## _wp14205 - References

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### I. Introduction and context
- EMEs grew by about 4¼ percent annually during 2000–12—one percentage point higher than on average in the 1990s.
- In 2013–14 economic growth in EMEs declined to just 3¼ percent, with notable slowdowns in the BRICS (Brazil, Russia, China, India, and South Africa).
- Country-specific slowdowns:
  - Brazil’s growth about 2¼ percentage point lower than the 2000–12 average.
  - India’s about 1½ percentage points lower.
  - China’s growth rate declined to single digits.
- Research questions:
  - What drove the strong growth momentum until 2012?
  - What is behind the recent slowdown—supply side constraints or tightening external conditions?
  - Is the slowdown temporary or more permanent (with implications for the global economy)?
- Sample and method:
  - Analysis based on a group of 63 EMEs with data starting in 1980.
  - Decompose output growth into capital, labor, and total factor productivity (TFP) using a Solow-style growth accounting methodology and a battery of filtering techniques to measure trends and smooth cyclical fluctuations.
  - Estimate potential growth rate ranges for 2013–17 using the production function approach and multiple filtering techniques.

### II. Main findings from growth accounting (2000–12 versus 1990s)
- Stylized fact 1: Factor accumulation has been the main driver of growth in EMEs since the 1990s, with labor especially important.
- Stylized fact 2: The 2000–12 pickup in growth in EMEs is mainly explained by higher TFP.
  - TFP alone explains the 1 percentage point of the increase in the average growth rate in EMEs in the period 2000–12.
  - With the exception of Asia, the growth contribution of physical capital also increased, though to a much lesser extent.
  - Labor contribution to growth declined in EMEs on average since 2000, particularly large declines in Asia.
- Stylized fact 3: Growth in Asia remains well above the EME average; most of the growth differential is explained by differences in TFP performance.
  - The growth gap vis-à-vis Asia narrowed for all regions in the last decade compared with the 1990s due to reductions in differences in capital accumulation and—to a smaller extent—labor contributions, but large TFP growth differentials remain for LAC, MENA and the CCA.
- Stylized fact 4: TFP performance generally improved in 2000–12, with important regional and country differences.
  - China exhibits the largest TFP growth in Asia, though its TFP growth diminished considerably following the global financial crisis (TFP rose by about 3 percent annually since end-2008 compared to over 5 percent in the early 2000s).
  - Many countries that experienced large improvements in TFP growth rates were in LAC, MENA and the CCA (albeit from very low rates).

### III. Estimating sustainability: potential growth rate ranges (2013–17)
- Overall assessment:
  - While EMEs averaged 4¼ percent during 2000–12, estimates suggest the average potential GDP growth rate in 2013–17 is only 3½ percent.
- Projection assumptions:
  - Labor accumulation:
    - Labor grows in line with working-age population projections (UN Population Projections) adjusted by unemployment rate (April 2013 WEO projections); labor force participation rates held unchanged at their latest observation.
    - Scenario implies a decline of the contribution to growth from labor accumulation, reflecting population aging in most of Asia, Europe and LAC; limited room to increase participation rates; and limited space for further increases in employment rates as unemployment rates have declined.
    - MENA and CCA regions have the largest potential to increase growth through labor contributions because of favorable demographics and very low participation rates (particularly for women), but they still face high unemployment rates.
  - Capital accumulation and TFP:
    - Assume both grow at the same average annual rate as in 2000–12 (an assumption noted as rather optimistic because both are procyclical and 2000s performance was exceptionally strong).
    - Risks to this optimistic assumption include expected lower commodity prices, tightening global financial conditions, debt problems in European markets, and political strains affecting investment in MENA and CCA.
  - Human capital accumulation:
    - Assume continued accumulation at recent historical growth rate (average of 2005–10).
    - Improvements in human capital would take time and require important improvements in quality of schooling, especially in LAC, MENA, and CCA.
- Potential growth range findings:
  - Potential growth rate ranges vary significantly across regions and countries.
  - Regions expected to have the highest growth rates: Asia, MENA and the CCA.
  - Regions with bigger growth challenges: Europe and Caribbean countries; largest Latin American economies (notably Brazil and Mexico) also facing low potential growth estimates.
  - Ranges constructed using four filtering techniques to reflect uncertainty.

