Conditional Convergence and Future TFP Growth in Israel

27/03/2019 |  Tsur Shay, Argov Eyal
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Growth and The Business Cycle
Abstract

This study is part of a broad project of constructing a long-run growth model for Israel, and to evaluate how different exogenous developments, or policy steps, are expected to affect the long run growth rate. The current study describes the Total Factor Productivity (TFP) block of the project. We first estimate productivity determinants in regressions that are based on a cross section of countries with fundamental variables such as geography and culture, together with policy affected variables such as physical and human infrastructures, and institutions. We test the robustness of the policy estimates by running panel regressions with policy variables for which historical data are available. Using the estimates from the cross section regressions we calculate the gap of each country's productivity from its own predicted value, and forecast Israel's TFP growth by using this calculated gap as the potential to converge and therefore to grow faster than the average world growth rate. In this respect, this work is novel in integrating the deep roots of growth literature into a conditional convergence framework. We find that Israel's actual productivity level is slightly below the predicted one, suggesting that it has only a small potential to grow faster than the average global growth. The baseline TFP growth forecast for the years 2015--60 is 0.47, very similar to the historical growth rate of Israel's TFP over the last 15 years.​