "Returns to investment in education: A global update," World Development, Elsevier, vol. 22(9), pages 1325-1343, September.
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