Accounting for Growth in History
Leandro Prados de la Escosura (Universidad Carlos III and CEPR) Tamás Vonyó (Bocconi University, Dondena Centre, and CEPR)
Ilya B. Voskoboynikov (National Research University Higher School of Economics, Moscow) Growth accounting is as old as modern growth theory. Building on the seminal work of Morris Copeland (1937), Jan Tinbergen (1942) was the first to use the
aggregate production function to decompose output growth into input contributions. George Stigler (1947) introduced the concept of Total Factor Productivity (TFP) and Robert Solow (1957) adopted it as a parameter of the Hicks-neutral neoclassical production function. In his pathbreaking article, Solow (1957) distinguished between two proximate sources to economic growth: movements along the aggregate
production function, which implies capital deepening, and shifts of the production function, meaning total factor productivity growth (Crafts and Wotljer, This issue). His approach to measuring growth dynamics has remained the template for growth accounting during the past six decades.
The first generation of growth accounts focused on quantifying stocks of capital and decomposing outputgrowth into the contributions of inputs, both capital and labour, and a residual that would capture the efficiency of their use. These studies, starting with the seminal work of Solow, commonly attributed an overwhelming proportion of economic growth to the growth of TFP and suggested that factor accumulation cannot drive development in the long run. Ever since, research on the sources of long-run growth has aimed at whittling away the ‘residual’ or, in Moses Abramovitz’s (1956: 11) famous quip, the ‘measure of our ignorance’. Critical to these endeavours was an improved measurement of production inputs, including labour quality and human capital. Edward Denison (1962) was the first to add education to the aggregate production function as a factor augmenting labour but had not yet
considered human capital as an independent factor of production.
The next generation of growth accounts (Jorgenson and Griliches, 1967; Jorgenson, Gollop, and Fraumeni, 1987; Jorgenson, Ho, and Stiroh, 2005) further reduced the ‘residual’ by developing an enhanced concept of labour and capital inputs. Instead of stocks measured by employment the and accumulation of physical assets they quantified the flow of services that workers and capital stocks provided to
production. These improved measures incorporated composition effects resulting from various types of labour and capital assets, i.e. from changes in capital and labour quality. Disaggregated growth accounts allowed researchers to measure returns to scale, intermediate goods, and changes in the relative prices of industry-specific products and inputs. By integrating growth accounting with index number theory they effectively rendered TFP a measure of technical efficiency (Jorgenson et al., 1987; Jorgenson et al., 2005), which Solow had intended but could not quantify.
In the last thirty years, New Growth Theory raised doubts on whether factor accumulation can be isolated from efficiency gains. Models of endogenous growth (Romer 1986, 1994; Aghion and Howitt 1998) and of biased technical change
(Acemoglu 2002, Acemoglu and Zilibotti 2001) demonstrated that initial endowments of physical and human capital can be critical to innovation and technological progress and determine productivity gains from technical change. Robust empirical evidence now supports these claims both in modern (Kumar and Russel 2002) and historical (Allen 2012) settings. Econometric techniques enable researchers to account for capital and skill bias when measuring growth dynamics (as in Kukic, This issue). New
Structural Economics introduced by Justin Yifu Lin (2010) suggest that the same production function may not apply to different sectors of the economy which experience fundamentally different underlying growth dynamics and, therefore, patterns of cross-country convergence (Rodrik 2013). Even though the neoclassical framework of growth accounting had been applied to studying planned economic development in the post-war period (Balassa and Bertrand 1970; Ofer 1987), the assumptions of perfect competition and factor substitution may not be acceptable when free markets are absent or seriously constrained (Weitzman, 1970; Easterly and Fischer, 1995).
