Title: Historical Persistence and the Dynamics of Development

Abstract: How can we quantify the effects of policy in economies in which firms face adjustment frictions and the economic environment changes constantly? In such settings, changes in the economy may come from new policy changes or from adjustments to past changes. We show how to empirically disentangle both using a structural model of firm dynamics and standard firm-level panel data. We apply our approach to the Indonesian manufacturing Growth Miracle from 1975 to 2015, estimating the model on 40-years of micro data along the observed growth path without assuming that the economy is ever at a steady state. We find that growth from catching-up to previous changes in the economy is key and does not get less important over time, because adjustments are slow and economy-wide changes frequent. Wrongly assuming the economy is in steady state before major new policy changes -- as is common practice in the literature -- can lead to large errors.

A link to an old version of the paper is here: https://www.jonasgathen.com/uploads/JMP_Jonas_Gathen.pdf