Making a Growth Miracle - Historical Persistence and the Dynamics of Development (JMP)

What explains growth miracles? Periods of rapid economic growth are driven by aggregate changes in the economic environment and economies slowly catching up with previous changes. Building on 40 years of plant-level manufacturing panel data for Indonesia, we show that large population changes and the slow entry, exit and growth of plants drive prolonged periods of catch-up growth. Motivated by the empirical evidence, we build a model of plant dynamics, which we estimate on the micro data along the observed growth path without assuming that the economy is at a steady state. Catch-up growth starting from initial conditions in 1975 accounts for 42% of Indonesia’s subsequent industrialization. But catch-up growth does not become less important over time because further changes in worker and plant demographics induce new adjustments. Observed changes in government policy explain few changes in worker and plant demographics and thus drive at most 10% of observed economic growth.