Guilherme R. Magacho

Verdoorn’s law and productivity dynamics: An empirical investigation into the demand and supply approaches

ABSTRACT According to Verdoorn’s law, productivity growth is endogenous to output growth, due to the existence of increasing returns to scale, broadly defined. Such an idea is at the root of both the endogenous growth theory and the Kaldorian approach. While in Kaldor’s view, a country’s growth is demand-driven, in the endogenous growth theory, growth is determined by the growth of the factors of production and hence growth is supply-constrained. This article empirically tests both assumptions for Verdoorn’s law by using a dynamic panel of manufacturing industries for seventy countries at different stages of development for the years between 1963 and 2009. In order to distinguish between these approaches, two different specifications are estimated where the growth of output and the supply of factors of production are instrumentalized by system generalized method of moments (GMM)estimators. The results show that, if it is assumed that the growth rates of countries are demand-driven, a faster growth of output increases productivity growth due to the existence of increasing returns. Alternatively, if it is assumed that output growth is driven by the growth of the supply of the factors of production, it is not possible to conclude that productivity growth is induced by output growth.

Structural change and economic growth: Advances and limitations of Kaldorian growth models

Many different approaches have addressed the issue of why were some developing countries able to reduce the income gap with developed economies while others were not. However, few approaches take into account the process of structural change. This paper reviews the theoretical basis of the Kaldorian approach for the relationship between structural change and countries’ long-term economic growth, emphasising its recent developments and its limitations. According to Kaldor, structural change towards specific sectors continuously increases countries’ growth rates through a cumulative causation process. Although he had stressed it exhaustively, only recently Kaldorian models have explicitly incorporated this feature. Nevertheless, these models still face significant limitations to show how a cumulative causation process takes place in an open economy. The paper discusses the most relevant such limitations, and suggests options for future directions. JEL codes: 041, E12, F43