### IV. Decomposing the recent slowdown: structural versus cyclical factors
- Aggregate finding:
  - On average, almost half of the recent slowdown in EMEs is explained by structural factors.
- Regional patterns:
  - Cyclical factors more prevalent in explaining the slowdown in Asia.
  - Structural factors particularly binding in MENA and the CCA regions, and in some countries in Europe and LAC.
- BRICS decomposition:
  - China, Russia and South Africa: primarily structural factors behind the slowdown.
  - Brazil and India: slowdown appears to be to a large extent cyclical.
- Aggregation and data limitations:
  - Aggregate for the MENA region includes Pakistan but excludes Saudi Arabia, Iran, Iraq, Algeria, and the United Arab Emirates due to data limitations.

### V. Interpretation, caveats, and policy implications
- Interpretation:
  - The growth pickup in 2000–12 was driven mainly by supply-side improvements in TFP and, to a lesser extent, capital accumulation (except in Asia where capital mattered more).
  - Given demographic constraints on labor, expected moderation in capital accumulation and TFP (relative to the 2000s), and external headwinds, the strong growth momentum of 2000–12 is unlikely to be fully sustainable unless policies and structural reforms raise potential growth.
- Caveats:
  - Estimated potential growth rates differ from IMF country desk estimates due to differences in methodologies and assumptions; ranges are presented rather than point estimates given uncertainties.
  - Capital stock measure does not capture changes in capital utilization; if capacity utilization was above average in 2000–12, TFP estimates may be an upper bound.
- Policy implications:
  - Structural reforms to boost TFP and capital accumulation are crucial—particularly where structural factors dominate the slowdown.
  - Where labor contributions are constrained (aging or low participation), policies to raise labor force participation (notably female participation) or to increase productivity per worker (education quality, human capital improvements) are important, noting these take time.
  - Managing external vulnerabilities (commodity price shifts, tighter global financial conditions, debt overhangs, political risks) is important to support investment and sustain capital accumulation.

