Why are Some Countries Richer than Others? A Reassessment of Mankiw-Romer-Weil's Test of the Neoclassical Growth Model | Asian Development Bank

Why are Some Countries Richer than Others? A Reassessment of Mankiw-Romer-Weil's Test of the Neoclassical Growth Model

Publication | August 2002
Why are Some Countries Richer than Others? A Reassessment of Mankiw-Romer-Weil's Test of the Neoclassical Growth Model

This paper has evaluated whether the predictions of Solow’s growth model - that the higher the rate of saving, the richer the country; and the higher the rate of population growth, the poorer the country - can be tested and refuted.

This paper provides evidence of a problem with the influential testing and assessment of Solow's (1956) growth model proposed by Mankiw et al. (1992) and a series of subsequent papers evaluating the latter. First, the assumption of a common rate of technical progress maintained by Mankiw, Romer, and Weil (1992) is relaxed. Solow's model is extended to include the different levels and rates of technical progress of each country. This increases the explanatory power of the cross-country variation in income per capita of the Organisation for Economic Co-operation and Development (OECD) countries to over 80%. The estimates of the parameters are statistically significant and take the expected values and signs. Second, and more important, it is shown that the estimates merely reflect a statistical artifact. This has serious implications for the possibility of actually testing Solow's growth model.

Contents 

  • Abstract
  • Introduction
  • Solow's Growth Model and the Mankiw-Romer-Weil Specification
  • Relaxing the Assumption of a Common Technology Across CountriesToo Good to be True: The Tyranny of the Accounting Identity
  • The Convergence Regression and the Speed of Convergence
  • Conclusions: What is Left of Solow's Growth Model?
  • References