1. Accounting for long run growth
Since its inception, growth accounting was part of the standard toolkit of economic historians, too. From the late 1950s, substantial progress has been achieved in historical growth accounting and extending national accounts back in time. The initial NBER investigation on long- run growth trends in the United States (Kuznets, 1952; Abramovitz, 1956, 1962) culminated in the works of John Kendrick (1961) and
Denison (1962), and later updated by Abramovitz and Paul David (2001). The approach pioneered by Kuznets was extended to other advanced countries, first in the Income and Wealth Series published by the International Association for Research in Income and Wealth: Japan (Tsuru and Ohkawa 1953), the United Kingdom (Jeffreys and Walters 1955), France (Perroux 1955), Germany (Jostock 1955), Denmark (Bjerke 1955),
Hungary (Eckstein 1955), Canada (Firestone 1958), Norway (Aukrust and Bjerke 1959), South Africa (Franzsen and Willers 1959), Yugoslavia (Vinski 1961), and Czechoslovakia (Pryor et al. 1971). Subsequent work improved on and revised these seminal accounts and extended their analysis with growth accounting, most notably for the United Kingdom(Matthews et al., 1982), France (Carré et al., 1975), and Japan (Okhawa and Rosovsky, 1972). The collective achievements of this scholarship were placed in comparative perspective by Angus Maddison (1987) and informed the debate on the causes and the dynamics of the Industrial Revolution (Feinstein, 1981; Crafts and Harley, 1992; Crafts, 1983, 1995, 2004, 2005).
A second generation of historical growth accounts has broadened the focus beyond cases of early and successful industrialisation adding countries in Asia, including both India and China (Young, 1995; Felipe and McCombie, 2001; Bosworth and Collins, 2003; Wu 2014), Portugal (Lains, 2003), Turkey (Altug, Filiztekin, and Pamuk, 2008), Spain (Prados de la Escosura and Rosés, 2009, 2010)- , and Latin America (Hofman, 2000; and Díaz-Bahamonde and Wagner, 2020, on Chile). Recent work on Central and South-Eastern Europe revised earlier accounts of the socialist growth experience in the post-war era (Vonyó and Klein 2019; Kukic 2018, 2020). In addition to the ‘primal’ approach following Solow (1957), ‘dual’ TFP accounting developed by Dale Jorgenson and Zvi Griliches (1967) and applied to the study of late industrialization in East Asia by Chang-Tai Hsieh (2002) has helped historians to extend the analysis of growth dynamics to times preceding the establishments of national accounts using data on factor prices rather than quantities (Antràs and Voth 2003; Broadberry and Gupta 2006).
Beyond country-specific studies, the last ten years witnessed significant
developments in comparative growth accounting databases, which enable researchers to move beyond convergence and compare the dynamics of growth across countries and over time. . Bergeaud et al. (2016), relying on the recent international research,
provide estimates for up to 23 countries in their latest round (2019) over the period 1890-2018, whereas the Penn World Tables (PWT 9.0, 9.1, 10.0) now include full growth accounts for most countries in the world since the 1950s (Feenstra et al., 2015).The KLEMS methodology, initially introduced for the United States by Jorgenson et al. (2005), has been extended to up to thirty advanced economies in the OECD and beyond in the EU-KLEMS database for the period since 1970. This new state of the art in growth accounting exploits the richness of disaggregated statistics on output and inputs, including ICT capital, intangible assets, natural resources, and service inputs available for more recent times, to better understand the structural components of the aggregate growth process and their role in comparative growth performance (Timmer et al. 2010; Jorgenson, Fukao, and Timmer 2016).
2. Measurement
How we measure output and inputs, the assumptions we make in the construction of capital and labour inputs, and the choice of production function condition the outcome of growth accounting. Second-generation growth accounts tend to downplay the role of TFP and enhance that of labour quality (not simply education) and capital composition, but to construct reliable measures of labour and capital services requires sufficient data. Even greater demands are imposed on economic historians wishing to construct disaggregated growth accounts and employ multi-factor analysis. Can historical growth accounting apply methodologies comprising the current state of the art? If not, can older methods still be considered valuable?
How have historical series of output been constructed? Are deflators
appropriate and value added obtained through double deflation? How have available national accounts for different periods been spliced? Are capital, land, and labour inputs measured as service flows, or just stocks? How many different types of assets are distinguished in capital stock estimates? Is labour quantity measured in terms of the number of workers or actual hours worked? How is the quality of labour assessed? Are compositional changes of capital stocks (capital quality) taken into consideration? All these are relevant questions to be posed for historical growth accounts.
