Thursday, December 10, 2009

What Causes Economic Growth?

. Thursday, December 10, 2009

Nothing. And everything. William Easterly reviews an important new article:

Despite Climategate, even a superficial reading seems to indicate that there is enough evidence for effects of man-made activity on the climate.

Surprisingly, there is a lot less evidence for effects of man-made activity on something that actually is completely man-made: the rate of economic growth in each country.

I had this frustrating thought as I was reading an important new paper, “Determinants of Economic Growth: Will Data Tell?” [1]

The paper gives a conclusive and resounding answer to the question in the title: no.

It has taken economists a lot of hard work to attain this level of sublime ignorance. There were three steps in the the great History of Evolving Cluelessness:

1. Economists spent the past two decades trying every possible growth determinant in sight. They found evidence for 145 different variables (according to an article published in 2005). That was a bit too many in a sample of only about one hundred countries. What was happening is there would be evidence for Determinants A, B, C, and D when tried one at a time to explain growth. But the evidence for A disappeared when you also controlled for some combination of B, C, and D, and/or vice versa. (Interestingly enough, foreign aid never even merited inclusion in the list of 145 variables.)

2. The Columbia economist Xavier Sala-i-Martin and co-authors ran millions of regressions on all possible combinations of 7 variables out of the many possible determinants of growth. Skipping a lot of technical detail, they essentially averaged out the millions of regressions to see which determinants had evidence for them in most regressions. There was hope: some were robust! For example, the idea that malaria prevalence hinders growth found consistent support.

3. This new paper by Ciccone and Jarocinski found that every time the growth data are revised, or if the sample is changed to another equally plausible one, the results vanish on the “robust” variables and new “robust” variables appear. Goodbye, malaria, hello, democracy. Except the new “robust” determinants are no longer believable if minor differences between equally plausible samples changes what is robust. So nothing is robust.

There is more at the link, including whether we should think of the growth literature as GrowthGate.


What Causes Economic Growth?
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