Volatility and Risk of Economic Growth: The Determinants and Effects in Developing Countries

Abstract

This article aims at identifying the variables that influence economic growth volatility, in order to promote the policies that lead to a high and maintainable growth in the long-run. The article used the standard deviation of annual growth rates to measure volatility, and selected 14 variables out of 54 reported in the literature to explain growth volatility. The model was then estimated by using data from 72 countries and applying WLS method. After excluding extreme cases, and countries that achieved nearly no growth during the last decade, it became clear that six explanatory variables had significant influence on growth volatility. These variables were: democracy index, natural logarithm of completed years of education per capita, the standard deviation of consumer price index, the standard deviation of exports to GDP, competitiveness index and risk index. The results indicates that macroeconomic policies which aim at achieving price stability, enhancing competitiveness and lessening exports instability would lead to less growth volatility. This, in turn would produce higher growth in the long-run and help to achieve the objectives of economic development.