Some guidelines for data construction and growth accounting in economic history may be derived from the new national accounts system (System of National
Accounts 2008) and recent approaches to capital and productivity measurement OECD, 2001, 2009).A non-negligible issue is how comparable the outcomes of growth
accounting exercises are. A tension and, perhaps, a trade-off exist between
constructing comparable international output and inputs data under a common set of conventions and assumptions which implies simplifications (as in Bergeaud et al., 2016) and respecting their adequacy to the specific historical circumstances of national cases.
Still, what TFP really means remains unclear. In addition to technological change, it may capture improved resource allocation, changes in capacity utilization, filled technology gaps, economies of scale, factor and managerial quality, and spillover effects (Jorgenson and Griliches, 1967; Maddison, 1987; Aghion and Howitt, 1992). Furthermore, when technological change is embodied in new types of capital goods, its contribution incorporates both TFP and part of capital-deepening (Crafts and Wojlter, This issue). TFP growth can be relatively high in command economies (Voskoboynikov, this issue). In any case, growth accounting falls short of ascertaining the ‘ultimate’ causes of growth, that is, why some economies mobilise more labour and capital then others, or why capital deepening and TFP growth occur. Causal interpretations of growth accounting outcomes will remain dependent on growth theory. Growth accounting has been the product of modern growth theory and cannot become a purely empirical discipline.
3. Content of the Special Issue
This special issue has been inspired by a conference panel on Accounting for Growth in Global Economic History at the World Economic History Congress hosted by the Massachusetts Institute of Technology in 2018. The majority of the papers included in this issue were presented at the congress. Our first aim has been to offer an
overview of historical growth accounting from a long-run perspective to demonstrate where the literature stands and what the strengths and weaknesses of the growth accounting methodology are. Secondly, we address some of the challenges that accounting for the sources of economic growth in the long run faces including the choice of production function and investigating differences in productivity levels across countries.
The special issue opens and closes with comparative papers that address some of these challenges. In addition, it contains two set of papers, the former offering long-run perspectives on Britain since the Industrial Revolution, as well as Japan, Italy, and Spain from the late nineteenth century, and Latin America during the two-hundred years since independence. The latter deals with post-World War II episodes under Soviet and Fabian socialism and the transition to market economies in Eastern Europe and India.
Nicholas Crafts and Pieter Wotljer open the issue with a comprehensive survey of growth accounting in economic history, extracting lessons and pointing to challenges ahead. Growth accounting provides a diagnosis of growth performance at aggregate level and for specific industries or technologies. Adopting the state-of-the-art in growth accounting improves the economic history narrative. The slow TFP growth during the First Industrial Revolution, the lagged full impact of General-Purpose Technologies, starting with steam power, or the differential contribution of efficiency gains to labour productivity growth across world regions provide good examples. Investigating the interaction between technological change and broad capital deepening and the
implications of relaxing the assumptions associated with the Cobb-Douglas production function are among the challenges economic historians must confront.
3.1 Long run perspectives Britain
In his contribution on Britain since the industrial Revolution, Nicholas Crafts examines long-run economic performance using successive vintages of growth accounting over the last forty years and shows how conceptual and empirical
improvements in methodology alter the interpretation of the Industrial Revolution, the Victorian economy, the Interwar experience, and the Golden Age in British economic history. Data improvements include the use of hours worked rather than the number of workers, education-based human capital estimates, and the employment of capital services, rather than stock, form 1950 onwards.
New findings include the definitive rejection of Rostow’s take-off hypothesis and the depiction of the Industrial Revolution as a slow growth process in which the modernised sectors represented initially a small share of GDP. They paint a much less severe view of the Edwardian climacteric and an improved performance of the British
economy between the world wars, though still modest in comparison with the United States.; The results suggest that British economic growth during the Golden Age (1950-73) sufficed to prevent the United Kingdom from falling behind continental Western Europe. Vigorous performance over between 1973 and 2007 contrasts with a productivity puzzle of stagnation since the financial crisis of 2008.
