Transcript Beyond the Solow Growth Model

Beyond the
Solow Growth Model
Beyond the Solow Growth Model
Three Reasons to Go Beyond the
Solow Growth Model (SGM)
The SGM doesn’t fit facts too well
Saving and Investment Don’t Seem to
Always Foster Growth
Technology is only a residual in the
SGM (technological change is not
explained but taken as a fact-of-life).
The SGM Doesn’t Fit the Facts
The SGM predicts:
that growth rates would decline as
economies approached their steady
states
convergence - income per person of
poor countries will catch up to that of
rich countries
Facts
World growth rates have not declined
Convergence hasn’t happened
SGM Predicts Rich Countries Grow
More Slowly than Poor Countries
Growth in the United States
Period
1800-1840
1840-1880
1880-1920
1920-1960
1960-2000
Annual Percent Change
in Real GDP per Person
0.58%
1.44%
1.78%
1.68%
2.20%
Comparisons of Income per Capita
Saving and Investment Don’t Always
Foster Growth!
The SGM suggests that saving and
investing cause economies to grow
The Soviet Union is an exception to
the rule
The Soviet Union saved and invested a
tremendous amount of capital in its
80-year history
Most of the countries in the former
Soviet Union have income levels
comparable to developing countries
Explanations for Non-convergence
(or conditional convergence)
Differences in the Quality of the
Labor Force
Education
Health
Sociological Aspects of Labor (Social
capital)
Differences in Institutions
Increasing Returns to scale
Differing Quality of Labor
The adjustment for quality of labor
makes
capital per quality adjusted person
smaller in developed countries with
more productive labor
the marginal product of capital in
developed countries higher
The expanded SGM predicts that a
developed country will grow faster.
Higher Education
Education and Growth
Differing Institutions
Social capital is the set of institutions of
a society, such as degree of trust,
customs, laws, and civic and government
organizations that positively affect
growth.
Social capital provides incentives to
produce, invest, and innovate.
Countries with more social capital
generally have higher income (growth)
levels.
Institutions
Corruption
Rule of Law
Foreign Aid and Social Capital
Increasing Returns
A production function shows increasing
returns to scale when an increase in all
inputs leads to a proportionately greater
increase in output.
Increasing returns production
allows continual increases in income per
person
creates the possibility of a virtuous cycle
in which growth creates more growth
Production function
with increasing returns
Inputs
Income per person
Production Function - Increasing Returns
A: Increasing
returns
B: Constant Returns
Time
Why Increasing Returns Makes Sense
Geographical effects of technology
Areas where technology initially develops
may have increasing returns
Hollywood, the Tropics
Learning by doing
The more one does something, the more
productive one becomes
Textiles in Bangladesh, toys in China
Agglomeration effects
Concentration of similar firms increases
the productivity for all area firms
Silicon Valley, Liverpool
New (Endogenous) Growth Theory
New growth theory focuses on the role
of technology in economic growth.
In the Solow growth model, technology is
a residual (exogenous parameter).
In new growth theory technology is
endogenous, explained by the model.
Capital, Labor and R&D
Capital and labor in the technology
production function are the amounts
of capital and labor used in
research and development.
The more a society invests in
research and development, the
faster its economy will grow.
Not-So-New Growth Theory
Adam Smith
Not-So-New
Growth Theory
Developed
From
(18th century)
Specialization
and Markets
Joseph Schumpeter
(early 20th century)
Entrepreneurs
Adam Smith
Specialization and the Market
Specialization of labor was the key
to growth.
Trade expands markets and
encourages further specialization.
Specialization increases output,
which increases the market, and
leads to more specialization.
Joseph Schumpeter
The Entrepreneur
Entrepreneurs are individuals who
see opportunities to produce and
coordinate, manage, and assume the
risk of production.
Entrepreneurs create major
technological changes and growth.
The entrepreneurs’ industries are
leading industries that pull the rest
of the economy along with them.
Potential Growth Policies (?)
 Promote innovation
 Encourage entrepreneurial
activity
 Make education widely
available
 Ensure political stability
and good governance
 Establish well-defined
property rights
 Protect intellectual
property rights
 Promote aggregate demand
policies
 Establish private
enterprise zones
 Build industrial policies
that promote technological
innovation
 Lower tax rates
 Privatize government
owned businesses
 Increase openness to
international trade by
reducing trade restrictions