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Summary Growth Accounting

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Growth accounting

Understand the aim and idea behind growth accounting: what can it do and what not?

Growth accounting is methodology as indirect way to measure technology and knowledge (also common with term technological progress) which are soft elements related to the efficiency of production function. They explain why a country is able to produce more than with the same input.

What can it do:

- a useful framework for assembling quantitative “facts” and quantified hypotheses about growth causality in a coherent way.

- Relevance for quantitative analysis of economic history, it has a certain explanatory power for each country and time period which in the past has often been based on loose description, untestable assertions, and literary modes of persuasion. This result can indicate likely and unlikely cause of growth or decline.

- It also has spurred large improvements in measurement at statistical offices.

What not/limitation:

- Strong assumptions of perfect competition (the way weighted)

- Productivity is taken as macro-phenomenon, no consideration of firm level heterogeneity

- Factor inputs are not independent

- No consideration for role of institution

- Poor conceptualization of technology, residual element is not reflection or a measure of technological change, but can be considered a measure of our ignorance (probably informal sector, government sector)

- It should also be emphasized that this approach deals only with proximate causality, and one has to look behind this to institutions, ideology, sociopolitical conflicts, degree of sophistication of policy,system shocks such as wars, and other historical accidents to get a fuller picture.

On the one hand he engages in establishing what he refers to as “ultimate causality,” which considers the importance of institutional and other unmeasurable factors, such as politics, CULTURE and economic polities, in enabling nations to grow and develop. This is in the grand tradition of Max Weber and Karl Marx. On the other hand, Maddison also attempts to determine proximate or technocratic causation where measurable variables such as output, labor, capital and land are technically considered in the causal schema. In the latter case, one can determine the statistical relationship between variables. But also, this correlation may be suggestive of causality and point to further research toward determining ultimate causality. Technical progress, although not quantifiable in any direct or exact manner, is approximated using a combination of proximate and ultimate analysis.

What does the combined use of growth accounting and structural change analysis say about the productivity gap between US and Europe (according to the data presented by van Ark et al)?

- Main differences between Europe and US in 1995-2006 are in TFP, not in capital intensity nor in labor quality

- TFP residual remains a black box including organizational and institutional innovation

- They recognize the sources of TFP differ per sector and the additional analysis indicates that Europe lags behind in market services.

The resurgence of productivity growth in the US appears to have been a combination of high levels of investment in rapidly progressing information and communication technology in the second half of 1990s, followed by rapid productivity growth in the market services sector of the economy in the first half of the 2000s.

Conversely, the productivity slowdown in the Europe countries is largely the result of slower multifactor productivity MFP growth in market services, particularly in trade, finance, and business services.

Innovation in services are more difficult to imitate than ‘hard’ technologies based in manufacturing.  The greater emphasis on human resources, organizational change, and other intangible investments are strongly specific to individual firm.  Moreover, the firm receives most of the benefits of such changes, which reduces the legitimation for government support such as research and development and innovation subsidies to support ‘technology’ transfer in services.  Service activities also tend to be less standardized and more customized than manufacturing production; they depend strongly on the interaction with the consumer and are therefore  more embedded in national and cultural institutions.  In this situation, the spillover of technologies across firms and nations becomes much more difficult.

Written by ibu didin

June 24th, 2010 at 3:11 pm