09 Jul Determinants of Economic Growth: A Cross-Country Empirical Study
1.0 abstracts: 2.0 Introduction: The remainder of the research paper process in as following sequence as. In section 3 we discuss related to topic literature review available in market done before in past. In section 4 we describe in data collection and methodology of the data process we used in study. In this section the we introduces the empirical data collection and data proses methods are discuss. In section 5 and 6, we generate the empirical model and present the variable are used in study and proses the data in model to find the result.in section 7, we summarized and conclude the result of the study. 3.0 literature review 4.0 Data description: We use the World bank for our empirical analysis (http://databank.worldbank.org/data/reports.aspx?source=World-Development-Indicators) . This is a crosssection time-series panel of data collected by using the world development indicator of over 56 different countries across upper middle class countries from 2000 to 2016. Table 1.0: Descriptive Statistics Variable Economic growth Investment Govt_Expen~ e Trade Inflation FDI Population Natural_Re~s Obs 938 Mean 4.069 Std.Dev. 7.258 Min -62.076 Max 123.14 773 771 25.766 16.391 11.027 6.84 4.348 2.736 147.879 58.118 886 791 901 952 925 89.618 7.324 5.379 4.34e+07 7.91 40.714 14.979 10.598 1.77e+08 12.986 21.852 -10.067 -56.464 9420 0 351.106 254.949 217.92 1.38e+09 82.53 In table 1.0 is evaluating the descriptive statistic of the upper middle class countries from 2000 to 2016. Its evaluating the eight different variables, which include GDP growth (annual %), Gross capital formation (% of GDP), General government final consumption expenditure (% of GDP), Trade (% of GDP), Inflation, consumer prices (annual %), Foreign direct investment, net inflows (% of GDP), Population, total, and Total natural resources rents (% of GDP). While looking at data from table 1.0 trade is the most significant variable for the upper middleclass counties. While looking to other variables, economics growth is inflated on average 4.06% but the total investment is mean 25.76% of GDP which is good for the country for development. Other variables are play major role in development but is not that significant as compere to trad and investments. Table 2.0 Matrix of correlations Variables (1) Economic_growth (2) Investment (3) Govt_Expenditure (4) Trade (5) Inflation (6) FDI (7) Population (8) Natural_Resour~s (1) 1.000 0.141 -0.160 0.061 0.011 0.164 0.179 0.240 (2) (3) (4) (5) (6) (7) (8) 1.000 -0.184 0.054 0.019 0.177 0.310 0.106 1.000 0.060 0.029 -0.074 -0.054 -0.176 1.000 -0.061 0.247 -0.258 -0.003 1.000 -0.129 -0.057 0.040 1.000 -0.073 -0.000 1.000 -0.057 1.000 The table 2 is reprinting the correlation coefficients for all variable used in study. As expected, economic growth is positively correlated with investment, trade, foreign direct investment, population and natural resources. Country of expectation 5.0 Empirical Model: 𝐸𝑐𝑜𝑛𝑜𝑚𝑖𝑐 𝐺𝑟𝑜𝑤𝑡ℎ𝑖,𝑡 = 𝛽0 + 𝑋′𝑖,𝑡 ϒ + Ɛ𝑖,𝑡 Equation is representing the 𝑖 and 𝑡 as a countries and time in data. In this model the economic growth is referring the different country(𝑖) and time period (𝑡) with the independent variable (ϒ) in manner of time and different country. 𝑖 in the year are denoted as a N number of country and 𝑡 as a denoted as a N number of years. All other independent variables are covered in the vector 𝑋′𝑖,𝑡 . The vector of fundamental economic growth is including investment, government expenditure, trade, inflation, FDI, population, and natural resources. Ɛ𝑖,𝑡 is the error term. 𝛽0, ϒ are the variable to estimated. A more thorough explanations of all variables are as bellow. literature review Fig 1: Economic growth and Investment Investment is a key factor in economic growth. Investment fuels increase in productivity by enhancing the productive capacity of firms and workers. As firms invest more, they improve the capacity to produce more goods and services, leading to greater productivity and ultimately economic growth. Therefore, Investment leads to growth. Given that investment is a component of Gross Domestic Product, the increasing investment may fuel economic growth as assessed through annual GDP rates (Ramirez& Nazmi, 2003). Often, nations with high rates of investments also record high economic growth rates for the period. This underscores the need for continued investment to achieve economic progress. Investment can be categorized into private and public investment. Public investment spending can facilitate capital formation in the private sector, thus spurring economic growth through its influence on private sector