Productivity or External Environment: Which is More Important for Growth in Emerging Markets?

Abstract

Objective: Assessing and comparing growth promoting effects associated with productivity determinants and external environment determinants in 34 emerging market economies.

Research Design & Methods: The study is based on growth regression research design. Two different modelling frameworks – panel OLS and Arellano-Bond GMM estimator – are exploited. The study operates with a unique dataset, covering 34 emerging market economies over 11 years (2007-2017). A traditional set of growth regressors is enriched by the measures of productivity determinants. A set of country-specific measures of the external environment stance are computed and exploited in the modelling framework. Moreover, for capturing numerous attributes of growth promoting effects, the study considers alternative measures of economic growth.

Findings: Both productivity and external environment determinants are meaningful for growth in emerging market. However, external environment determinants dominate in explaining short-term growth, while productivity determinants are more important for long-run sustainable growth.

Implications & Recommendations: The importance of external conditions for emerging markets should not lead us to incorrect belief that productivity fundamentals do not matter anymore. Changes in the external environment are more likely to generate relatively short-term growth rate fluctuations. Hence, a country aiming to secure sustainable growth should still first of all think about productivity fundamentals.

Contribution & Value Added: The study allows to explain recent signs of decoupling between productivity gains and output growth without challenging the foreground role of productivity for generating growth.