### Box 1. External Conditions and Capital Accumulation — Key points
- Regional capital accumulation and external conditions:
  - Asia:
    - Gross fixed capital formation almost tripled during the last decade.
    - Investment share among EMEs at 38 percent of GDP.
    - Performance occurred despite continuous deterioration in the region’s terms of trade.
    - Greater financial liberalization largely behind this performance.
  - Europe:
    - Benefited from easy global financial conditions despite deteriorating terms of trade.
    - Debt problems in core and peripheral European markets could weigh heavily on investment in the last two years.
    - Investment was stagnant in real terms, compared to a real annual average increase of 8 percent in 2003–11.
  - LAC:
    - Terms of trade improved by almost 30 percent in the last decade.
    - Financially open economies experienced the biggest gains in capital accumulation amid favorable external financial conditions.
    - Gross fixed capital formation more than doubled in the last decade, rising by an annual average of 7 ½ percent (inflation-adjusted).
  - Middle East:
    - Gross fixed capital formation more than doubled (in real terms) since end-2002 amid a 60 percent surge in terms of trade.
- Aggregate implications:
  - Given expected moderation of capital accumulation and natural constraints on labor, strong growth momentum in EMEs is unlikely to be sustainable unless TFP performance improves significantly.
  - Recent GDP growth rates are higher than (or close to the upper bound of) the potential output growth ranges for 2013–17 in most countries.
  - Under optimistic assumptions for capital accumulation and TFP, the average potential GDP growth rate in 2013–17 would be between 3 and 4 percent in EMEs, compared to an average of 4¼ percent in the 2000–12 period.
- Decomposition of the recent growth slowdown:
  - Method: Split slowdown into structural (difference between estimated potential growth rates for 2013–17 and historical average 2000–12) and cyclical (remaining difference in actual growth rates between 2012-13 and 2010-11 not explained by the structural component).
  - Key findings:
    - On average, the recent slowdown in EMEs is explained equally by cyclical and structural factors.
    - Cyclical factors possibly related to external conditions account for a large component of the slowdown.
    - About half of the slowdown is explained by structural factors (an endogenous decline in EMEs potential growth estimates).
  - Regional and country specifics (select highlights):
    - MENA and CCA: slowdown largely structural.
    - Asia: slowdown largely cyclical.
    - BRICS:
      - Brazil and India: most of the slowdown has been cyclical; potential growth rates have declined by about ¾ and 1½ percentage points, respectively.
      - China, Russia, South Africa: slowdown largely structural.
    - Within Asia: Singapore, Hong Kong SAR, Taiwan Province of China: large decelerations largely due to cyclical factors; Sri Lanka: both cyclical and structural; Philippines and Thailand: growth acceleration; Indonesia: slowdown despite increasing potential growth rates.
    - Europe: many experienced slowdown in 2012–13 driven by both structural bottlenecks and cyclical considerations; Turkey estimated to have a decline in potential growth of about ¾ percentage points.
    - Latin America: Chile largely structural slowdown; Peru and Colombia largely cyclical; Mexico slowdown entirely cyclical but potential growth remains modest given investment at 23 percent of GDP in 2012 and low productivity growth; Venezuela potential growth rate estimated to have declined by over ¾ percentage points though growth did not slow owing to cyclical conditions.
  - MENA and CCA: mixed picture across countries.
- Policy implications (from Box 1):
  - For cyclical slowdowns: consider countercyclical macroeconomic policies where policy space and market conditions permit.
  - For structural slowdowns: focus on reforms to reduce resource allocation distortions, alleviate infrastructure bottlenecks, and improve education access and quality.
  - Dabla-Norris and others (2013) summarized guidance:
    - Lower-middle income countries: banking and agricultural sector reforms, reducing barriers to FDI, increasing competition in product markets, improving secondary and tertiary education quality, alleviating infrastructure bottlenecks.
    - Upper-middle income countries: deepen capital markets, develop competitive and flexible product and labor markets, foster a higher-skilled labor force, invest in research and development and new technologies.
  - Demographics:
    - Long-term demographic impacts larger in Europe and some Asian countries.
    - In MENA, CCA, and African countries, youthful populations pose challenges: high unemployment (especially youth), limited employment prospects, limited opportunities for women to enter the labor force.
    - Policies to achieve job-rich growth and enhance female participation could help raise growth potentials.

### Annex 2. Estimating Potential Growth Rate Ranges — Method summary
- Estimation approach:
  - TFP first estimated using the production function identity from Annex 1.
  - Trend series for K, L, h, and A (K_T, L_T, h_T, A_T) obtained for 1980–2017 using four filters: Hodrick-Prescott (λ = 6.25 and λ = 100), Baxter and King, and Christiano and Fitzgerald.
  - To avoid end-of-sample bias, projections through 2019 are included based on assumptions about K, L, h, and A.
- Projection assumptions through 2019:
  - i. Both capital and TFP grow at the 2000–12 average annual rate (see Table A.2).
  - ii. Labor input projections:
    - Projected unemployment rates (from WEO) are used.
    - Labor force assumed to grow in line with working-age population from U.N. Population Projections.
    - Labor force participation rates assumed constant at their latest observation.
    - Footnote: do not use unemployment data for India due to data constraints; instead assume full employment.
  - iii. Human capital increases at the 2005–10 average annual rate.
- Computation of average point estimate of potential output growth:
  - 푌푝 = 퐴푇 + 훼퐾푇 + 1−훼 퐿푇 + 1−훼 ℎ푇
  - Here 푥푇 is the average trend growth rate of variable x from the four filtering techniques.
- Construction of potential growth ranges:
  - Ranges obtained by taking the maximum and minimum estimate from the four filtering techniques (Hodrick-Prescott with λ = 6.25 and λ = 100, Baxter and King, Christiano and Fitzgerald).

