Published as “Why Economies Grow the Way They Do” Canadian Business Economics, SpringSumm.pdfVIP

November 30, 1997 [2.3+] Determinants of Long Term Growth Jeffrey A. Frankel, Member, U.S. Council of Economic Advisers Background Paper for the Morning Session of the Meeting of the Asia-Pacific Economic Cooperation Economic Advisers, Vancouver, Canada, November 20, 1997 Published as “Why Economies Grow the Way They Do” Canadian Business Economics, Spring/Summer 1998 1 Introduction 1.1 The last 20 years have seen wide-ranging research, both theoretical and empirical, on the determinants of long term growth. “Old growth models” of closed economies have given way to “new growth models” of open economies in concert with “new trade” theories. Facilitated by the availability of data that compare income levels across countries in real terms, econometricians have been able to study what factors tend to be associated with more rapid growth. 1.2 The resurgence in research is partly the result of interest in the explanation of the rapid growth in many East Asian economies. The record of growth in this part of the world had been so spectacular, at least until recently, that it was claimed as supporting evidence by both sides in each of three debates (at least). First is the debate on whether the East Asians success is proof of the superiority of protectionist policies on the one hand, or of outward-oriented policies on the other. Second is the broad debate whether the East Asian phenomenon is evidence of the virtues of government intervention in general, or of laissez-faire market-oriented policies.1 Third is the debate over whether the statistics support growth based on simple accumulation of the factors of production (labor, education, and especially physical capital), or growth based on improvements in technology and efficiency (measured as an increase in total factor productivity, or the So