Japan
Using a new database, Kyoji Fukao, Tatsuji Makino, and Tokihiko Settsu aim at measuring the contribution of human capital or labour quality, understood as labour reallocation across industries and improvements in education at sector level, to labour-productivity growth in Japan since the Meiji revolution. A distinction is made between primary and non-primary sectors for the period 1885-1955.From 1955 onwards, growth accounts are determined at the industry level. Over the 130 years considered, aggregate labour productivity increased at an average rate of 2.9 per cent yearly. Capital deepening accounted for two-fifths, labour quality one fourth, and TFP growth over one-third of aggregate growth. However, the pace of labour-productivity growth differed. Before World War II, it grew at 2.2% per annum, with approximately comparable contributions from labour quality, capital deepening, and TFP growth., During the productivity acceleration over 1926-40,TFP became the prominent source of growth. In the post-war era, more precisely since 1955, labour productivity has grown twice as fast as in Imperial Japan (3.9%). Capital deepening and TFP growth became the main drivers and the contribution of labour quality improvements became relatively less important. A closer look reveals that TFP growth and capital deepening remained equally important for labour-productivity growth until 1990, but since then capital deepening provided more than half of labour-productivity growth and TFP only one-fifth. In other words, sluggish TFP growth has been chiefly responsible for Japan’s slow growth in the past thirty years.
Italy
Claire Giordano and Francesco Zollino use disaggregate data to investigate the labour productivity performance of Italy in the long run. They find that the within-sector growth was the main driver of labour productivity, while structural change made
a minor contribution. Alas lack of data on capital at sector level prevents them from carrying out a growth accounting exercise at sectoral level. Capital input is constructed on the basis of five types of assets with the addition of intangibles to residential and non-residential structures, machinery and equipment, and transport equipment.
TFP contribution dominated long-run labour productivity growth, representing up to two-thirds over the period since unification, 1861-2017. A closer look reveals a changing pattern in the contributions of capital deepening and TFP over time. Capital deepening dominated up to World War I and during the Great Depression, while TFP drove labour productivity in the 1920s and 1950-1973, explaining two-thirds of the 6.1 per cent annual growth during the Golden Age. In the sustained deceleration of labour productivity since the 1970s, capital deepening has prevailed, contributing above 60 per cent until 2008 and mitigating the contraction in output per hour worked since the Great Recession, although TFP still contributed two-fifths of labour productivity growth during 1994-2007. Productivity growth before 1950 was slowed down by a large agricultural sector but the redeployment of labour away from agriculture helped productivity acceleration in the 1920s and during the Golden Age together with technology transfers and economies of scale.
Spain
Between 1850 and2019, capital deepening accounted for half the growth of labour productivity in Spain, efficiency gains about one-third, with the remainder attributable to the enhancement of labour quality, as shown by Leandro Prados de la Escosura and Joan Rosés. TFP made significant contributions in three specific periods. 1850-92 was a phase of trade openness and modernisation, which included the
introduction of railways. TFP was responsible for half the growth of labour productivity. The 1920s witnessed vigorous labour-productivity growth with TFP contributing
between half to two-thirds (depending on whether it is derived with income- or education-based labour quality) and capital deepening one-third. Between 1954 and 1985, output per hour worked grew exceptionally fast (5.7%), and TFP contributed nearly half of this growth physical capital deepening explaining another two-fifths. Conversely, two periods, 1890-1920 and 1986-2019, present sluggish labour
productivity growth largely derived from poor TFP performance. Between Spain’s accession to the European Communities (1985) and the eve of the Global Financial
Crisis (2007), labour-productivity growth slowed down and was almost exclusively the product of capital deepening. Again, capital drove the mild acceleration in labour productivity growth during the Great Recession (2008-13), while TFP growth was negative. In the post-2013 recovery, TFP has led the paltry labour productivity growth as the contribution of capital turned negative, a feature that Spain shared with Italy. Latin America
Economic growth in Latin America since its independence is the subject studied by André Hofman and Patricio Valderrama. For a nine-country sample, they paint a picture of dismal TFP growth over the long run, contributing only 0.25 per cent to the average annual growth rate of 1.6 per cent in GDP per worker hour). However, the pace of TFP growth and its role in explaining labour-productivity performance varied widely over time.. Labour productivity grew between the post-independence years and the Great Depression, driven by capital deepening until World War I and TFP growth thereafter. The TFP-driven phase of labour productivity growth lasted six decades, during which TFP contributed more than half of output per hour growth in 1913-1929 and two-fifths between 1929 and 1973. The periods 1913-29 and 1950-73 recorded the fastest labour productivity growth during the last two centuries. After the Golden Age, the pace of output per hour growth was maintained up to 1980, but on the basis of factor intensity, mostly capital deepening. After a lost decade, with negative labour productivity growth due to the collapse of TFP, output per hour exhibited much slower growth between 1980 and the Global Financial Crisis (2008) with TFP contributing two-fifths of it. During the Great Recession, negative TFP growth explained the weak progress in labour productivity.