*Italic: Source content extracted from _wp14205 - References (PDF chapter/section).*

### References .............................................................................................................

### _wp14205 - References

### I. Introduction and context
- Emerging market economies (EMEs) grew by about 4¼ percent annually during 2000–12—one percentage point higher than on average in the 1990s.
- In 2013–14 economic growth in EMEs declined to just 3¼ percent, with notable slowdowns in the BRICS (Brazil, Russia, China, India, and South Africa).
- Country-specific slowdowns cited: Brazil’s growth about 2¼ percentage point lower than the 2000–12 average; India’s about 1½ percentage points lower; China’s growth rate declined to single digits.
- Research questions addressed:
  - What drove the strong growth momentum until 2012?
  - What is behind the recent slowdown—supply side constraints or tightening external conditions?
  - Is the slowdown temporary or more permanent (with implications for the global economy)?
- Sample and method:
  - Analysis based on a group of 63 EMEs with data starting in 1980.
  - Decompose output growth into capital, labor, and total factor productivity (TFP) using a Solow-style growth accounting methodology and a battery of filtering techniques to measure trends and smooth cyclical fluctuations.
  - Estimate potential growth rate ranges for 2013–17 using the production function approach and multiple filtering techniques.

### II. Main findings from growth accounting (2000–12 versus 1990s)
- Stylized fact 1: Factor accumulation has been the main driver of growth in EMEs since the 1990s, with labor especially important.
- Stylized fact 2: The 2000–12 pickup in growth in EMEs is mainly explained by higher TFP.
  - TFP alone explains the 1 percentage point of the increase in the average growth rate in EMEs in the period 2000–12.
  - With the exception of Asia, the growth contribution of physical capital also increased, though to a much lesser extent.
  - Labor contribution to growth declined in EMEs on average since 2000, particularly large declines in Asia.
- Stylized fact 3: Growth in Asia remains well above the EME average; most of the growth differential is explained by differences in TFP performance.
  - The growth gap vis-à-vis Asia narrowed for all regions in the last decade compared with the 1990s due to reductions in differences in capital accumulation and—to a smaller extent—labor contributions, but large TFP growth differentials remain for LAC, MENA and the CCA.
- Stylized fact 4: TFP performance generally improved in 2000–12, with important regional and country differences.
  - China exhibits the largest TFP growth in Asia, though its TFP growth diminished considerably following the global financial crisis (TFP rose by about 3 percent annually since end-2008 compared to over 5 percent in the early 2000s).
  - Many countries that experienced large improvements in TFP growth rates were in LAC, MENA and the CCA (albeit from very low rates).

### III. Estimating sustainability: potential growth rate ranges (2013–17)
- Overall assessment:
  - While EMEs averaged 4¼ percent during 2000–12, estimates suggest the average potential GDP growth rate in 2013–17 is only 3½ percent.
- Methodological assumptions for projections:
  - Labor accumulation: labor grows in line with working-age population projections (UN Population Projections) adjusted by unemployment rate (April 2013 WEO projections); labor force participation rates held unchanged at their latest observation.
    - Scenario implies a decline of the contribution to growth from labor accumulation, reflecting population aging in most of Asia, Europe and LAC; limited room to increase participation rates; and limited space for further increases in employment rates as unemployment rates have declined.
    - MENA and CCA regions have the largest potential to increase growth through labor contributions because of favorable demographics and very low participation rates (particularly for women), but they still face high unemployment rates.
  - Capital accumulation and TFP: assume both grow at the same average annual rate as in 2000–12 (an assumption noted as rather optimistic because both are procyclical and 2000s performance was exceptionally strong).
    - Risks to this optimistic assumption include expected lower commodity prices, tightening global financial conditions, debt problems in European markets, and political strains affecting investment in MENA and CCA.
  - Human capital accumulation: assume continued accumulation at recent historical growth rate (average of 2005–10).
    - Improvements in human capital would take time and require important improvements in quality of schooling, especially in LAC, MENA, and CCA.
- Potential growth rate range findings (2013–17):
  - Potential growth rate ranges vary significantly across regions and countries.
  - Regions expected to have the highest growth rates: Asia, MENA and the CCA.
  - Regions with bigger growth challenges: Europe and Caribbean countries; largest Latin American economies (notably Brazil and Mexico) also facing low potential growth estimates.
  - The paper constructs ranges using four filtering techniques (Annex 2) rather than point estimates to reflect uncertainty.

