Beyond classical growth theory

Human capital, Endogenous growthGrowth and development

Beyond classical growth theory

Last week we saw the Solow modelThe most well-known neo-classical

growth model

This week we explore the limits of this model and go through the extensions that have been brought to itEndogenous growth theoryThe link with development

Beyond classical growth theory

Growth and Convergence

Endogenous growth

Growth and Development

Growth and convergence

Empirical analysis of growth (%Δ real GDP)

Country 1948-1972 1972-1995 1995-2000

Germany 5.7 2.0 1.7*

Canada 2.9 1.8 2.7

United States 2.2 1.5 2.9

France 4.3 1.6 2.2

Italy 4.9 2.3 1.4

Japan 8.2 2.6 1.1

United Kingdom 2.4 1.8 2.5

Growth and convergence

The sources of growth (USA, %Δ annual average)

Growth rate of GDP

Labour L

CapitalK

TFP(Solow

Residual)

1950-60 3.3 1.0 1.0 1.3

1960-70 4.4 1.4 1.2 1.8

1970-80 3.6 1.4 1.2 1.0

1980-90 3.4 1.2 1.6 0.6

1990-00 3.7 1.2 1.6 0.9

1950-00 3.1 1.2 1.3 1.1

Growth and convergence

ARG

AUS

AUT

BDI

BEL

BEN

BFABGD

BOL

BRABRB CAN

CHE

CHL

CHN

CIV

CMR

COGCOL

COM

CPV

CRI

DNK

DOM

DZA

ECU

EGY

ESP

ETH

FINFRAGAB GBR

GHAGIN

GMBGNB

GNQGRC

GTM

HKG

HND

IDN

IND

IRL

IRN ISLISR ITA

JAM

JOR

JPN

KEN

KOR

LKALSO

LUXMAR

MDG

MEX

MLI

MOZ

MUS

MWI

MYS

NER

NGA

NIC

NLD

NOR

NPLNZL

PAKPAN

PER

PHL

PRT

PRY

ROM

RWA

SEN

SGP

SLV

SWE

SYC

SYR

TCDTGO

THA

TTO

TUR

TZA

UGA URY

USA

VENZAF

ZMB

24

68

10

Ave

rage

ann

ual g

row

th ra

te

0 1000 2000 3000 4000GDP per capita (1960)Source: Penn Tables 6.1

Convergence (All countries)

Growth and convergence

ARG

AUS

AUTBEL

CAN

CHE

DNK

ESP

FINFRA

GBR

GRC

IRL

ISL

ISRITA

JPN

LUX

NLD

NOR

NZL

PRT

SWE

USA

56

78

Ave

rage

ann

ual g

row

th ra

te

1000 1500 2000 2500 3000 3500GDP per capita (1960)Source: Penn Tables 6.1

Convergence (OECD Countries)

Growth and convergence

BDI BEN

BFABGD

BOL

BRABRBCHL

CHN

CIV

CMR

COGCOL

COM

CPV

CRI

DOM

DZA

ECU

EGY

ETH

GAB

GHAGIN

GMBGNB

GNQ

GTM

HKG

HND

IDN

INDIRN

JAM

JOR

KEN

KOR

LKALSO

MAR

MDG

MEX

MLI

MOZ

MUS

MWI

MYS

NER

NGA

NIC

NPL

PAKPAN

PER

PHL

PRY

ROM

RWA

SEN

SGP

SLV

SYC

SYR

TCDTGO

THA

TTO

TUR

TZA

UGA URYVENZAF

ZMB

24

68

10

Ave

rage

ann

ual g

row

th ra

te

0 500 1000 1500GDP per capita (1960)Source: Penn Tables 6.1

Convergence (Non OECD countries)

Growth and convergence

Convergence, as predicted by the Solow model, is not a universal phenomenon. Not all countries seem to be converging…

Disparities between groups of countries can be explained by differences in the determinants of the steady state. Rate of investment Growth rate of the population Level of technology

Convergence only occurs between countries that have the same steady state!

