Some Evidence on the Continuity of the Growth Process among the G7 Countries

DAVID H. PAPELL [*] The stability of the growth process, whether growth rates are rising, falling, or constant, is one of the central questions of economic growth theory. We use recently developed techniques for identifying structural change in economic time series, and find evidence of multiple breaks in per capita real GDP of the G7 countries over the past 120 years. Once determined, these breaks are used to delineate time periods. Although there is some evidence of individual periods of slowdowns, the overall tendency appears to be one of increasing steady state growth over the long run. (JEL 05, 01, C22) I. INTRODUCTION This article examines the growth process of each of the Group of Seven (G7) countries between 1870 and 1989. The question that lies at the heart of the analysis that follows centers on the stability of the growth process. Specifically, (a) are there distinct periods of development for each country; (b) in the event that there are distinct periods, when did one period of development end and the next begin; (c) what evidence do we have regarding growth rates over the long-run? Are these steady, as Solow [1956] and Kaldor 119611 proposed? Are they falling, as Malthus believed that they eventually would? Or are they increasing, as Romer [19861 and others have recently suggested? One of the interesting, and related, questions that this analysis raises is the issue of the postwar slowdowns among the G7. How prevalent, and how severe, were these slowdowns? When did they begin and how do the postslowdown growth rates compare to earlier periods when examined from the longrun perspective of 120 years? One of the goals of this article is to provide a precise characterization of takeoffs and slowdowns. This is done by sequentially determining the timing of breaks in the trend process for per capita real GDP and estimating changes in the coefficients. Once a break has been identified and determined to be statistically significant, takeoffs and slowdowns are defined by changes in the slope coefficient of the trend function. The trend breaks are determined in the next section. We find evidence of two breaks for Canada, Japan, the United Kingdom, and the United States, three breaks for Germany, four breaks for Italy, and five breaks for France. A number of the breaks, associated with the world wars and the Great Depression, follow a pattern of an initial drop in the level of output followed by an increase in the growth rate. Only two countries, France and Japan, display evidence of a postwar growth slowdown. The third section examines the growth implications of these results. Although no two countries are identical, the estimated break dates partition the past 120 years into eight distinct time periods for the G7 countries as a whole. The long-run tendency is one of increasing steady-state growth. Comparing the first to the last period, steady-state growth rates increased for all seven countries and, on average, almost doubled. The major events of the last century had both common and idiosyncratic effects on the countries. World War II affected the continental European countries much differently than the others, and the Great Depression was significant only for Canada and the United States. Section IV concludes. II. TREND BREAKS It is possible to think of log per capita output [y.sub.t] as being the sum of a deterministic component [TD.sub.t], and a stochastic component [Z.sub.t], (1) [y.sub.t] = [TD.sub.t] + [Z.sub.t], where the deterministic component [TD.sub.t] is linear in time t, (2) [TD.sub.t] = [mu] + [beta]t. As shown below, a takeoff is associated with an increase in [beta], whereas a slowdown is associated with a decrease in [beta]. We define takeoffs and slowdowns as changes in [beta] associated with statistically significant breaks in the deterministic component [TD.sub.t] of per capita output. …