Growth analysis in developing countries: empirical issues and a small dynamic model

Most developing countries are small open economies; they have quite limited absorptive capacity for new physical and human capital; face credit constraints in international financial markets; and, last but not least, they are usually far from the steady state. Thus, transitional dynamics starting from actual initial conditions matters, and matters a lot. To account for these features in the simplest way, we develop a small intertemporal model suitable for growth analysis in developing countries. We discuss each model equation, variable and parameter from an empirical point of view; we analyze the model’s main dynamic features; and we present illustrative simulations for a “typical” developing economy. We find a rich transitional dynamics induced by the existence of absorptive capacity functions and a foreign debt constraint. We also find that for many relevant variables and parameters there are still problems of lack of data and estimates. Thus, a good deal of empirical work on these issues is needed to make growth analysis in developing countries operational for applied policy analysis.