“New Growth Theories” Endogenous Growth Models

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 • Endogenous Economic Growth Model • New Explanatory Variables - Human Capital with Knowledge; It is separate Physical Capital with Technical Innovation; we can have an accumulation/evolution function for Human Capital - Other variables measuring quality of human factors may be tried. • No convergence – MPK does not have to decline if there is an increase in Human Capital

4. The contribution of this model is that it emphasizes the link between Technical innovation, Human Capital, and Institutions including Government. Cf. The previous Neo-Classical economists emphasized the close relationship between Technical Innovation and Physical Capital.

5. Formal EG Model: Romer-Mankiew-Weil Model • Technological change is the result of the intentional actions of people, such as Invention, and Research and Development • Some institutions promote innovation and R & D, and others inhibit R & D. • Romer supports Government-funding for Educational Institution and R & D. http://www.stanford.edu/~promer/EconomicGrowth.pdf

6. 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)

7. 3. Human Capital: • What is it?

8. 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

9. Labor versus Human Capital • Labor - Quantity of workforce - physical - solated , invididual • Human Capital -Quality of workforce -Intellectual - Between Humans, Institutional

10. 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: knowledge can be moved and shared. This transfer does not prevent its use by the original holder. It is public goods.

11. Quantification of Human Capital • Now economists want to find the measure of Haman Capital: • They look at Education Indexes, such as the years of Schooling.

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

13. 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

14. 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 Ka Hb L1-a-b

15. Because of H, there is no Convergence; an increase in H can cancels the decreasing MP. H becomes the engine of growth

16. 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

17. 6. Limitations and Extension A Lot of Remaining Ambiguity of Human Capital -not fully captured by a single, individual measure of education eg) military services, and non-school training and services are not formally included in education, but should be included in case of nation-wide compulsory military services. -not only quantity of education but also quality of education -some authors suggest that education system should be included

18. * Example of Extension into a ‘system’by Peter Howitt – Education policies need to be appropriate to country’s position in relation to the frontier - May explain discrepancies in correlations between education and growth - Effects of liberal trade policy on domestic innovation

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

20. Example 1) Financial Developmentby King and Levine • 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.

21. 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.

22. 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

23. Example 3) One of More Comprehensive Models • http://www.imf.org/external/pubs/ft/wp/2004/wp04217.pdf

24. 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)

25. The Bottom line is Endogenous Growth Theory may be at the frontier line, but still falls within the Neo-classical economics. Just like Technology, Human Capital complements Capital. But what exactly human capital is, and how it is best measured are still ambiguous. It is still very narrow: It does not give enough of weight to ‘Invisible’ Mindset or Value System in explaining East Asian Economic Growth. It is only because it cannot be quantified, and if it is not quantified, economists do not use it.