Transcript Where we have been

Where we have been?
First stop: The
economics of growth.
Solow.
Unmodified Solow
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Given DMR, the long-run (“steady state”) rate of
growth is governed by rate of technological progress.
For LDCs, this rate IS largely exogenous.
Changes in depreciation rates, rates of population
growth and investment ratios affect the transitional
rate of economic growth.
They do not however affect the “steady state” rate of
growth.
Level effects(transitional rates of
growth in the unmodified Solow model)
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The unmodified Solow model is a very simple model of economic
growth. It is very much in the same vein as the model of the economic
growth David Ricardo developed. Ricardo was a very famous English
economist from the early 19th century. His contemporary Thomas
Malthus questioned the very long-run perspective of Ricardo’s model
when he noted that “it is in the transition that we have our being”. In
short, the transitional stuff is what really matters! We could say the
same to Solow (and Solow unlike Ricardo would agree!)
Regardless, the factors just mentioned DO have level or transitional
effects. The level of per capita income may be SIGNIFICANTLY
different thanks to an increase in the investment ratio or a decline in
the rate of population growth or depreciation rates.
So, despite the fact that changes in these factors have no impact on
growth in the “long-run” steady state this does NOT mean that they are
unimportant.
Modified Solow (New Growth Theory or
NGT)
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NGT starts by focusing on what the original
unmodified Solow model ignores:
Investment in human capital.
Endogeneity of technological progress.
Complementarities.
The significance of human capital
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Delays the onset of
DMR.
Means that the level of
real per capita income
the economy
eventually reaches will
be higher than if
investment directed
exclusively toward
physical capital
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CAN also help
endogenize the rate of
technological progress.
A skilled labor force
means one that R&D
can possibly be carried
out in one’s own
country.
The significance of endogenous
technological progress
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The degree to which
technological progress
is a function
investment means that
increases in the
investment ratio CAN
have growth effects
(long-run) as well as
level (transitional)
effects.
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TO THE DEGREE
THAT investment in
human capital CAN
encourage R&D (or at
the very least make it
easier) increased
investment in human
capital CAN have
growth effects as well.
An interlude: The idea of conditional
convergence
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If growth rates differ over time it is due to rates of technological
progress.
If levels of real per capita income differ it is due to differences in
investment ratios, population growth rates and depreciation.
Note what happens if these things are taken as given and
therefore are treated as root causal factors .
Low growth and low real per capita income can be blamed on
(1) lack of inquisitiveness and corruption (so low investment
ratios and low rates of technological progress).
Idea of conditional convergence
(cont’d)
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(2) Lack of foresight and irrationality (high population
growth rates and low investment in physical and
human capital)
(3) Lack of care in maintaining structures and capital
or geography (high depreciation rates)
The solution then becomes simply that “they” need
to be more like “us” if “they” want the same rates of
growth and the same standard of living that “we”
have.
This unfortunately is the central thesis
of the best selling Wealth and Poverty
of Nations by historian David Landes
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Early on this book Landes states that “If we learn anything from
the history of economic development, it is that culture makes all
the difference”.
This is pure unmodified Solow and conditional convergence
which takes key economic factors as exogenous: In terms of
policy this implies that the culture of a poor country must
change first if its economy is to change. Fatalism, attachment
to large families, lack of foresight and inquisitiveness,
acceptance of corruption must all change so that investment
ratios and technological progress may rise and population
growth rates and depreciation may fall.
Debraj Ray, New Growth Theory and
the Macro Perspective on
Development.
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The modifications of Solow discussed above encourage us ask
what if the factors held responsible for low growth and low real
per capita income are not culturally determined but rather are
themselves driven by economic considerations?
What if they are the result of poverty and underdevelopment
rather than the root causes?
Then policy advice that asks the poor nations of the world to
change first as a precondition to growth are akin to the
oncologist asking her cancer patient to eat more. Weight loss is
a symptom of cancer not its cause. She would be attacking
one symptom of the cancer and not doing anything about the
disease itself. And her patient would die.
Once we understand this …
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We ask the question what fundamentally
keeps countries back?
Answer is complementarities (positive
feedback effects).
The significance of complementarities:
If you build them, they won’t
necessarily come:
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The very poverty we are trying to conquer
creates all sorts of obstacles to dotting the i’s
and crossing the t’s in the preceding!
The very poverty, both relative and absolute,
in an economically developing country can
keep population growth rates high, make
agriculture inefficient, crowd cities and act as
disincentives to investment overall and
investment in education and training.
Example 1: It is not enough to build
schools and train teachers.
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Families living in poverty
face a tremendous amount
of cost upfront and the
potential benefits of sending
a child to school
(1) Are just that … potential,
off in the distant future.
(2) uncertain unless a
sufficient number of students
enroll.
Example 2: Limited access to credit
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Also, because of poverty, the money needed
to fund an education is hard to come by.
The poor (who would benefit most from
education) lack the assets/wealth that could
be used as collateral for loans to fund this
education or for other investments.
And significant default risk and general
uncertainty makes the need for collateral
especially important.
Why do the poor lack assets/wealth?
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At one level, this is a very stupid question.
If they had assets they would not be poor!
As a vestige of the past however land (the
principle form of wealth in a largely rural
society) tends to be very unevenly
distributed.
On the one hand you have the rich who hold
a great deal of land …
Why do the poor lack
assets/wealth(continued)?
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They tend to underutilize the land they hold.
The yields per acre tend to be higher for the smaller
farms operated by the poor (see chapter 12 of Ray
for evidence)
If collateral not an issue then it should be possible
for land sales to take place between rich and poor.
This would shift land resources from lower yield
activities (less productive ones of the rich) to higher
yield activities of the poor
“Catch 22”
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Lack of land means poverty.
Poverty means high default risks in credit
markets.
High default risks means need for collateral
to access what credit is there.
The circle is complete and the poor are shut
out.
Hopeless?
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Not in the least!
(1) We can argue that once a transfer of resources
occurs the gap between rich and poor will narrow
(with the poor gaining more than the rich, at least the
rich in the short-term, will lose!)
(2) As the previously poor gain assets and the risk of
default falls, the need for collateral to access credit
declines.
And …
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Microcredit can be used to minimize default risk and
so get around the problem of poor collateral.
Support programs designed to break the lock-in
effects of low education and large family sizes can
be encouraged.
Infrastructural investment that is complementary to
private investment (and therefore “crowds in” rather
than “crowds out” this private economic investment)
must be carried out.
Just like someone trying to move a
very heavy piece of furniture
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They may push once and find that it was not enough.
They push again and see that it was still too little.
They finally push hard enough to make it move.
Similarly, the effort in terms of policy must be on a
sufficiently large enough scale and sustained long
enough to budge the economy from its spot.
It makes no sense to tell the heavy piece of furniture
that it needs to move itself.
Nor does it make any sense to give up after only
one push.