economic activity (Makuyana& Odhiambo, 2016). Public investments in areas such as airports, water supply, education, transmission, power generation, highways, sewerage systems, and roads improve the marginal productivity of private capital (Choe, 2003). The key infrastructures reduce the cost of facing private sector firms. The arrangement creates an enabling environment for new and higher capital formation new private sector as well as output growth. Additionally, well-developed public infrastructure reduces the private firm’s start-up costs. Fig 2: Economic growth and Natural Resource Natural Resource: The impact of natural resources abundance on economic growth is discussed in numerous studies. While some studies show that natural resource abundance positively affects economic growth, others show that resource abundance negatively affects growth. Many studies tend to suggest the existence of a negative relationship (Niezhad, 2014). Accordingly, mineral and energy reserves are not always significant determinants of economic growth. Therefore, the story behind the impact of natural resources on economic growth is a complex one. Further, the observation that resource-poor economies can outperform the resource-rich economies is not new in the history of economics. As such, natural resource abundance does not guarantee economic growth (Sachs & Warner, 1995). Even where different studies have been carried out to address the impact, it seems there is no consensus concerning the effect can be observed by a nation or a region that is rich in natural resource. With natural resources not being significant determinants of economic growth, the explanation of the of the relationship is based on theories that attempt to explain positive and negative channels affecting natural resources and how they influence economic growth (Stijns, 2005). For example, the discovery of natural resource deposits can be characterized by a “feeding frenzy” which involves competing factions fighting for natural resources rent. The end result may be inefficient exhaustion of the public good (Ding & Field, 2005). Where the endowment of natural resources is greater, then the demand for manufacturing products is likely to soar. This means that abundance in natural resources is likely to lead to a significant focus on natural resources while little focus is on manufacturing sectors (Gylfason, 2002). Fig 3: Economic growth and Trade Trade: The link between trade and economic growth is a complex one. The relationship has been theoretically controversial, and growth in real export may not necessarily cause real GDP growth. Other factors such as trade openness and investment policies can affect the amount of growth in GDP. Often, nations that trade more are likely to have a high growth path, which may be partly attributed to trade. However, it is challenging to attribute much of the growth to trade and trade openness. According to Zahonogo (2016), there is a trade threshold where greater trade openness affects growth. The study shows that there is a non-fragile link between trade openness and economic growth among the sub-Saharan countries. Therefore, the relationship between trade openness and economic growth is non-linear. Therefore, countries with more effective trade openness that is characterized by efficient control of the level of imports can boost economic growth through international trade. Busse & Königer, (2012) suggest that trade integration is a fundamental determinant of economic growth and that the causal linkage between growth and trade is ambiguous. The impact of trade depends significantly on trade specification such as the volume of trade. Other factors include the development strategies, foreign exchange controls, nature and characteristics of the goods and trade policies. Fig 4: Economic growth and Government expenditure Government expenditure: The idea that more government expenditure stimulates growth is also controversial as some researchers have established positive relationship between government expenditure and growth while others have found a negative relationship between the two (Koeda, 2008). Sometimes, growth causes government spending to expand. However, the causality is not always direct. The relationship may be explained in two ways. Budget deficits are expansionary while budgetary surpluses are contractionary. Often, when determining the appropriate policy measures that can stimulate growth, policymakers are often interested in supply-side policies and demand management policies. The demand management policies fundamentally focus on the management of government expenditures and money supply. Controlling money supply