Weighted average growth rates for Latin America are heavily dependent on the growth dynamics of Brazil and Mexico, its two most populated countries, and the wide dispersion of economic performance across countries demands a closer look at
individual experiences. The productivity slowdown
The long-run view provides the opportunity to address a widely accepted model of productivity performance going through two stages: a an extensive phase of
perspiration, when factor accumulation dominates, and an intensive phase of
experience, Giordano and Zollino suggest that improving efficiency represents a learning process that follows a phase of factor accumulation. This does not conceal, they acknowledge, that in Italy, as in Spain or Japan, labour-productivity growth became extensive again, depending on capital accumulation, at the end of the 20th
century. In fact, a capital-driven growth phase can be observed in the United States after 1973 leading to an inverted U-shape of TFP growth over the twentieth century (Crafts and Wotljer, This issue; Gordon, 2016). In the case of the United Kingdom, Crafts describes the evolution of TFP as a roller coaster with “twin peaks” in the third
quarters of the 19th and 20th centuries followed by deceleration.
The slowdown in TFP growth has provoked a lively debate on its causes. The recent literature suggests that disaggregated growth accounts are useful in explaining the recent productivity climacteric. EU-KLEMS data have revealed that the falling behind of major EU economies as well as Japan in labour productivity and TFP relative to the United States since the 1990s has been primarily the cause of an American productivity surge in market services, which in turn was driven by both relatively more substantial investment in ICT capital and faster diffusion of new technologies (Timmer et al. 2010). Delayed adoption of these practices in Southern Europe may be, in part responsible, for the improved TFP growth or recent years.
Giordano and Zollino point toinstitutional obstacles leading to factor
misallocation in the case of Italy, including tax and regulatory disincentives, centralized industrial relations,inefficient judicial system and public administration that constrain the adoption of innovation and advanced technology,and to poor human capital.
Research on Spain stresses similar causes. Resources have been re-allocated towards sectors that attracted less innovation and low skills have limited the
exploitation of new technologies. Allocative inefficiency across often small firms results from government regulation. Regulatory restrictions to competition in product and factor markets account for firms’ low expenditure on research and development and low investment in intangible capital. Thus, obstacles to competition in product and factor markets, subsidies, and cronyism have led to capital misallocation and low investment on intangibles and higher quality capital affecting negatively capital deepening and TFP growth. Hence, constraints on economic freedom, regulation and
property rights, in particular, appear as the ultimate determinants of the efficiency decline.
3.2 Accounting for planned economic growth
The second set of papers deal with shorter episodes of planned economic development under different forms of socialism and during the transition from planned to market economy.
Russia and the USSR
Ilya Voskoboynokov carries out a comparison between the USSR and post-Soviet Russia, both at the aggregate and industry level, and constructs growth accounts for Soviet socialist republics to re-examine earlier interpretations that linked the growth deceleration in the USSR to diminishing returns to extensive growth (Krugman 1994; Easterly and Fischer 1995) and resource misallocation (Allen 2001).
