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On the Mechanics of Economic Development. By Robert E. Lucas Discussant: Wang Xiongjian Oct 2, 2004. Overview of the Theory of Economic Development. Stylized facts on economic development -- levels and rates of growth of national incomes:
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On the Mechanics of Economic Development By Robert E. Lucas Discussant: Wang Xiongjian Oct 2, 2004
Overview of the Theory of Economic Development • Stylized facts on economic development -- levels and rates of growth of national incomes: 1) great diversity of per capita income levels across countries; 2) diversity of rates of growth of real per capita GNP; 3) relationship between growth rates and income levels. …
Overview of the Theory of Economic Development • What should a successful theory of economic development explain: 1) sustained income growth; 2) sustained or increasing inequality; 3) trade-related growth phenomenon; 4) demographic transition; …
Overview of the Theory of Economic Development • Central questions of economic growth and development (Charles I. Jones 1995) : 1) the world distribution of per capita incomes and the levels of development; 2) what is the engine of economic growth? 3) “growth miracles”– catch up phenomenon in economic growth.
The basic idea of the paper • To see if modern growth theory could also be adapted for use as a theory of economic development. • growth theory: for highly successful society; • development theory: the relationships between economies with sustained growth and those remain stagnant.
The basic idea of the paper • To provide some kind of framework for organizing facts, for judging which represent opportunities and which necessities.
What has the paper done? • Three growth models: 1) Neo-classical growth model: physical capital accumulation and technological change; 2) human capital accumulation through schooling; 3) Specialized human capital accumulation through learning-by-doing.
What has the paper done? • Neo-classical growth model: • key assumption: factor mobility; • fits U.S. data well; • however, predicts the tendency toward income equalization (because of diminishing return); • fails to explain the flow of factors from poorer countries to richer ones; … It is not an adequate model of economic development.
What has the paper done? • Human capital and growth: • motivation: to obtain a theoretical account of cross-country differences in income levels and growth rates;
What has the paper done? • Human capital and growth – content : • Romer (1986) – externality of the stock of knowledge, human capital; increasing returns; • Uzawa (1965) – physical capital k and human capital h; constant returns;
What has the paper done? • Human capital and growth – content : • one-sector model: interaction of physical and human capital accumulation;
What has the paper done? • Human capital and growth – content : • Features of the model: there exist balanced paths and each country’s relative income position is dictated by its initial situation, and inequality persists; • the engine of growth: human capital.
What has the paper done? • Learning-by-doing and comparative advantage: • motivation: model the evolution of national incomes in a two-good world;
What has the paper done? • Learning-by-doing and comparative advantage: • connects trade volumes with knowledge acquisition. Accumulation of human capital Economic growth International trade
What has the paper done? • Learning-by-doing and comparative advantage: • assumption: the production of one good results in productivity-improving learning, the other does not;
What has the paper done? • Learning-by-doing and comparative advantage: • results: the dynamics work to intensify static comparative advantages over time, and incomes become ever unequal; • can not explain catch-up growth.
What has the paper succeeded in? • Providing a framework for analyzing endogenous growth; • Providing possible answers to the engine of endogenous growth ; • Explaining the diversities in income levels across countries; • Combining growth with trades among countries;
What are the deficiencies? • No demographic transition in the models provided – taking population growth as given; • No answer to the “growth miracles” question; • Still ad hoc assumption in the model; • No answer to the mobility of productive factors;
Comments • In fact, it is unfair to require all these matters related to economic development be settled within one model; • No monetary policy and fiscal policy;
Methodology • “There is no point in arguing over a model’s assumptions until one is clear on what question it will be used to answer.”
Methodology • “A model as explicit as this one, by the very nakedness of its simplifying assumptions, invites criticism and suggests refinements to itself. This is exactly why we prefer explicitness, or why I think we ought to.”
Methodology • “The role of theory is not to catalogue the obvious, but to help us to sort out effects that are crucial, quantitatively, from those that can be set aside.”