Beyond classical growth theory

Growth and Convergence

Endogenous growth

Growth and Development

Endogenous growth

The Solow model has got several limits First, the convergence problem, which shows that

countries are not converging in general In particular, certain countries are actually losing

ground compared to the OECD.

Secondly, there is the Solow paradox: “Computers are everywhere, except in the

productivity statistics.”

The great IT revolution does not seem to have brought gains in productivity and growth.

Endogenous growth

Measurement problem on the qualitative evolution of GDP? The composition of GDP has changed: services are

important This is a limited explanation

The slowdown in research ? The returns to research are reducing (the easy discoveries

have been made) Entrance into the age of complexity

The price of basic commodities (Oil, minerals, etc.)? These cause productivity losses for a given amount of

capital and labour. However, from 1986 until recently, prices have been

relatively low.

Endogenous growth

What is ‘Endogenous growth’ ? For proponents of this theory, one needs to go

beyond the stylised approach of Solow and the exogenous rate of technological progress.

The first to do so was Paul Romer in the mid-1980’s, who managed to combine the complex reality of technological progress and the production function approach that is central to neoclassical theory.

The growth rate of technology becomes a function of the level of output of the economy.

Endogenous growth

Endogenous growth theories often call upon the idea of knowledge externalities. Knowledge is a public good Its social benefit is greater than its private

benefit As a result there is an incentive problem with a

role for public intervention.

The micro-econometrics of R&D support this concept: the social return of R&D is two to three times the private return (Griliches, Mansfield).

Endogenous growth

Endogenising technical change leads in fact to accounting for the qualitative variation of factors over time:

The characteristics of capital and labour in 1970 and 2009 are not the same!

What affects the quality of these factors? 1. Education 2. Health3. Infrastructure (Networks in particular)4. Political Institutions5. Research and development

Beyond classical growth theory

Growth and Convergence

Endogenous growth

Growth and Human development

Growth and Human development

The Human Development Indicator aims to measure the level of development of a country. The HDI is calculated by the United Nations Development Program (UNDP). It is a composite indicator:

Life expectancy at birth The level of schooling The schooling rate The rate of adult literacy The GDP per capita

It is given by a number between 0 and 1. The closer the HDI to 1, the higher the level of development of a country.

Growth and Human development

The club of Rome and the limits to growth: Founded on the 8th of April 1968, it is an international

NGO regrouping scientists, economists, national and international civil servants and representatives of industry from 53 countries.

The goal of the club is to find practical solutions to planetary problems and to provide advocacy to world leaders about important global issues.

In 1972 : “The limits to growth” (aka the Meadows report) aims to

substitute equilibrium to growth. In 1974 :

“Mankind at the turning point” introduces the concepts of sustainable development and ecological footprint.

Growth and Human development

Within this context, the idea of a human development that is ethically separate from economic growth is becoming more popular.

Sustainable development : satisfy the needs of the present generation without reducing the capacity of future generations of satisfying theirs

Antoine de Saint Exupéry “We do not inherit the earth from our ancestors, we borrow it from our children”

The recommendations of “zero-growth”: Relocalise activity (New definition of space) Reduce the importance with working (J. Rifkins, the end of

work) Develop new associative links Stop reasoning in terms of GDP (HDI, A. Sen)

Growth and Human development

However, economics can actually contribute a lot to a sustainable development:

Forecasts must not rely on current technology (see the example of Malthus)

GDP is the sum of added value, but the sources of value added change over time. (Service economy)

Sustainable development and growth of GDP are complementary: Growth is required to increase the standards of living of entire

populations, particularly the poorest. What is required given the ecological constraints is a change in the

behaviour of economic agents.

GDP measures added value: it can grow at the same time as the qualitative aspect (Sustainability) changes.