As regards the aggregate economy, during the Soviet era (1961-90), capital deepening maintained steady growth, while TFP growth slowed down, halving its growth rate between 1961-63, at the time of Kosygin’s reforms, and 1974-85, although its contribution to labour productivity growth only fell from 62 to 41 per cent. TFP collapsed occurred during 1985-1990, largely accounting for the sharp deceleration in labour-productivity growth. TFP and employment moved together. TFP-sustained growth coincided with job creation during the 1960s and early 1970s and its collapse with employment stagnation in the late 1980s. In the early years of the transition (1991-98), negative TFP growth intensified and capital deepening only grew at half the pace of the Soviet post-1960 period, while employment experienced a dramatic contraction. The second phase of the transition showed a remarkable recovery of labour productivity based almost exclusively on TFP growth over 1999-2007 when employment initiated a slow recovery. The post- Global Financial Crisis (2008) saw a mild increase in capital deepening and a return of TFP growth to the level of 1961-73. To sum up, growth became increasingly extensive, due to the decline of TFP growth, during the Soviet era, but gave way to TFP-driven labour productivity in the second phase of the transition. These findings highlight the difficulty of giving meaning to TFP in growth accounting studies. The Soviet and Russian experience reveals that wild swings in the rate of TFP growth may be driven by exogenous shocks affecting factor
utilization, returns to scale, or production structure, rather than technical and allocation efficiency.
In the case of industry (for which capital services are used), capital deepening was much more stable over the long run than for the economy as a whole. During the Soviet era, TFP only dominated labour productivity growth during 1961-73, while capital deepening increased its contribution steadily. Over 1974-85, TFP growth was negative, which likely reflects worsening utilization or adverse structural shifts. Industry followed the pattern of the aggregate economy during the transition but TFP grew significantly less and capital deepening more over the period 1999-2007. An important difference between the Soviet and the late transition periods is the compositional change of capital from structures to machinery, that is, higher quality of capital. As regards industrial employment, similar patterns are observed to the whole economy until 1985, but the destruction of jobs was much more intense since 1986 and only started a slow recovery after 2009.
India
Following its independence from British imperial rule, India went through a Fabian socialist experience until 1979, when it initiated a transition to the market economy. In a growth accounting exercise at sectoral level, in which capital services and labour quality (after 1980) are distinguished, Deb Kusum Das, Abdul Azeez
Erumban, and Jagannath Mallick present a pessimistic revision of post-1950 sources of growth. Two main phases are distinguished with 1980 as the threshold. Pre-1980 is the era of socialism with import substitution policies and government intervention aimed at rapid industrialisation, which resulted in restrictions to competition, inefficient firms sheltered from international competition, limited structural change, and sluggish per capita GDP growth. The authors break the Socialist period into the Nehru phase of strong investment in infrastructure and education and the post-Nehru phase of quantitative trade controls and regulation. Capital deepening accounted for labour productivity growth in an economy driven by the non-market sector over 1950-1979. Unlike previous estimates, TFP growth appears negative in aggregate terms, but not for non-market services, in which TFP contributed more than half of labour productivity growth. The post-socialist period witnessed increasingly faster growth, with a pro-business phase in the 1980s and a pro-market one in the 1990s. In the post-socialist
era, TFP growth was positive and, despite weak progress in the 1980s, during 1993-2007 contributed about one-fourth of labour productivity growth while capital
deepening explained above two-thirds. Poor job creation associated to labour market regulations that evolved in parallel to the rise of skill-intensive services remains a challenge.
The contrast between India’s performance with other Asian experiences reveals a more extensive growth than in East Asian countries, usually associated factor-driven labour productivity growth. If a comparison is carried out with China for the post-reform era, India offers slower TFP growth and lower contribution to labour productivity growth in the 1980s but faster TFP growth and larger contribution to output per worker over 1991-2001 (Wu et al., 2017). In light of the revision of the East Asian growth story by Hsieh (2002), one might speculate if using dual-TFP accounting could offer an approach to further investigating Asian growth experiences.
A comparison
In the decades after-World War II, growth across the globe occurred in the context of government activism and, often, in the absence or free markets. Socialist economies, especially those of the Soviet type, have been considered to suffer from inefficiency due to restrictions to economic freedoms, including private property, poor innovation incentives, inefficient firms, and inability to adopt flexible technology. These features, however, do not only affect command economies but also regulated market economies. Hence, comparing labour productivity performance between different systems may be instructive.
New research on Eastern Europe by Tamás Vonyó and Alexander Klein (2019) and Kukic (2018, 2020), without rejecting the view of inefficiency, offers a new assessment of its progressive slowdown. Rather than just stagnant or negative TFP performance, a combination of decelerating TFP growth and declining capital
deepening accounts for the sluggish labour productivity growth of the late 1970s and the socialist climacteric of the 1980s. The contribution of TFP to labour productivity growth declined from representing, on average, over two-thirds in the 1950s, to nearly half in the 1960s, to less than one-third in the 1970s.
