Economic Growth and Convergence across the OIC Countries: An Econometric Framework
Date : 15 May 2013

There has been considerable empirical work on cross-country growth for the last two decades. On the one hand, there were studies done on the basis of pre-existing models of growth in the tradition of Solow (1956), Cass (1965), and Koopmans (1965) and, on the other hand, some others were done along with the emergence of endogenous growth theories, including but not limited to, Uzawa (1965), Romer (1986) and Lucas (1988).

The first group of economists claims that without conditioning on any other characteristics of economies, the lower the initial level of real per capita gross domestic product (GDP) the higher is the predicted growth rate. This is referred to as absolute convergence. The main idea is that poor countries tend to grow faster per capita than rich ones. However, if the heterogeneity is allowed across the economies, or to put it differently, if countries differ in various respects - propensities to save, willingness to work, higher access to foreign markets- and if these respects are controlled for, then the convergence applies only in a conditional sense. This concept is called conditional convergence meaning convergence after differences in the steady states across countries are controlled for. The main idea is that an economy grows faster, the further it is away from its own steady-state (long-run) value and, hence, in looking for convergence in a cross-country framework, it is necessary to control for the differences in steady-states of different countries (Islam, 1995).

A more explicit formulation of the concept of conditional convergence is found in Mankiw, Romer and Weil (1992), henceforth MRW, and this paper is based on that study, which is accepted as a milestone for the empirical cross-country growth literature. In brief, MRW performed an empirical evaluation of a Solow (1956) growth model using a multi-country dataset for the period 1960-1985. They found support for the Solow model’s predictions by the inclusion of saving and population growth rate variables in the regression. Furthermore, they considered an augmented version of the Solow model by adding human capital as a factor of production, and ended up with strong evidence for conditional convergence.

The main purpose of this paper is to investigate whether there is a tendency for regional convergence among OIC countries . The determinants of growth are also examined in this manner. Such an analysis requires econometric framework for two reasons. First, econometric framework will allow us to estimate to which extent the various explanatory variables (such as population, investment, human capital, inflation and etc.) can affect the growth. Second, in order to analyze the determinants of growth, graphical representation, alone, may be misleading. The relation can easily be driven by a few outliers on the graph. It is, therefore, crucial to support graphical representation of the data by econometric framework.

Online Electronic Version

Economic Growth and Convergence across the OIC Countries: An Econometric Framework (English)