alters private spending and thus impact the level of liquidity in the financial market. As a result, a change in the level of government spending directly impacts aggregate demand in the economy. Government spending, therefore, affects economic growth through its impact on Government revenue and expenditure, firms and households. Foreign direct investments: The assertion that foreign direct investment (FDI) drives economic growth has been investigated by different researchers in the field of economics. The common argument is that savings are required for development (Pelinescu & Radulescu, 2009). Given that accumulating adequate amounts of savings may be challenging in the short term, particularly for developing countries (Iqbal et al., 2013). As a result, countries borrow through Foreign Direct Investments, loans and Fig 5: Economic growth and Foreign direct investments portfolio to augment domestic savings, and thus attain their targeted growth rates. Regional administrations and governmentscompete for FDI to enhance growth through subsidies and tax incentives (Azman et al., 2010).This way, FDI inflows become a catalyst for economic growth in developing countries. Another way through which FDI affects economic growth is technology transfer and the accumulation of natural growth (Carkovic & Levine, 2005). This applies to developed countries where FDI increase a country’s export capabilities and lead to increases in profits (Bermejo & Werner, 2018). Additionally, there are increases in the provision of funds that reinforce the technology transfer, encourage the creation of new jobs, promote domestic investments, and ultimately increase in total economic growth (Durham, 2004). Therefore, the role of foreign direct investment is widely recognized as a growthenhancing factor (Forte & Moura, 2013). As a result, FDI is among the most common forms of investments used by countries. Population: The link between population size and economic growth of a country is a complexone. Growing economies require growing populations in order to increase the supply of consumers and workers (Easterlin, 1967). However, the unique nature of this relationship is complex and variable. This means that population size may enhance economic growth in certain ways and hamper it in other ways. Thus, the relationship between population size and economic growth is interacting, intricate and complex (Tsen & Furuoka, 2005). On one hand, a growing population means a huge source of labor, which is a basic factor of production. A growing Fig 6: Economic growth and population size population can, therefore, be a major source of economic growth (Kelley & Schmidt, 1995). For the longest time, human labor assisted by tools and implements has always been the greatest productive asset for nations. A large population leads to a high total output (Savaş, 2008). On the other hand, a growing population means a greater number of people among who the output is divided (Sibe et al., 2018). In accordance with this view, high population size in a poor country would divert scarce resources away from investment and savings, thus placing a drag on economic growth (Simon & Gobin, 1979). Additionally, larger families may have fewer resources to support a large number of children. With less investment and savings, there are less growth-enhancing activities. According to Peterson (2017), the impact of population size on economic growth is dependent on other population factors such as patterns of the population 6.0 empirical result: VARIABLES Table 3.0: determinant of economic growth (1) (2) GDP growth annual GDP growth annual Gross capital formation General government 0.0507 (0.0324) -0.257*** (0.0591) 0.0632** (0.0322) -0.243*** (0.0590) Trade of GDP 0.0230*** (0.00795) 0.00973 (0.0150) 4.12e-09*** (1.57e-09) 0.113*** (0.0396) 3.964*** (1.426) Inflation Consumer Population Foreign direct investment Constant Observations Number of Panel_id 0.0107 (0.0151) 3.05e-09** (1.53e-09) 0.131*** (0.0393) 5.350*** (1.345) 648 43 Standard errors in parentheses *** p<0.01, ** p<0.05, * p<0.1 648 43 7.0: Research conclusion: 8.0: Reference: 9.0 Appendix: Table 4.0: Country list: Albania Ecuador Montenegro Algeria Equatorial Guinea Namibia American Samoa Fiji Nauru Argentina Gabon Panama Azerbaijan Grenada Paraguay Belarus Guyana Peru Belize Iran, Islamic Rep. Romania Bosnia and Herzegovina Iraq Russian Federation Botswana Jamaica Samoa Brazil Kazakhstan Serbia Bulgaria Lebanon South Africa China Libya St. Lucia Colombia Macedonia, FYR St. Vincent and the Grenadines Costa Rica Malaysia Suriname Croatia Maldives Thailand Cuba Marshall Islands Tonga Dominica Mauritius Turkey Dominican