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Growth empirics or how do we use growth theory in practice

Growth empirics or how do we use growth theory in practice. Silvia Dal Bianco Advanced Macroeconomics Pavia, A.Y. 2010-2011. (some of ) t he relevant questions. Growth determinants : which factors seem to explain observed differences in growth?

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Growth empirics or how do we use growth theory in practice

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  1. Growthempiricsor how do weusegrowththeory in practice Silvia Dal Bianco AdvancedMacroeconomics Pavia, A.Y. 2010-2011

  2. (some of) the relevantquestions • Growthdeterminants: which factors seem to explain observed differences in growth? • Convergence question: are contemporary differences in aggregate economies transient over sufficiently long time horizons? • Catch-all question: why is it that so many people are still poor?

  3. 1) Growthdeterminants or modeluncertainty • Canonical cross-country regression: • X=variablesstemmingfrom the originalSolowgrowthmodel(i.e. savingrates) • Z=variablesnotincluded in the originalframework (i.e. institutions–fromcorruptiontodemocracy-, geography, inflation, infrastructure, religion, openess (real and financial), stability, …

  4. Whichofthem are significant? • Overview, Steven Durlauf, and Jonathan Temple (2005) Growth Econometrics , Handbook of economic growth, Appendix 2. around 150 Variables listed!!! • How to choose the relevant ones? • Levine and Renelt (1992, AER): extreme bound analysis only initial GDP and investment ratio are “robust” • Sala-i-Martin et al.(2004, AER): bayesian averaging of classical estimates found instead

  5. 2) Convergencedebate • Whichdefinitionofconvergence? • Whicheconometrictechniqueshouldbeused? • Strugglingempiricalevidence: twin peaksdynamics. The resurgenceof the Galton’s fallancy and non-parametricapproach (Quah, JEG 1993)

  6. Example: cross-regionalconvergence in Italy and convergencedrivingforce • Convergencedrivingforces: capital stock accumulation or technological catch-up? • Regional data, 1980-2003 • The evidenceofcross-regionalconvergenceischallengedby the twin peakdynamics • Result: supportiveevidencefortechnologicalconditionalconvergence

  7. 3) Why some countries are STILL so poor? Are theytrapped? • Poverty traps: Theory • Start with Fundamental Equation of “Solow-Swan”: • Δk=sf(k) - (δ+n) k or • Δk/k=sf(k)/k - (δ+n) • If s and n are constant, and f(.) is neoclassical (concave with inada conditions), then UNIQUE AND STABLE STEADY STATE • Poverty Trap Theory: instead of unique and stable steady state, THREE STEADY STATES and Lower and Upper steady states stable and middle one unstable

  8. Poverty traps: Theory continued • Savings trap (savings rate is close to zero for poor countries for subsistence reasons and then shuts up as income increases) • Nonconvexity in the production function (there are increasing returns for some range of k) • Demographic trap (impoverished families choose to have lots of children)

  9. Savings and non-convexitytrap Stable Stable δ+n Unstable s(k)f(k)/k

  10. Demographic Trap Stable Unstable s(k)f(k)/k Stable δ+n k

  11. Solutiontopovertytrap: AID BIG PUSH STRATEGIES • Big problem: we do notknowwhetheraidiseffective • Aid has some positive effects on growth (Jeffrey Sachs 2004) and needs to be multiplied. • Aid has effect on growth, only under some circumstances (conditional aid) • Conditional on Policies (Craig, Burnside and Dollar (2000), Dalgaard and Tarp (2004)) • Conditional on type: • Infrastructures [Clemens, Radelet, and Bhavnani (2004)] • Education [Michaelova and Weber (2006) and Dreher, Nunnenkamp and Thiele (2007)] • Health [Mishra and Newhouse (2007)] • Aid has NO effect on growth or may even undermine it (Peter Bauer (1972), Bill Easterly (2006))

  12. Aid in Africa, Easterly (2003, JEP)

  13. Whyaidmightnot work? Istherespacefordevelopmenteconomics? • Corruption trap (Easterly, 2006) • More generally: misalignment of incentives. We have donors, WB Bureaucrats, African Bureaucrats, African citizens • All of them have different interests and different incentives and the main baseline problem is that we are not sure on what African citizens need! • Do they need nets against malaria or HIV vaccines? • How development economists can help development? • Frontier in this field is “randomized field experiment”: http://www.povertyactionlab.org/

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