Measuring the sources of economic growth in the EU with parametric and non-parametric methods

The standard neoclassical growth accounting (parametric) framework serves to explain only a minor part of labour productivity growth and its cross-country differences, thus implying an important role (as yet unexplained) for the Solow Residual or the Total Factor Productivity (TFP). However, the increased application of non-parametric methods in growth accounting, and in particular with Data Envelopment Analysis (DEA), has revealed that, along with the direct effect on output, a higher capital stock will have a substantial indirect effect that has been disregarded by the neoclassical framework. In line with an appropriate technology model (Basu, Weil, 1998), a higher capital stock allows a country to use a better technology. This paper extends the evidence regarding the relevance of an appropriate technology view to those Eastern European countries that were not previously included in a growth accounting investigation using non-parametric methods. It also reveals that the appropriate technology view is useful in explaining labour productivity growth and its cross-country differences within the EU. Furthermore, the results are robustly subject to assumptions on capital formation and on whether labour productivity has been adjusted with regard to the cross-country differences in employment structure by the various sectors and by natural resource endowment. Given both the direct and indirect effects of capital accumulation, it might prove to be a much more important tool for determining labour productivity growth than is usually considered within a neoclassical framework.