### IV. Decomposing the recent slowdown: structural versus cyclical factors
- On average, almost half of the recent slowdown in EMEs is explained by structural factors.
- Regional patterns:
  - Cyclical factors more prevalent in explaining the slowdown in Asia.
  - Structural factors particularly binding in MENA and the CCA regions, and in some countries in Europe and LAC.
- BRICS decomposition:
  - China, Russia and South Africa: primarily structural factors behind the slowdown.
  - Brazil and India: slowdown appears to be to a large extent cyclical.
- Note on aggregation and data limitations:
  - Aggregate for the MENA region includes Pakistan but excludes Saudi Arabia, Iran, Iraq, Algeria, and the United Arab Emirates due to data limitations.

### V. Interpretation, caveats, and policy implications
- Interpretation:
  - The growth pickup in 2000–12 was driven mainly by supply-side improvements in TFP and, to a lesser extent, capital accumulation (except in Asia where capital mattered more).
  - Given demographic constraints on labor, expected moderation in capital accumulation and TFP (relative to the 2000s), and external headwinds, the strong growth momentum of 2000–12 is unlikely to be fully sustainable unless policies and structural reforms raise potential growth.
- Caveats:
  - Estimated potential growth rates differ from IMF country desk estimates due to differences in methodologies and assumptions; ranges are presented rather than point estimates given uncertainties.
  - Capital stock measure does not capture changes in capital utilization; if capacity utilization was above average in 2000–12, TFP estimates may be an upper bound.
- Policy implications (implied by the analysis):
  - Structural reforms to boost TFP and capital accumulation would be crucial to raise potential growth—particularly in regions and countries where structural factors are the dominant explanation for the slowdown.
  - In regions with constrained labor contributions (due to aging and high participation), policies to raise labor force participation (notably female participation where low) or to increase productivity per worker (education quality, human capital improvements) would be important, recognizing these take time to materialize.
  - Managing external vulnerabilities (commodity price shifts, tighter global financial conditions, debt overhangs, political risks) will be important to support investment and sustain capital accumulation.

*Italic: Source content extracted from _wp14205 - References (PDF chapter/section).*

### Box 1. External Conditions and Capital Accumulation

### Box 1. External Conditions and Capital Accumulation

### Regional capital accumulation and external conditions
- Asia
  - Gross fixed capital formation almost tripled during the last decade.
  - Region enjoyed the highest investment share among EMEs at 38 percent of GDP.
  - Performance occurred despite a continuous deterioration in the region’s terms of trade.
  - Greater financial liberalization was largely behind this performance.
- Europe
  - Benefited from easy global financial conditions despite deteriorating terms of trade.
  - Debt problems in core and peripheral European markets could weigh heavily on investment in the last two years.
  - Investment was stagnant in real terms, compared to a real annual average increase of 8 percent in 2003–11.
- Latin America and the Caribbean (LAC)
  - Terms of trade improved by almost 30 percent in the last decade.
  - Financially open economies experienced the biggest gains in capital accumulation amid favorable external financial conditions.
  - Gross fixed capital formation more than doubled in the last decade, rising by an annual average of 7 ½ percent (inflation-adjusted).
- Middle East
  - Gross fixed capital formation more than doubled (in real terms) since end-2002 amid a 60 percent surge in terms of trade.

