I am teaching this stuff this week, and while I enjoy doing it and think it is important for students to know--no World Bank country economic memorandum is apparently complete without a sources-of-growth exercise--I wonder what purpose it really serves....Aside from all kind of measurement problems, these accounting exercises say nothing about causality, and so are very hard to interpret. Say you found it's 50% efficiency and 50% factor endowments. What conclusion do you draw from it? You could imagine a story where the underlying cause of growth is factor accumulation, with technological upgrading or enhanced allocative efficiency as the by-product. Or you could imagine a story whereby technological change is the driver behind increased accumulation. Both are compatible with the result from accounting decomposition. Indeed, I have yet to see a sources-of-growth decomposition which answers a useful and relevant economic or policy question....
What growth accounting allows us to do is to break down output growth into its component parts. For example, growth in "labor productivity" (output per unit of labor) can be decomposed into "total factor productivity" (technological progress) and contributions from "capital deepening" (increasing the amount of equipment per worker), and sometimes also "labor quality" (changes in the education and experience of the labor force).
One recent example that I found interesting is Jorgenson, Ho and Stiroh's paper "A Retrospective Look at the US Productivity Growth Resurgence" which further sub-divides capital deepening and total factor productivity into information technology (IT) and Non-IT components. Their results indicate that the US "productivity resurgence" since the mid-1990's has two distinct sub-periods:
Robert Solow once said "we see the computers everywhere but in the productivity statistics," (this is the "Solow paradox") but they seem to have finally showed up in a big way in the late 1990's. The decomposition suggests that productivity growth in the late 1990's was an Information Technology story, reflected in the boom in IT investment and in productivity growth in the IT sectors. The second phase of the resurgence appears to have been much more broadly based.
I stumbled on another interesting example writing a problem set for my principles students. I asked them to break the 1974-95 slowdown period into sub-periods:
The late 1970's were terrible for TFP (perhaps due to oil shocks, or maybe because we were distracted by "CHiPs") but still saw a respectable contribution from capital deepening, while the later period had decent TFP growth, but didn't get much from capital deepening. That might lend some creedence to the notion that the federal budget deficts that ballooned during that period "crowded out" investment.Rodrik is right that growth accounting doesn't really explain what causes growth, but it is very useful for telling us where to look. That is, it doesn't really answer questions so much as help us figure out what questions to ask.
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I disagree that growth accounting is useful. The exercise allows us to sort economic growth into little piles called "labour", "capital", and "who the heck knows" (aka technology or productivity), but the legitimacy of this exercise depends on the legitimacy of the aggregate production function used. Use a different production function, get different sized piles. Which collection of piles is the "right" one? Depends on which production functin is your your favourite - this judgement is made without data, as it is utterly impossible to falsify or evaluate any of them. (Cobb Douglas with elasticities = shares of national income is tractible and esthetically appealing, who is to say whether it is right or not?)
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