Tuesday, March 18, 2008

What Makes Growth Sustained?

This is a title of a recent paper from the IMF Research Department authored by Anthony Berg, Jonathan David Ostry, Jeromin, Zettelmeyer. They explore what keeps growth going, not what matters for getting growth going.

We identify structural breaks in economic growth in 140 countries and use these to define "growth spells:" periods of high growth preceded by an upbreak and ending either with a downbreak or with the end of the sample. Growth spells tend to be shorter in African and Latin American countries than elsewhere. We find that growth duration is positively related to: the degree of equality of the income distribution; democratic institutions; export orientation (with higher propensities to export manufactures, greater openness to FDI, and avoidance of exchange rate overvaluation favorable for duration); and macroeconomic stability (with even moderate instability curtailing growth duration).


Our main findings confirm some previous results in the literature—in particular, that external shocks and macroeconomic volatility are negatively associated with the length of growth spells, and that good political institutions help prolong growth spells. We also have some more surprising findings. Trade liberalization, seems to help not only in getting growth going, as emphasized by previous authors, but also in sustaining it—particularly when combined with competitive exchange rates, current account surpluses, and an external capital structure weighted toward foreign domestic investment.Consistent with the findings of Johnson, Ostry, and Subramanian (2006, 2007), Hausmann, Hwang, and Rodrik (2006) and Hausmann, Rodriguez, and Wagner (2006), we find that the manufacturing share in exports, and more generally, export product sophistication tend to prolong growth. Most strikingly, we find that the duration of growth spells is strongly related to income distribution: more equal societies tend to grow longer. On the whole, these results share some of the flavor of recent work on the political economy of growth and development, as briefly discussed in Section III and in our conclusions.