The experience of the Soviet Union is highly coincidental in the decline of TFP growth that moves, according to Voskoboynikov, from representing three-fifths of
labour productivity growth in 1961-73 to two-fifths in 1974-85, collapsing in the late 1980s, even though capital deepening remained relatively stable over 1960-1990. Growth dynamics appear similar between the USSR and smaller Eastern European economies until the 1970s, but demonstrate fundamental differences during the 1980s. While the Soviet economy recorded first stagnant, then declining TFP, the contraction of other socialist economies was driven by declining labour input and investment with TFP growth remaining in the positive territory. As Vonyó and Klein (2019) argued, the most obvious explanation for this divergence is the impact of the oil shocks, which imposed austerity in oil-importing nations in Central and South-Eastern Europe while creating a windfall of cheap money and a shift in comparative advantage from steel-based capital goods to primary commodity exports for the hydrocarbon-rich Soviet economy.
The outcome of Fabian socialism in India was significantly poorer than that of central planning in Eastern Europe, with labour productivity growth dominated by relatively vigorous capital deepening but with negative rates of TFP growth. Again, socialist Europe behaved better than Maoist China where TFP growth was negative over 1952-1977, and TFP only contributed positively to labour productivity growth in 1952-57 (about two-fifths) and during 1965-71 (between 7 and 25 per cent) (Wu, 2014). Negative rates of TFP growth reported over long periods for planned economies still beg the question what TFP in these accounts actually stands for. In a
technologically progressive century, production technologies or human capital are unlikely to have become regressive over time. Resource allocation may have worsened between industries, firms, or regions, but declining capital utilization or worsening capital composition may have equally been the culprits. Breaking this black box continues to call for more disaggregated analyses of socialist economic growth. Furthermore, as the work of Vonyó (2017) and Vonyó and Klein (2019) has shown, previous growth accounts of planned development may have been biased by inconsistent data on output and factor inputs. Substituting work hours for raw
employment and improved measures for capital accumulation independent of inflated official investment statistics may reveal a less idiosyncratic growth experience for socialist countries compared to market economies at similar levels of development.
An instructive example is a comparison with capitalist economies in southwestern Europe. Italy (a democracy after 1945) and Spain (under Franco’s dictatorship, 1939-75) present faster TFP growth than Eastern Europe during the Golden Age (4 per cent yearly over 1951-73 in Italy and 2.9 per cent annually in Spain over 1954-75), which accounted for two-thirds and half of labour productivity growth, respectively. In Italy TFP also decelerated thereafter, but only since the late 1980s in the case of Spain. However, as shown by Vonyó and Klein (2019), the
underperformance of Central European economies relative to Southern Europe between 1950 and 1989 had as much to do with more modest capital accumulation and, from the 1970s, worsening capital composition as with more modest productivity growth.
4. Challenges ahead
Biased technological change
Most historical growth accounts have studied the sources of growth using the standard neoclassical Cobb-Douglas production function, which implies stringent assumptions, including Hicks-neutral technical change, an elasticity of substitution equal to 1, constant returns to scale, diminishing marginal returns to each factor of production independently, and perfect competition to make sure that output
elasticities with respect to labour and capital are equivalent to the shares of labour and capital in national income.
A challenge in historical growth accounting is, then, the choice of production function. It could be the case that technological change only affects the productivity of labour or of capital (Harrod or Solow neutral) Productivity gains from technological progress may depend on past capital deepening and skill accumulation. In addition, there is no theoretical reason to assume the same functional form over space and time, and especially in different industries. Moreover, increasing returns to scale have been demonstrated in New Economic Geography research. If these objections are accepted, the results derived with the conventional Cobb-Douglas function are biased by weak underlying assumptions.
Crafts and Woltjer point out that if the implicit assumptions of the Cobb-Douglas are not observed, the rate of growth of total factor productivity will be biased
and remind us that with an elasticity of substitution below 1 and biased technological change (labour saving) TFP growth will be underestimated, which East Asian countries in the late twentieth century seems to illustrate .
