Long-run economic growth in OECD countries: a century of evidence

This thesis examines three important issues in growth economics. These issues are productivity catch-up in the manufacturing sector, the direction of causality between schooling and economic growth, and the role of fiscal policy in explaining long-run growth. The main contribution of this thesis is to provide new empirical evidence on productivity growth in OECD countries using an extensive dataset going back to 1870, with important implications for growth researchers and policy makers around the world. Each chapter also makes significant contributions to the literature. The first contribution is to provide conclusive evidence of both β-convergence and σ- convergence in the manufacturing sector. The results in Chapter 2 suggest that the convergence has been driven by domestic research intensity, technology spillovers through the channel of imports, distance to the technology frontier, and catching up to the technology frontier through the channel of financial development. The empirical estimates are consistent with the predictions of Schumpeterian growth theory since domestic research intensity and foreign research intensity spillovers are found to have permanent growth effects. A clear policy implication is that innovation and R&D are essential for manufacturing productivity advances and governments must therefore ensure that appropriate legislations and institutions are in place to encourage innovation. The second contribution is to provide new empirical evidence showing that reverse causality does not appear to exist between schooling and growth. The results presented in Chapter 3 suggest that schooling is not affected by expected growth and most other variables linked to the present value of schooling. Furthermore, even if feedback effects from growth to schooling are allowed for in the growth regressions, the growth effects of schooling are not reduced. The most important implication of this result is that human capital driven growth models are still valid – schooling is indeed one the main drivers of long-run growth. The third contribution is to provide significant evidence that an increase in personal income taxation hinders the growth rate, while the long-run growth effects of corporate income taxation are found to be insignificant. Furthermore, consumption taxation is found to be positively correlated with the economic growth, suggesting that a reduction in income taxation financed by a higher consumption tax can be growth enhancing. Taken as a whole, this thesis suggests that technological progress, financial development and schooling have been among the strongest predictors of economic growth in OECD countries over the last century. Identifying these important growth determinants can help governments design sound economic policies to ensure sustained growth in the future