Republic Mexico Turkmenistan Venezuela, RB Tuvalu Table 5.0 Definitions: List of variables GDP growth (annual %) Definition Sources Annual percentage growth The world Bank: World rate of GDP at market prices development indicators based on constant local currency. Aggregates are based on constant 2010 U.S. dollars. GDP is the sum of gross value added by all resident producers in the economy plus any product taxes and minus any subsidies not included in the value of the products. Gross capital formation (% of GDP) Gross capital formation (formerly gross domestic investment) consists of outlays on additions to the fixed assets of the economy plus net changes in the level of inventories. Fixed assets include land improvements (fences, ditches, drains, and so on); plant, machinery, and equipment purchases; and the construction of roads, railways, and the like, including schools, offices, hospitals, private residential dwellings, and commercial and industrial buildings. General government final General government final consumption expenditure (% consumption expenditure of GDP) (formerly general government consumption) includes all government current expenditures for purchases of goods and services (including compensation of employees). Trade (% of GDP) Trade is the sum of exports and imports of goods and services measured as a share of gross domestic product Inflation, consumer prices Inflation as measured by the (annual %) consumer price index reflects the annual percentage change in the cost to the average consumer of acquiring a basket of goods and services that may be fixed or changed at specified intervals, such as yearly. Foreign direct investment, net Foreign direct investment are inflows (% of GDP) the net inflows of investment to acquire a lasting management interest (10 percent or more of voting stock) in an enterprise operating in an economy other than that of the investor. The world Bank: World development indicators The world Bank: World development indicators The world Bank: World development indicators The world Bank: World development indicators The world Bank: World development indicators Population, total Total natural resources rents (% of GDP) It is the sum of equity capital, reinvestment of earnings, other long-term capital, and short-term capital as shown in the balance of payments Total population is based on the de facto definition of population, which counts all residents regardless of legal status or citizenship. Total natural resources rents are the sum of oil rents, natural gas rents, coal rents (hard and soft), mineral rents, and forest rents. The world Bank: World development indicators The world Bank: World development indicators BADM 735 - Comparative Economics – Final Paper Research Topic: “Determinants of Economic Growth: A Cross-Country Empirical Study.” 1. Abstract ▪ Your abstract should summarize the significant aspects of the entire paper in a prescribed sequence that includes: a. The overall purpose of the paper b. Major findings or trends found as a result of your analysis; and, c. A brief summary of your interpretations and conclusions. 2. Introduction ▪ Your introduction should consist of three distinct parts: a. You should first give a general presentation of the research problem. b. You should then lay out exactly what you are trying to achieve with this research paper. c. Explanation of the organization of the remainder of the paper 3. Literature ▪ Discuss previous research directly relevant to the topic . 4. Data Description ▪ Describe the name and source of the data you are using and the period it covers. ▪ Describe whether you have a panel, cross-section or time series, what the unit of observation is and how many observations you have. ▪ Discuss limitations of the data, if any, such as missing variables, missing observations, small number of observations, etc. ▪ Present descriptive statistics of the data. ▪ Present the correlation matrix. 5. The Model ▪ Specify the empirical model. o Explain each of the variables used in the model and the parameters of interest ▪ Discuss previous research that show the relationship between the variables used and economic growth. o Present some scatter plots 6. Empirical results ▪ Present the empirical findings in a table ▪ Discuss the empirical results. 7. Research Conclusions ▪ Summarize the main points of the paper ▪ Identify any limitation (s) of the paper, if any. ▪ Present your recommendations. 8. References & Appendix ▪ Reference should be based on APA format 9. Appendix ▪ A table of the variable names, description, and sources ▪ List of countries used in the study ...
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