beyond classical growth theory
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Beyond classical growth theory. Human capital, Endogenous growth Growth and development. Beyond classical growth theory. Last week we saw the Solow model The most well-known neo-classical growth model - PowerPoint PPT PresentationTRANSCRIPT
Beyond classical growth theory
Human capital, Endogenous growthGrowth and development
Beyond classical growth theory
Last week we saw the Solow modelThe most well-known neo-classical
growth model
This week we explore the limits of this model and go through the extensions that have been brought to itEndogenous growth theoryThe link with development
Beyond classical growth theory
Growth and Convergence
Endogenous growth
Growth and Development
Growth and convergence
Empirical analysis of growth (%Δ real GDP)
Country 1948-1972 1972-1995 1995-2000
Germany 5.7 2.0 1.7*
Canada 2.9 1.8 2.7
United States 2.2 1.5 2.9
France 4.3 1.6 2.2
Italy 4.9 2.3 1.4
Japan 8.2 2.6 1.1
United Kingdom 2.4 1.8 2.5
Growth and convergence
The sources of growth (USA, %Δ annual average)
Growth rate of GDP
Labour L
CapitalK
TFP(Solow
Residual)
1950-60 3.3 1.0 1.0 1.3
1960-70 4.4 1.4 1.2 1.8
1970-80 3.6 1.4 1.2 1.0
1980-90 3.4 1.2 1.6 0.6
1990-00 3.7 1.2 1.6 0.9
1950-00 3.1 1.2 1.3 1.1
Growth and convergence
ARG
AUS
AUT
BDI
BEL
BEN
BFABGD
BOL
BRABRB CAN
CHE
CHL
CHN
CIV
CMR
COGCOL
COM
CPV
CRI
DNK
DOM
DZA
ECU
EGY
ESP
ETH
FINFRAGAB GBR
GHAGIN
GMBGNB
GNQGRC
GTM
HKG
HND
IDN
IND
IRL
IRN ISLISR ITA
JAM
JOR
JPN
KEN
KOR
LKALSO
LUXMAR
MDG
MEX
MLI
MOZ
MUS
MWI
MYS
NER
NGA
NIC
NLD
NOR
NPLNZL
PAKPAN
PER
PHL
PRT
PRY
ROM
RWA
SEN
SGP
SLV
SWE
SYC
SYR
TCDTGO
THA
TTO
TUR
TZA
UGA URY
USA
VENZAF
ZMB
24
68
10
Ave
rage
ann
ual g
row
th ra
te
0 1000 2000 3000 4000GDP per capita (1960)Source: Penn Tables 6.1
Convergence (All countries)
Growth and convergence
ARG
AUS
AUTBEL
CAN
CHE
DNK
ESP
FINFRA
GBR
GRC
IRL
ISL
ISRITA
JPN
LUX
NLD
NOR
NZL
PRT
SWE
USA
56
78
Ave
rage
ann
ual g
row
th ra
te
1000 1500 2000 2500 3000 3500GDP per capita (1960)Source: Penn Tables 6.1
Convergence (OECD Countries)
Growth and convergence
BDI BEN
BFABGD
BOL
BRABRBCHL
CHN
CIV
CMR
COGCOL
COM
CPV
CRI
DOM
DZA
ECU
EGY
ETH
GAB
GHAGIN
GMBGNB
GNQ
GTM
HKG
HND
IDN
INDIRN
JAM
JOR
KEN
KOR
LKALSO
MAR
MDG
MEX
MLI
MOZ
MUS
MWI
MYS
NER
NGA
NIC
NPL
PAKPAN
PER
PHL
PRY
ROM
RWA
SEN
SGP
SLV
SYC
SYR
TCDTGO
THA
TTO
TUR
TZA
UGA URYVENZAF
ZMB
24
68
10
Ave
rage
ann
ual g
row
th ra
te
0 500 1000 1500GDP per capita (1960)Source: Penn Tables 6.1
Convergence (Non OECD countries)
Growth and convergence
Convergence, as predicted by the Solow model, is not a universal phenomenon. Not all countries seem to be converging…
Disparities between groups of countries can be explained by differences in the determinants of the steady state. Rate of investment Growth rate of the population Level of technology
Convergence only occurs between countries that have the same steady state!
