John Landon-Lane and Peter Robertson: Government policies have little effect on long-term growth

From a speech given by the two economists to the Royal Economic Society conference

There is a substantial amount of theoretical evidence to suggest that long-run national growth rates respond to a range of economic variables. These theories contrast sharply with the neo-classical view, in which long-run growth rates are largely independent of economic policies.

Both views enjoy some support from empirical studies where a broad array of potential explanatory variables are considered across 100 or more countries. Many of the variables in these studies, however, are not especially relevant to policy-makers in developed market economies.

Thus a recent but rapidly growing literature has emerged that focuses on the sources of differences in growth rates among the set of relatively developed economies, such as the G7 and the Organisation of Economic Co-operation and Development (OECD). Indeed, since much theoretical endogenous growth literature is explicitly concerned with policies such as esearch and development subsidies, patent protection and taxation, it is appropriate that these theories should also be tested in sub-samples of developed economies

Many growth theories suggest that domestic policy choices are an important determinant of national long-run growth rates. Empirical support for these theories is mixed, however.

We have considered an alternative empirical test that sets a minimum standard for any theory of growth relating domestic policy to national long-run growth rates. By estimating the trend growth rates of 17 OECD countries, we found that for the first three and last three decades of the century, the hypothesis that the trend growth rates are the same across countries cannot be rejected at any reasonable level of confidence. Thus there is no evidence of country-specific effects on long-run growth rates.

The results have stark implications for the ability of most countries to determine their own long-run growth rates. The many policy packages used across these countries, including differences in tax, research, education and investment, did not have significant effects. We conclude that long-run growth rates are determined by international factors, and are insensitive to national policies, especially for small countries. This implies severe restrictions of the ability of most governments to increase national long-run growth rates. Never the less our results provide empirical support for a number of recent growth models that have emphasised the importance of international links in determining national productivity growth.