The difficulty in meeting neoclassical assumptions shows up especially in command economies and economies with high level of state interference. This challenge has been accepted by Leonard Kukic, who in his contribution uses as a Constant-Elasticity-of-Substitution (CES) production function that allows technology to be factor-augmenting and factor-biased. This allows, for the first time in the study of planned economic development, to test theories of capital or skill biased technical change.
Kukic investigates the sources of growth in four countries of socialist Europe over 1950-1989, Czechoslovakia, Hungary, Poland, and Yugoslavia, and finds that technical change was skill biased for labour and machinery-biased for capital. Economic growth decelerated in Eastern Europe because capital efficiency deteriorated since the 1960s as a result of its allocation to structures away from machinery, but labour efficiency contributed increasingly to economic growth. The unproductive shift of capital from agriculture into industry together with labour scarcity caused capital inefficiency. From 1980 onwards both labour and capital efficiency declined, arguably due to plummeting utilization.
These findings concur with Vonyó and Klein (2019) about the trajectory and causes of relative economic decline, but they have an additional, perhaps more radical, implication for the debate on the viability of the planned economic model for late-developing nations. Since substantial gains in labour efficiency were achieved, converging to the global frontier, Kukic suggests, “socialist economies were not doomed to fail”.
Level accounting
Development accounting aims at quantifying the proximate differences in levels of labour productivity in terms of capital deepening and labour quality with the
residual attributed to differences in TFP levels. A substantial difference with comparative growth accounting is that level accounting addresses the immediate causes of convergence by breaking down labour productivity differences into factor intensity and efficiency gains.
Development or level accounting has a special appeal for economic historians and economists of the long run as they are more interested in comparative levels than in growth rates.
So far, the main finding of development accounting is that TFP contribution to productivity differences between countries is larger than that of capital deepening and labour quality, as already demonstrated in the canonical article of Robert Hall and Charles Jones (1999). Daniel Gallardo-Albarrán and Robert Inklaar put this hypothesis to the test for 1913-2011 using a large sample of counties representative of the world per capita income distribution for 1913-2011. Their results challenge the conventional wisdom as they find that the leading role of TFP is restricted to the recent past and that it is achieved through a long and complex process in which capital deepening
dominance during the early twentieth century gave way to another phase from 1970 onwards in which TFP prevailed. Thus, only in the late twentieth century are
differences in levels of labour productivity across countries accounted for by “differences in technological adoption rates and efficiency”. The new finding lends support to the view that factor accumulation comes first as becoming more efficient requires a learning process. These findings, in turn, strengthen the revisionist literature of socialist economic development, as the centrally planned model focussed on factor accumulation and structural change may have been objectively wise to adopt in the middle of the twentieth century and was undermined by changes in global technology rather than the intrinsic inefficiencies of the socialist system. Such considerations motivated the application of development accounting to the Yugoslav growth experience under socialism by Kukic (2018).
Frontier analysis
An alternative to growth accounting, either in growth rates or levels, is provided by frontier analysis that investigates the existence of a biased technological change implying more intense technological change at higher levels of capital deepening, as Allen (2012) finds. Frontier models distinguish two sources of productivity growth, technological change, which shifts the production frontier upward, and technical efficiency change, which improves the capacity of productive units at each level of technology (Ahmed and Bhatti, 2020: 10).
Crafts and Woltjer point out that frontier analysis connects biased technological change with technological congruence (the cost appropriateness of the leader’s
technology) and social capability (ability to assimilate new technology). Economic historians have long been familiar with both concepts from the work of Abramovitz (1986, 1993). This concern is also addressed by Kukic, who asserts that in the presence of biased technological change, technology at the frontier may not be adoptable by developing countries as a result of their relative factor endowments.
5. Final remarks
The contributions to this Special Issue present the state of the art of growth accounting in economic history, exhibiting its strengths and weaknesses. They reveal how sensitive the interpretation of results is to the quality of output and inputs and the growth accounting procedure employed, as well as to the choice of production
function. Adopting the new developments in growth accounting improves the
economic history narrative. Level accounting and frontier analysis offer an opportunity to enhance comparative economic history.
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