DEVELOPMENT ECONOMICS
Sponsored by a Grant TÁMOP-4.1.2-08/2/A/KMR-2009-0041 Course Material Developed by Department of Economics,
Faculty of Social Sciences, Eötvös Loránd University Budapest (ELTE) Department of Economics, Eötvös Loránd University Budapest
Institute of Economics, Hungarian Academy of Sciences Balassi Kiadó, Budapest
2
Author: Katalin Szilágyi Supervised by Katalin Szilágyi
January 2011
Week 2
Exogenous growth theory Introduction
• Growth is the key
• Stylized facts: world income growth is steady on average but with high cross- sectional variance
• Why?
• Here: focus on proximate causes
• Normative consequences?
Outline
• Proximate and deeper causes of growth
• The Harrod–Domar model
• The Solow model
3
1. Proximate and deeper causes of growth Proximate causes
• Proximate causes of growth
• Physical capital
• Population
• Human capital
• Technology
• Incorporated in the production function
4
From proximate to deeper causes
• Exogenous growth models
• Emphasis on proximate causes
• No explanation for
• New growth models (endogenous, institutional)
Deeper Causes
• Deeper (fundamental) cause can be:
• Luck (multiple equilibrium)
5
• Geographical features
• Institutions
• Culture, values
• Softer factors but the same rigour and empirical supervision are required concerning the explanation
2. Harrod–Domar modell Background
• Historical experience: World Crisis, and the Soviet Planned Economy (1939, 1946)
• Infinite supply of labor force
• Capital is a scarce resource
• Growth policy based on capital-intensive industry seems to be successful
• Originally not a growth-theory but its development-policy implications proved to be highly appealing
Assumptions
• The key of growth is the expansion of capital (what kind of production technology?)
• alias: abandonment of present consumption (what kind of economy?)
• Growth, if investment exceeds the amortization of capital stocks
• Accumulation function:
I(t) + )K(t) -
(1
= 1) +
K(t
6
Assumptions and result
• Saving, technology, capital market equilibrium:
• Economic growth:
With population growth
• If population increases too, then growth per capita depends on:
• Rate of saving, demography, technology
• Consequences: descriptive and normative:
• Descriptive: how does growth changes in a market economy in which parameters are considered to be exogenous? (comparative statics)
• Normative: what kind of parameters are effected by economic policy? How to intensify growth?
s t
Y
t Y t
Y
t sY t Y t
Y t Y
t K
t sY t
S
) (
) ( ) 1 (
) ( ) ( ) 1 ( ) 1 (
) (
) (
) ( )
(
n s g
n s t g
P t P t y
t
y (1 )(1 ) (1 )
) (
) 1 ( ) (
) 1 (
7
Conclusions
• Convergence or divergence?
• HD neutral theory
• Extensions: endogenizing growth determining parameters
• Endogenous rate of saving (how?)
• Endogenous population growth (how?)
Endogenous rate of saving
• Endogeneity in savings : S/Y can be dependent on income and the distribution of it as well (why?)
• Usual assumption: inverse U-shaped relation
• Convergence or divergence?
• How does it relate to the ”stylized facts” of the mobility matrix?
Endogenous population growth
• Endogeneity in population growth: n can be dependent on income per capita (why?
What kind of correlation can exist?)
• Development Trap and the Theory of Development Threshold: from drastic simplifications, drastic normative predictions
• Fast industrialization and family planning as development policy
8
Evaluation
• Mechanical approach (all direct causes are exogenous)
• No economical behavior (scarcities, incentives)
• Strongly questionable on empirical basis (Soviet experiment)
• By far survives its academic dethronement as a normative standard (for a long time granting functions according to the financial gap approach)
3. Solow modell Backgroud
• Phenomenon to explain: growth of the USA in time (not cross-sectional motivation)
• Endogenizing investment (capital accumulation) is important
• Role of scarcities and incentives: the disclaimer of capital-funding
• Strong (testable) predictions
Assumptions
• Capital accumulation:
• Technology:
• Population growth:
K - I
= K
K (L * E)
1Y
L n
L
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• Technological development:
• Saving: S = sY
• Stock-market equilibrium: S = I
Technology
• First-order homogenous technology
• In both (two) coefficients (partially) diminishing returns
• Constant factor incomes (Káldor-facts)
• Usual choice: Cobb–Douglas (1/3-2/3)
Constant factor incomes
E g
E
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Technological development
• Work-extending technology: same output with less labor force
• Will ”technological unemployment” emerge?
• Ludditistic delusion vs. economic incentives
• Redefinable total factor productivity (how?)
Steady state
• SS: quantities per utility units (K/EL, Y/EL) are constant
• Constantly proportionate growth of economy:
The lesson
• Permanent expansion of wealth due to the development of technology (exogenous cause)
• Rate of saving does not effect long term growth (only level-effects, temporary dynamics)
Variable L E K/EL Y/EL K/L Y/L K Y
Growth rate
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• Countries with same/similar parameters are converging (same SS): unconditional convergence
• What kind of assumptions do we have about technology?
• What mechanisms create convergence? Do we give credit to it?