### Aggregate implications for EMEs and projections
- Given expected moderation of capital accumulation and natural constraints on labor, strong growth momentum in EMEs is unlikely to be sustainable unless TFP performance improves significantly.
- The analysis finds recent GDP growth rates are higher than (or close to the upper bound of) the potential output growth ranges for 2013–17 in most countries.
- Under optimistic assumptions for capital accumulation and TFP, the average potential GDP growth rate in 2013–17 would be between 3 and 4 percent in EMEs, compared to an average of 4¼ percent in the 2000–12 period.

### Decomposition of the recent growth slowdown
- Method: Split slowdown into structural (difference between estimated potential growth rates for 2013–17 and historical average 2000–12) and cyclical (remaining difference in actual growth rates between 2012-13 and 2010-11 not explained by the structural component).
- Key findings
  - On average, the recent slowdown in EMEs is explained equally by cyclical and structural factors.
  - Cyclical factors possibly related to external conditions account for a large component of the slowdown.
  - About half of the slowdown is explained by structural factors (an endogenous decline in EMEs potential growth estimates).
- Regional and country-specific patterns
  - MENA and CCA: slowdown largely explained by structural factors.
  - Asia: slowdown largely cyclical.
  - BRICS:
    - Brazil and India: most of the slowdown has been cyclical; potential growth rates have declined by about ¾ and 1½ percentage points, respectively.
    - China, Russia, South Africa: slowdown largely structural.
  - Within Asia:
    - Singapore, Hong Kong SAR, Taiwan Province of China: large decelerations largely due to cyclical factors.
    - Sri Lanka: slowdown driven by both cyclical and structural factors.
    - Philippines and Thailand: experienced growth acceleration given cyclical advantages and rising potential growth rates.
    - Indonesia: slowdown despite increasing potential growth rates.
  - Europe (with the exception of Latvia and Romania): all experienced a slowdown in 2012–13; many cases driven by both structural bottlenecks and cyclical considerations. Turkey estimated to have a decline in potential growth of about ¾ percentage points.
  - Latin America:
    - Chile: slowdown largely structural, possibly reflecting subdued productivity developments.
    - Peru and Colombia: slowdown largely cyclical despite some declines in potential growth.
    - Mexico: slowdown appears entirely cyclical; projected increasing potential growth rate but potential growth would remain relatively modest given low levels of investment (23 percent of GDP in 2012) and low productivity growth.
    - Venezuela: potential growth rate estimated to have declined by over ¾ percentage points in the last couple of years though growth did not slow owing to cyclical conditions.
  - MENA and CCA: mixed picture; among countries that experienced a slowdown, cyclical factors dominant in about half of the cases and structural factors in the other half.

### Caveats on the analysis
- Potential GDP is unobservable; accuracy relies on estimation method and assumptions.
- Uniform methodology and uniform assumptions for projecting TFP and capital growth are used across all countries (based on historical average of 2000-12), so country-specific considerations (e.g., structural breaks, changes in the investment climate) are not taken into account.
- Results should be interpreted with caution but provide a reasonable sense of economies’ growth potential.

### Policy implications
- For countries where the slowdown is largely cyclical:
  - There could be an argument to introduce countercyclical macroeconomic policies to the extent policy space is available and market pressures are contained.
- For countries where the slowdown is largely structural:
  - Policymakers should focus on reforms to reduce distortions in the allocation of resources, alleviate infrastructure bottlenecks, and improve education access and quality.
  - Dabla-Norris and others (2013) findings (as summarized in the source):
    - Lower-middle income countries: highest growth dividend from focusing on banking and agricultural sector reforms, reducing barriers to FDI, and increasing competition in product markets; also improving the quality of secondary and tertiary education and alleviating infrastructure bottlenecks.
    - Upper-middle income countries: reforms to deepen capital markets, develop more competitive and flexible product and labor markets, foster a higher-skilled labor force, and invest in research and development and new technologies.
- Demographics:
  - Over the longer term, demographic factors will play an increasingly important role; impact larger in Europe and some Asian countries.
  - In MENA, CCA, and African countries, youthful populations pose challenges: high unemployment (especially youth), limited employment prospects, limited opportunities for women to enter the labor force.
  - Policies to achieve job-rich growth and enhance female participation could help raise growth potentials.