Beyond classical growth theory
Growth and Convergence
Endogenous growth
Growth and Development
Endogenous growth
The Solow model has got several limits First, the convergence problem, which shows that
countries are not converging in general In particular, certain countries are actually losing
ground compared to the OECD.
Secondly, there is the Solow paradox: “Computers are everywhere, except in the
productivity statistics.”
The great IT revolution does not seem to have brought gains in productivity and growth.
Endogenous growth
Measurement problem on the qualitative evolution of GDP? The composition of GDP has changed: services are
important This is a limited explanation
The slowdown in research ? The returns to research are reducing (the easy discoveries
have been made) Entrance into the age of complexity
The price of basic commodities (Oil, minerals, etc.)? These cause productivity losses for a given amount of
capital and labour. However, from 1986 until recently, prices have been
relatively low.
Endogenous growth
What is ‘Endogenous growth’ ? For proponents of this theory, one needs to go
beyond the stylised approach of Solow and the exogenous rate of technological progress.
The first to do so was Paul Romer in the mid-1980’s, who managed to combine the complex reality of technological progress and the production function approach that is central to neoclassical theory.
The growth rate of technology becomes a function of the level of output of the economy.
Endogenous growth
Endogenous growth theories often call upon the idea of knowledge externalities. Knowledge is a public good Its social benefit is greater than its private
benefit As a result there is an incentive problem with a
role for public intervention.
The micro-econometrics of R&D support this concept: the social return of R&D is two to three times the private return (Griliches, Mansfield).
Endogenous growth
Endogenising technical change leads in fact to accounting for the qualitative variation of factors over time:
The characteristics of capital and labour in 1970 and 2009 are not the same!
What affects the quality of these factors? 1. Education 2. Health3. Infrastructure (Networks in particular)4. Political Institutions5. Research and development
Beyond classical growth theory
Growth and Convergence
Endogenous growth
Growth and Human development
Growth and Human development
The Human Development Indicator aims to measure the level of development of a country. The HDI is calculated by the United Nations Development Program (UNDP). It is a composite indicator:
Life expectancy at birth The level of schooling The schooling rate The rate of adult literacy The GDP per capita
It is given by a number between 0 and 1. The closer the HDI to 1, the higher the level of development of a country.
Growth and Human development
The club of Rome and the limits to growth: Founded on the 8th of April 1968, it is an international
NGO regrouping scientists, economists, national and international civil servants and representatives of industry from 53 countries.
The goal of the club is to find practical solutions to planetary problems and to provide advocacy to world leaders about important global issues.
In 1972 : “The limits to growth” (aka the Meadows report) aims to
substitute equilibrium to growth. In 1974 :
“Mankind at the turning point” introduces the concepts of sustainable development and ecological footprint.
Growth and Human development
Within this context, the idea of a human development that is ethically separate from economic growth is becoming more popular.
Sustainable development : satisfy the needs of the present generation without reducing the capacity of future generations of satisfying theirs
Antoine de Saint Exupéry “We do not inherit the earth from our ancestors, we borrow it from our children”
The recommendations of “zero-growth”: Relocalise activity (New definition of space) Reduce the importance with working (J. Rifkins, the end of
work) Develop new associative links Stop reasoning in terms of GDP (HDI, A. Sen)
Growth and Human development
However, economics can actually contribute a lot to a sustainable development:
Forecasts must not rely on current technology (see the example of Malthus)
GDP is the sum of added value, but the sources of value added change over time. (Service economy)
Sustainable development and growth of GDP are complementary: Growth is required to increase the standards of living of entire
populations, particularly the poorest. What is required given the ecological constraints is a change in the
behaviour of economic agents.
GDP measures added value: it can grow at the same time as the qualitative aspect (Sustainability) changes.