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“New Growth Theories” Endogenous Growth Models

“New Growth Theories” Endogenous Growth Models. J.D. Han King’s University College UWO. 1. Problems of Neo-Classical Growth Model = Solow Model. Convergence MPK eventually declines

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“New Growth Theories” Endogenous Growth Models

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  1. “New Growth Theories”Endogenous Growth Models J.D. Han King’s University College UWO

  2. 1. Problems of Neo-Classical Growth Model = Solow Model • Convergence MPK eventually declines • Technological Advances may eliminate convergence, but they are Exogenous in the model- The growth model itself does not explain the TA, and technical innovation happens out of blue, and is injected into Solow Model.

  3. 2. Endogenous Growth Model and New Explanatory Variable The mainline Endogenous Economic Growth Model Identifies Human Capital as the key to sustainable Technological Advance in the long run.

  4. The Formal EG Model: Romer-Mankiew-Weil Model • Technological advance is the result of the intentional actions of human creativity, such as invention, innovation, and Research and Development • Some institutions promote those actions, and others inhibit them. example) Government-funding for Educational Institution and R & D; patent law protecting intellectual properties help promote invention, innovation, and creativity http://www.stanford.edu/~promer/EconomicGrowth.pdf

  5. Growth, Technology and Education Engelbrecht – At an early stage of economic development, the level of education plays important role in technological catch-up – Productivity growth is more rapid where countries have higher levels of average schooling – Human capital has largest effects when specific to subcategories important for technological diffusion (science, math, engineering)

  6. Human Capital Theory pioneered by Gary S. Becker • (1964, 1993, 3rd ed.). Human Capital: A Theoretical and Empirical Analysis, with Special Reference to Education. Chicago, University of Chicago Press. • human capital – “our knowledge, skills learning, talents and abilities.” (Definition by OECD) http://www.oecd.org/document/43/0,3343,en_21571361_37705603_37781227_1_1_1_1,00.html

  7. Labor versus Human Capital • Labor - Quantity of workforce - physical - isolated , individual • Human Capital -Quality of workforce -Intellectual - Between Humans, Institutional

  8. Unlike physical labor (and the other factors of production), knowledge is: • Expandable and self-generating with use: as doctors get more experience, their knowledge base will increase, as will their endowment of human capital. The economics of scarcity is replaced by the economics of self-generation. • Transportable and shareable(non-exclusive): knowledge can be moved and shared. This transfer does not prevent its use by the original holder. It is public goods.

  9. How to quantify Human Capital? • Education* • (years of )Schooling • Literacy

  10. Evidence: Economic Growth and the Quality of Human Capital • One standard deviation increase in international test scores (generalized) impacts growth rate by 1% per year • 1% rise in literary scores compared to the international average associated with 2.5% rise in productivity and 1.5% Robert Barro; The American Economic in GDP per capita Review; May 2001

  11. 4. Math of the Formal Model: Romer-Mankiew-Weil Model • Instead of Y= A Ka L1-a of conventional Neo-Classical Model • proposes Y = A KaHb L1-a-b

  12. What does this mean in graph of the k-y dimension of the Solow type? • For MPk, and the Convergence Issue over time as K rise and H rises as well.

  13. Because of H, there is no Convergence; an increase in H can cancels the decreasing Marginal Product of capital. H can enhance MPk, and becomes the engine of growth

  14. 5. Empirical Testing of Endogenous Growth Model • Run a restricted regression of log (dY) = α0 + α1 log (dK) + α2 log (dH) + α3 log (dL). Empirical results are mixed • Remaining Ambiguity: If H is measured by a narrow concept of “Schooling”, it delays but eventually shows the DMR again. http://www2.warwick.ac.uk/fac/soc/economics/seminars/macro/mankiw2.pdf

  15. 6. Limitations and Extension A Lot of Remaining Ambiguity of Human Capital -some authors suggest that education system should be included -not fully measured by a single, individual measure of education eg) military services, and non-school training and services are not formally included in education Thus, broad sense of education system should be considered.

  16. 7. Some Other Less Formal Modelsof Endogenous Growth model

  17. Example 1) Financial Developmentby King and Levine; by J.D. Han, et. al. • Y = f( H, M3/Y; K, L) Y = f(H, M3/Y , G/Y, (M+X)/Y, I/Y, INF) • Empirical results: H, M3/Y, IY are significant: /t-value/>1.96 INF, G/Y, (M+X)/Y are not significant.

  18. Example 2)Curse of Natural Resources by Carlos Leite http://ideas.repec.org/p/imf/imfwpa/99-85.html Model: Y = f( R; K, L) Results: Resources have negative impacts on Y. Conclusion: “Nature corrupts human beings” - Natural resources decrease Human capital.

  19. Example 3) Quality of Government (or its lack) • D%Y = a + b X + c (Quality Index of Government) Results? Generally +ve correlation • D%Y = a + b X + d (Corruption Index of Government) Results? Mixed or + ve correlations between corruption and growth for some countries Interpretations? Corruption can improve economic efficiency in an imperfect world; Cultural differences in definition of corruption

  20. Excellent References for Corruptionhttp://qcpages.qc.cuny.edu/Writing/Sun%20-%20PSCI%20384W%20S08.pdf • *TI Corruption Perception Index and Barometer, www.transparency.org • *WB Governance Indicators, http://info.worldbank.org/governance/wgi2007/ • *WB and ERDB Business Environment and Enterprise Performance Surveys, • http://info.worldbank.org/governance/beeps/ • *UN Interregional Crime and Justice Research Institute, International Crime • Victims Surveys, http://www.unicri.it/wwd/analysis/icvs/statistics.php

  21. Example 4) other Models • Carlos Leite argues that the endowment of resources in fact hinders economic development. • Other model http://www.imf.org/external/pubs/ft/wp/2004/wp04217.pdf

  22. Summary Formal Endogenous Growth Theory Capital Decreasing MP Labor (Forces) Technology Growth R & D: New Tech Diffusion: Existing Government Policy Education: Schooling Human Captial Literacy Ad hoc Endogenous Growth Model Other Preliminary Variables: (No) Corruption Order (Crime Rate)

  23. Example 5) Culture and Institution • Max Weber (19th century) said that ethics matters for modern economic growth. • Gino Tabellini(2006; 2011)’s empirical works on European countries: Culture and Institution matters persistently for sustainable economic growth in the long-run. • From studies of East Asian economies, Tu Weiming at Harvard says that Neo-Confucian ethics matters in the long-run sustainable economic growth.

  24. The Bottom line is -There are a variety of Endogenous Growth Theories. -They focus on ‘something inside or deeper’ than K, L, and T, which is called ‘Endogenous Factors’. -Some focuses on Human Capital, and other focuses on Social Capital or Culture and Institutions. -Somewhat convincing, but difficult to prove it definitely.

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