### Growth accounting methodology and key parameters
- Production function: standard Cobb-Douglas
  - Yt = At Kt^α Lt ht^(1−α)
- Capital share
  - α set at 0.4 (Gollin (2002) estimate); for Latin America and the Caribbean country-specific alphas are used per Sosa and others (2013).
- Data sources and periods
  - Annual data from Penn World Table 7.1 (PWT) for 1980–2010; subsequent years mainly from IMF’s World Economic Outlook (WEO) database.
  - Output: rgdpl series from PWT (PPP converted GDP per capita, 2005 constant prices) multiplied by population (POP); extended to 2012 using WEO.
  - Capital stock: constructed with investment data from PWT using perpetual inventory method until 2010; investment data from WEO for 2011–12.
- Initial capital stock computation
  - Initial year 1950; initial investment I0 uses average investment of first five years.
  - Assumed g (technological progress rate) = 1.53 percent.
  - Depreciation rate δ = 3.5 percent.
  - n is average annual population growth rate for each country between 1960 and 2012.
- Labor and human capital
  - Labor input measured by employment (employed labor force) to avoid reflecting unemployment changes into TFP.
  - Employment derived from PWT labor force and WEO employment/unemployment rates; labor force for 2011–12 assumed to rise in line with U.N. Population Projections (constant fertility scenario) for people aged 15 and over.
  - Human capital modeled as h = exp[φ(s)] = exp[ θ (1−ψ) / (1−ψ) s^(1−ψ) ] following Bils and Klenow (2000) and Ferreira et al. (2013) with schooling s from Barro and Lee (2010).
  - Parameter values: ψ = 0.58 and θ = 0.32.
- Growth decomposition
  - Using log-differentiated Cobb-Douglas: Y˙ = A˙ + α K˙ + (1−α) L˙ + (1−α) h˙, so GDP growth is decomposed into contributions from TFP (residual), capital accumulation, and quality-adjusted labor.

*Source: Box 1. External Conditions and Capital Accumulation, IMF working paper content provided in the prompt.*

### Annex 2. Estimating Potential Growth Rate Ranges

### _wp14205 - Annex 2. Estimating Potential Growth Rate Ranges

### Overview of approach
- To estimate potential growth rates, TFP is first estimated using equation (1) from Annex 1, which can be rewritten as:
  )1(
  aa
  LhK
  Y
  A
  
  
- Trend series for capital, labor, human capital, and TFP (K_T, L_T, h_T, A_T) are obtained for the period 1980–2017 using the Hodrick-Prescott (for both λ = 6.25 and λ = 100), Baxter and King, and Christiano and Fitzgerald filters.
- To avoid the end-of-sample bias, projections through 2019 are included based on assumptions about K, L, h, and A.

### Projection assumptions used to extend series through 2019
- i. Both capital and TFP grow at the 2000–12 average annual rate (see Table A.2).
- ii. To project the labor input:
  - projected unemployment rates (from WEO) are used; and
  - labor force is assumed to grow in line with working-age population from U.N.’s Population Projections database;
  - labor force participation rates are assumed to remain constant at their latest observation.
  - Footnote: We do not use unemployment data for India due to data constraints. Instead we assume that there is full employment.
- iii. The measure of human capital increases at the 2005–10 average annual rate.

### Computation of average point estimate of potential output growth
- The average point estimate of potential output growth (푌푝) is computed as follows, where x denotes the growth rate of a variable x:

  푌푝 = 퐴푇 + 훼퐾푇 + 1−훼 퐿푇 + 1−훼 ℎ푇             (5)
- Here 푥푇 is the average trend growth rate of variable x from the four filtering techniques.

### Construction of potential growth ranges
- Potential growth ranges are obtained by taking the maximum and minimum estimate from the four filtering techniques (Hodrick-Prescott with λ = 6.25 and λ = 100, Baxter and King, Christiano and Fitzgerald).

*Annex 2. Estimating Potential Growth Rate Ranges (source content).*

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