A CONTRIBUTION TO

THE EMPIRICS OF
ECONOMIC GROWTH
N. GREGORY MANKIW, DAVID ROMER,
DAVID N. WEIL
QJE Vol 107 Issue 2 (May 1992)

PRESENTATION
STRUCTURE
Introduction
Theory, Models and Data
Study Findings and
Conclusion
A critique of the study

INTRODUCTION
Study undertaken at a time
when the Solow growth
model was faced with
heavy attack from
proponents of endogenous
growth theory

INTRODUCTION
Romer, P.(1986): emphasis on
increasing returns and
externalities
Rebelo S. (1991): Emphasis on
increasing returns and taxation
policy

INTRODUCTION
Barro (1991) The hypothesis that poor
countries tend to grow faster than rich
countries seems to be inconsistent
with the cross-country evidence,
which indicates that per capita growth
rates have little correlation with the
starting level of per capita product

INTRODUCTION
Lucas (1988) asserts
Romer (1987, 1989)
argues that saving
has too large an
influence on growth
and takes this to be
evidence for positive
externalities from
capital accumulation

variation in population
growth cannot account
for any substantial
variation in real incomes
along the lines predicted
by the Solow model

INTRODUCTION
Lucas (1988),
Barro (1989),
King and
Rebelo(1989)

Solow model
fails to explain
either the rate
of return
differences or
international
capital flows

INTRODUCTION
Study objectives;
1) Examine the predictions of the
Solow model (signs and
magnitudes)
2) Test the convergence hypothesis
3) Discuss the predictions of Solow
for international variation in rates
of return and capital movements

TEXTBOOK SOLOW
MODEL
Rate of saving, population growth and
technological progress exogenous
Production at time t is given by

Y is output, K is capital, L is labor, A the

level of technology, AL effective labor;
= share of capital in output;

TEXTBOOK SOLOW
MODEL
L and A are assumed to grow
exogenously at rates n and g:

A constant fraction of output, s, is

invested; k=K/AL and y=Y/AL

TEXTBOOK SOLOW
MODEL
Evolution of capital governed by;

=depreciation rate. Steady state

value of k* will be

TEXTBOOK SOLOW
MODEL
Substituting 5 in production function yields;

TEXTBOOK SOLOW
MODEL

Equation 7 is the estimated version

(Results in table 1)
Assume g and are constant

TEXTBOOK SOLOW
MODEL AND DATA
Solow predicts that = 1/3 so that
Used Summers and Heston (1988) data
for 1960 to 1985
n is the average growth of the working
age population (15-64 years)
s is the average share of real
investment in real GDP

TEXTBOOK SOLOW
MODEL AND DATA
Y/L is real GDP in 1985 divided by
working age population in 1985

Three samples
All countries for which data were
available excluding oil producers (98)
Excludes countries whose data
received grade D from Summers and
Heston or whose populations in 1960
were less than 1 million (75)

TEXTBOOK SOLOW
MODEL AND DATA
OECD countries with population
greater than 1 million (22)

AUGMENTED SOLOW
MODEL
H=stock of human capital

AUGMENTED SOLOW
MODEL AND DATA
Equation 8 relates income per capita, and
population growth, accumulation of
physical and human capital
Model predicts that = 0.33, lies
between 0.33 and 0.5
h is measured as the % of working age
population that is in secondary school
(SCHOOL)

CONVERGENCE MODEL
In the Solow model, growth of income
is a function of the determinants of the
ultimate steady state and the initial
level of income
Countries that start poor grow faster

CONVERGENCE MODEL

RESULTS TEXTBOOK
MODEL

RESULTS TEXTBOOK
MODEL
1) Coefficients on saving and
Three

findings
that
support
the
Solow
model

population growth have the

predicted signs and, for two of the
three samples, are highly
significant
2) Restriction that the coefficients on
ln(s) and ln(n + g + ) are equal
in magnitude and opposite in sign
is not rejected in any of the
samples
3) Differences in saving and
population growth account for a
large fraction of the cross-country
variation in income per capita

