NBER WORKING PAPERS SERIES
A CONTRIBUTION TO THE EMPIRICS
OF ECONOMIC GROWTH
N. Gregory Mankiw
David Romer
David N. Weil
Working Paper No. 3541
NATIONAL BUREAU OF ECONOMIC RESEARCH
1050 Massachusetts Avenue
Cambridge, MA 02138
December 1990
We are grateful to Karen Dynan for research assistance, to
Laurence Ball, Olivier Blanchard, Anne Case, Lawrence Katz, Robert
King, Paul Romer, Xavier Sala—i—Martin, Amy
Saisbury,
Robert
Solow, Lawrence Summers, Peter Temin, and the referees for helpful
comments, and to the National Science Foundation for financial
support. This paper is part of NBER's research programs in
Economic Fluctuations and Growth. Any opinions expressed are
those of the authors and not those of the National Bureau of
Economic Research.
NBER Working Paper #3541
December 1990
A CONTRIBUTION TO THE EMPIRICS OF ECONOMIC GROWTH
ABSTRACT
This paper examines whether the Solow growth model is
consistent with the international variation in the standard of
living. It shows that an augmented Solow model that includes
accumulation of human as well as physical capital provides an
excellent description of the cross—country data. The model
explains about 80 percent of the international variation in income
per capita, and the estimated influences of physical—capital
accumulation, human—capital accumulation, and population growth
confirm the model's predictions. The paper also examines the
implications of the Solow model for convergence in standards of
living-—that is, for whether poor countries tend to grow faster
than rich countries. The evidence indicates that, holding
population growth and capital accumulation constant, countries
converge at about the rate the augmented Solow model predicts.
David Roiner
N. Gregory Mankiw
Department of Economics
NBER
787 Evans Hall
1050 Massachusetts Avenue
University of California
Cambridge, MA 02138—5398
Berkeley, CA 94720
David Weil
NBER
1050 Massachusetts Avenue
Cambridge, MA 02138—5398
Introduction
This paper takes Robert Solow aeriously. In his classic 1956
article, Solow proposed that we begin the study of economic growth by
assuming a standard neoclassical production function with decreasing
returns to capital. Taking the rates of saving and population growth as
exogenous, he showed that these two variables determine the steady-state
level of income per capita. Because saving and population growth rates
vary across countries, different countries reach different steady states.
Solow's model gives simple testable predictions about how these variables
influence the steady-state level of income. The higher the rate of
saving, the richer the country. The higher the rate of population growth,
the poorer the country.
This paper argues that the predictions of the Solow model are, to a
first approximation, consistent with the evidence. Examining recently
available data for a large set of countries, we find that saving and
population growth affect income in the direction that Solow predicted.
Moreover, more than half of the cross-country variation in income per
capita can be explained by these two variables alone.
Yet all is not right for the Solow model. Although the model
correctly predicts the direction of the affects of saving and population
growth, it does not correctly predict the magnitudes. In the data, the
effects of saving and population growth on income are too large. To
understand the relation between saving, population growth, and income, one
must go beyond the textbook Solow model.
We therefore augment the Solow model by including accumulation of
human as well as physical capital. The exclusion of human capital from
the textbook Solow model can potentially explain why the estimated
influences of saving and population growth appear too large, for two
reasons. First, for any given rats of human-capital accumulation, higher
saving or lower population growth leads to a higher level of income and
thus a higher level of human capital; hence, accumulation of physical
capital and population growth have greater impacts on income when
accumulation of human capital is taken into account. Second, human-
capital accumulation may be correlated with saving rates and population
growth rates; this would imply that omitting human-capital accumulation
biases the estimated coefficients on saving and population growth.
To test the augmented Solow model, we include a proxy for human-
capital accumulation as an additional explanatory variable in our cross-
country regressions. We find that accumulation of human capital is in
fact correlated with saving and population growth. Including human-
capital accumulation lowers the estimated effects of saving and population
growth to roughly the values predicted by the augmented Solow model.
1oreover, the augmented model accounts for about eighty percent of the
cross-country variation in income. Given the inevitable imperfections in
this sort of cross-country data, we consider the fit of this simple model
to be remarkable. It appears that the augmented Solow model provides an
almost complete explanation of why some countries are rich and other
countries are poor.
After developing and testing the augmented Solow model, we examine an
issue that has received much attention in recent years: the failure of
countries to converge in per capita income. We argue that one should not
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expect convergence. Rather, the Solow model predicts that countries
generally reach different steady states. We examine empirically the set
of countries for which non-convergence has been widely documented in past
work. We find that once differences in saving and population growth rates
are accounted for, there is convergence at roughly the rate that the model
predicts.
Finally, we discuss the predictions of the Solow modal for
international variation in rates of return and for capital movamants. The
modal predicts that poor countries should tand to have highar rates of
return to physical and human capital. We discuss various evidence that
one might usa to evaluate this prediction. In contrast to many recant
authors, we intarprat the available evidence on rates of raturn as
generally consistent with the Solow modal.
Overall, tha findings raportad in this papar cast doubt on the recant
trend among aconomiats to dismiss the Solow growth modal in favor of
andogenous-growth models that assuma constant or increasing returns to
scala in capital. One
can
explain much of tha cross-country variation in
incoma while maintaining the assumption of decreasing returns. This
conclusion does not imply. howaver, that the Solow model is a complata
theory of growth: one would like also to undarstand the detarminants of
saving, population growth, end world-wide technological change, all of
which the Solow model treats as exogenous. Nor does it imply that
endoganous-growth models are not important, for thay may provida the right
explanation of world-wide technological change. Our
conclusion does
imply, however, that tha Solow modal gives the right answers to tha
questions it is designed to address.
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