Sources of Economic Growth: An Extensive Growth Accounting Exercise

In the vast empirical growth literature, research on the sources of economic growth, based on the growth accounting framework, has received particular attention since the widely publicized papers of Alwyn Young and Paul Krugman in the mid-1990s.1 These authors generated a heated debate on the sources of real GDP growth in East Asian countries, by asserting that the “Asian Miracle” was a myth because the engine that drove the spectacular growth in the region came essentially from capital accumulation and not growth in total factor productivity (TFP). Why does the source of growth matter? The answer hinges on the important assumption of diminishing returns in physical capital in the neoclassical growth mode, which implies that capital accumulation cannot sustain long-term growth while TFP can. Thus, the source of growth is crucial to the long-term outlook of a country. This article provides a brief overview of recent IMF research on sources of growth using the growth accounting framework.