A Further Augmentation of the Solow Model and the Empirics of Economic Growth for OECD Countries

Mankiw, Romer, and Weil [1992] showed that the augmented Solow model, including accumulation of human as well as physical capital, provides a good description of cross-country data, with the exception of the OECD subsample. The textbook Solow model explains about 60 percent of the cross-country variation in per worker GDP in a comprehensive sample of 98 nonoil-producing countries. By including human capital, the augmented Solow model accounts for almost 80 percent of the variation in this sample. For the OECD subsample, explanatory power of the models is rather poor. The textbook Solow model explains very little of the variation in per capita income levels (less than 6 percent). The performance of the Mankiw-Romer-Weil [1992] human capital augmented model is somewhat better but still less than 30 percent. Differences in explanatory power between samples largely disappear in specifications that allow for departures from the steady state. Mankiw, Romer, and Weil interpret this finding by conjecturing that OECD countries are perhaps farther from their steady-state levels than countries in the broader sample. The difference in explanatory power of the augmented Solow model in a broader sample versus the OECD sample is possibly due to the similarity of the OECD countries and the limited variation in explanatory variables. An alternative explanation offered here is that not all relevant factors of production are included. We therefore suggest a further augmentation of the Solow model by explicitly including the (endogenous) accumulation of technological know-how.