RESULTS TEXTBOOK
MODEL
Solow model is not supported by the
result that the estimated impacts of
saving and labor force growth are
much larger than the model predicts
The authors cannot conclude that the
Solow model is consistent with data

RESULTS AUGMENTED
SOLOW MODEL

RESULTS AUGMENTED
SOLOW MODEL
The human capital measure enters
significantly in all three samples
It greatly reduces the size of the coefficient
on physical capital investment (1.42 0.69,
1.31 0.70, 0.5 0.28)
Improves the fit of the regression
(0.590.78, 0.590.77, 0.010.24)
The 3 variables explain about 80% of cross
country variation in the non-oil and
intermediate samples

RESULTS AUGMENTED
SOLOW MODEL
The augmented model predicts that the
coefficients on ln(I/Y), Ln(SCHOOL) and
ln(n+g+) sum to zero
This restriction is not rejected
For non-oil and intermediate samples, and
is approximately 0.33 (and highly
significant) as predicted by the theoretical
model
Conclusion: Adding human capital to the
Solow model improves its performance

RESULTS TEST OF
CONVERGENCE

RESULTS TEST OF
CONVERGENCE
Tests for unconditional convergence in Table III
replicate previous results on the failure of
incomes to converge (De Long, 1988; Romer,
1987)
Table IV adds rates of investment and
population growth to the right handside of the
regression
In all the three samples, the coefficient on the
initial level of income is now significantly
negative providing strong evidence of
convergence

RESULTS TEST OF
CONVERGENCE
The fit of the regression improves in all
samples
Table V adds the human capital
measure to the regression
This further lowers the coefficient on
the initial level of income and improves
the fit of the regression

RESULTS TEST OF
CONVERGENCE
Evidence on convergence contrasts
sharply with that of endogenous model
advocates

RESULTS INTEREST
RATES AND CAPITAL
Solow model predicts that the marginal
product of capital in low saving
countries will be high, but it does not
necessarily predict that interest rates
will also be high
Direct measurement of profit rates and
returns to schooling indicates that the
rate of return is much higher in poor
countries

CONCLUSION
International differences in income per
capita are best understood using an
augmented Solow growth model
The accumulation of physical capital has
a larger impact on income per capita
than the textbook Solow model implies
Population growth has a larger impact
on income per capita than the textbook
Solow model indicates

CONCLUSION
In contrast to endogenous growth models,
the augmented model predicts that
countries with similar technologies and rates
of accumulation of capital and population
growth should converge in income per capita
Finally, the results indicate that the Solow
dodel is consistent with international
evidence if one acknowledges the
importance of human as well as physical
capital

CRITIQUE
Paper is well written, easy to follow and
internally consistent
The model is fairly simple and the
theoretical extensions to the Solow
model are logically consistent with the
data

CRITIQUE
Closed economy assumption unrealistic;
the world consists of a cross-section of
countries which do not interact
these countries do not trade financial assets,
goods, or there is no slow diffusion of
technology across them
these countries inhabit the world, but they
are all islands onto themselves!

Inexistent government assumption does

not hold

CRITIQUE
Orthogonal technology assumption is too
strong (Aj = jA where j is orthogonal to
all other country variables);
A should correlate with s and vary across
countries

Estimate for that is implied by the

Mankiw-Romer-Weil regressions is too high
compared to microeconometric evidence
thus likely upwardly biased because of
omission of h capital externalities

CRITIQUE
Measurement of human capital erroneous
Schooling ignores the channels through which
human capital affects output
Ignores the role of health in human capital
development
Ignores the role of social capital

There is a reverse causality problem

Causal relationships exist between GDP per
capita and saving rate & population growth rate
under iso-elastic utility

CRITIQUE
Feasibility of OLS regression in this
problems

END OF
PRESENTATION

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