Neoclassical Growth Model - Empirical Evidence

Empirical Evidence

A key prediction of neoclassical growth models is that the income levels of poor countries will tend to catch up with or converge towards the income levels of rich countries as long as they have similar characteristics – for instance saving rates. Since the 1950s, the opposite empirical result has been observed on average. If the average growth rate of countries since, say, 1960 is plotted against initial GDP per capita (i.e. GDP per capita in 1960), one observes a positive relationship. In other words, the developed world appears to have grown at a faster rate than the developing world, the opposite of what is expected according to a prediction of convergence. However, a few formerly poor countries, notably Japan, do appear to have converged with rich countries, and in the case of Japan actually exceeded other countries' productivity, some theorize that this is what has caused Japan's poor growth recently – convergent growth rates are still expected, even after convergence has occurred; leading to over-optimistic investment, and actual recession.

The evidence is stronger for convergence within countries. For instance the per-capita income levels of the southern states of the United States have tended to converge to the levels in the Northern states. These observations have led to the adoption of the conditional convergence concept. Whether convergence occurs or not depends on the characteristics of the country or region in question, such as:

• Institutional arrangements
• Free markets internally, and trade policy with other countries.
• Education policy

Evidence for conditional convergence comes from multivariate, cross-country regressions.

If productivity were associated with high technology then the introduction of information technology should have led to a noticeable productivity acceleration over the past twenty years; but it has not: see: Solow computer paradox.

Econometric analysis on Singapore and the other "East Asian Tigers" has produced the surprising result that although output per worker has been rising, almost none of their rapid growth had been due to rising per-capita productivity (they have a low "Solow residual").