They did a standard Barro-type growth regression with growth rate on the left hand and a set of explanatory variables on the right hand, using district-level data. They did the regression in three different periods to capture the pre-crisis, crisis and post-crisis era. In addition to the standard variables like initial GDP level, share of population with secondary high school or more, telephone line density and some indicators of infrastructure, they introduced average growth of neighboring districts to capture the 'growth spillover effect.' However, because such data is not present, they were not able to add physical capital stock or investment in the regression.
A few weeks before the presentation I told one of the co-authors that I won't be surprised if they don't find anything significant in the regression. Indeed, except for initial GDP at t-zero, which indicates the convergence across districts, they found virtually nothing else was significant. Even the convergence seems to be driven by the crisis; richer regions got hit more.
This work was what Jeffrey Frankel once considered as 'zen economics' -- where your empirical work just prove... nothing. Or, in Neil's words, "We thought we knew what causes regional growth... In fact we don't."
Well, in empirical works, if nothing is significant then nothing is significant. But how do we explain such 'no finding?' Apart from some measurement error problems, I think of two things:
- Before 2000 provinces and districts were not independent units of economic activities. Most of decision-making made by the central government. So what matters for regional growth were a) national growth, and b) the way resources were distributed by the central government. Hence the variation of regional physical or human capital did not explain the variation of regional growth.
- Since decentralization has just formally started in 2000, the time frame is too short to see the effect. True, some regions perform better than the others. But perhaps that was due to non-standard variables such as leadership, or even luck. I think regions who do well are those lucky enough to have committed, visionary leaders. An article in Kompas about how Sragen became a pioneer in e-government, mainly because the leader had the vision and commitment to do that, provides an anecdotal evidence (unfortunately now Kompas doesn't provide the link to its previous editions).