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Endogenous growth Convergence New Growth Theories Bill Gibson UVM 1 Mar 2010 Bill Gibson University of Vermont Endogenous growth Convergence Summary of Solow with Technical Change = L(t ) = A(t ) = ke = ye = k˙e = Y ke∗ ye∗ K α (AL)1−α L(0)e nt A(0)e πt K /AL Y /AL skeα − (n + π + δ)ke 1 s ) 1− α = ( n+π+δ α s = ( ) 1− α n+π+δ Estimated by Mankiw, Romer and Weil (1992) Bill Gibson University of Vermont Endogenous growth Convergence Empirics of the Solow model Solow model gives simple testable predictions Bill Gibson University of Vermont Endogenous growth Convergence Empirics of the Solow model Solow model gives simple testable predictions Higher the rate of savings the richer the country Bill Gibson University of Vermont Endogenous growth Convergence Empirics of the Solow model Solow model gives simple testable predictions Higher the rate of savings the richer the country Higher the rate of population growth the poorer the country Bill Gibson University of Vermont Endogenous growth Convergence Empirics of the Solow model Solow model gives simple testable predictions Higher the rate of savings the richer the country Higher the rate of population growth the poorer the country To a first approximation, results are true Bill Gibson University of Vermont Endogenous growth Convergence Empirics of the Solow model Solow model gives simple testable predictions Higher the rate of savings the richer the country Higher the rate of population growth the poorer the country To a first approximation, results are true Savings and pop growth affect income in the way Solow predicts Bill Gibson University of Vermont Endogenous growth Convergence Empirics of the Solow model Solow model gives simple testable predictions Higher the rate of savings the richer the country Higher the rate of population growth the poorer the country To a first approximation, results are true Savings and pop growth affect income in the way Solow predicts More than half the cross country variation in per capita income can be explained by these results Bill Gibson University of Vermont Endogenous growth Convergence Empirics of the Solow model Solow model gives simple testable predictions Higher the rate of savings the richer the country Higher the rate of population growth the poorer the country To a first approximation, results are true Savings and pop growth affect income in the way Solow predicts More than half the cross country variation in per capita income can be explained by these results Example Why might this model be unrealistic? Bill Gibson University of Vermont Endogenous growth Convergence Empirics of the Solow model Solow model gives simple testable predictions Higher the rate of savings the richer the country Higher the rate of population growth the poorer the country To a first approximation, results are true Savings and pop growth affect income in the way Solow predicts More than half the cross country variation in per capita income can be explained by these results Example Why might this model be unrealistic? Answer: Exogenous rate of technical change and no human capital Bill Gibson University of Vermont Endogenous growth Convergence The estimated equation ye ln ye α s ) 1− α n+π+δ α α ln s − ln(n + π + δ) 1−α 1−α α α ln s − ln(n + π + δ) 1−α 1−α α α ln s − ln(n + π + δ) 1−α 1−α α ln A(0) + πt + ln s 1−α α − ln(n + π + δ) 1−α = ( = ln Y − ln(AL) = ln Y − ln(L) − ln A(0)e πt = ln y = or: ln y = β 0 + β 1 t + β 2 ln s + β 3 ln(n + π + δ) Bill Gibson University of Vermont Endogenous growth Convergence Results 414 QUARTERLY JOURNAL OF ECONOMICS TABLE I ESTIMATION OF THETEXTBOOK SOLOWMODEL Dependent variable: log GDP per working-age person in 1985 Sample: Observations: CONSTANT ln(I/GDP) ln(n + g + 8) H2 s.e.e. Restricted regression: CONSTANT ln(I/GDP) - ln(n + g + 8) 1?2 s.e.e. Test of restriction: p-value Implied a Non-oil 98 5.48 (1.59) 1.42 (0.14) -1.97 (0.56) 0.59 0.69 Intermediate 75 5.36 (1.55) 1.31 (0.17) -2.01 (0.53) 0.59 0.61 OECD 22 7.97 (2.48) 0.50 (0.43) -0.76 (0.84) 0.01 0.38 6.87 (0.12) 1.48 (0.12) 0.59 0.69 7.10 (0.15) 1.43 (0.14) 0.59 0.61 8.62 (0.53) 0.56 (0.36) 0.06 0.37 0.38 0.60 (0.02) 0.26 0.59 (0.02) 0.79 0.36 (0.15) Note. Standard errors are in parentheses. The investment and population growth rates are averages for the period 1960-1985. (g + 8) is assumed to be 0.05. Three aspects of the results support the Solow model. First, the coefficients on saving and population growth have the predicted Bill Gibson University of Vermont Endogenous growth Convergence Regression More than half the world wide variation in per capita GDP can be explained by the two variables s and n. Bill Gibson University of Vermont Endogenous growth Convergence Regression More than half the world wide variation in per capita GDP can be explained by the two variables s and n. Growth highly correlated with both Bill Gibson University of Vermont Endogenous growth Convergence Regression More than half the world wide variation in per capita GDP can be explained by the two variables s and n. Growth highly correlated with both Both highly significant and wide variation in both Bill Gibson University of Vermont Endogenous growth Convergence Regression More than half the world wide variation in per capita GDP can be explained by the two variables s and n. Growth highly correlated with both Both highly significant and wide variation in both Coefficients are large (1.42 and -1.97). Bill Gibson University of Vermont Endogenous growth Convergence Regression More than half the world wide variation in per capita GDP can be explained by the two variables s and n. Growth highly correlated with both Both highly significant and wide variation in both Coefficients are large (1.42 and -1.97). Not same magnitude (close) Bill Gibson University of Vermont Endogenous growth Convergence Regression More than half the world wide variation in per capita GDP can be explained by the two variables s and n. Growth highly correlated with both Both highly significant and wide variation in both Coefficients are large (1.42 and -1.97). Not same magnitude (close) Not equal to 1/2 Bill Gibson University of Vermont Endogenous growth Convergence Regression More than half the world wide variation in per capita GDP can be explained by the two variables s and n. Growth highly correlated with both Both highly significant and wide variation in both Coefficients are large (1.42 and -1.97). Not same magnitude (close) Not equal to 1/2 Population seems to have stronger effect on per capita incomes than savings Bill Gibson University of Vermont Endogenous growth Convergence Human capital Developing countries have shortage of skilled and excess supply of unskilled Bill Gibson University of Vermont Endogenous growth Convergence Human capital Developing countries have shortage of skilled and excess supply of unskilled Must augment growth model so that individuals can save in two forms, physical and human capital Bill Gibson University of Vermont Endogenous growth Convergence Human capital Developing countries have shortage of skilled and excess supply of unskilled Must augment growth model so that individuals can save in two forms, physical and human capital y = k α h1−α all per capita terms Bill Gibson University of Vermont Endogenous growth Convergence Human capital Developing countries have shortage of skilled and excess supply of unskilled Must augment growth model so that individuals can save in two forms, physical and human capital y = k α h1−α all per capita terms k (t + 1) − k (t ) = sy (t ) Bill Gibson University of Vermont Endogenous growth Convergence Human capital Developing countries have shortage of skilled and excess supply of unskilled Must augment growth model so that individuals can save in two forms, physical and human capital y = k α h1−α all per capita terms k (t + 1) − k (t ) = sy (t ) h (t + 1) − h (t ) = qy (t ) with q the amount spent on education Bill Gibson University of Vermont Endogenous growth Convergence Human capital Developing countries have shortage of skilled and excess supply of unskilled Must augment growth model so that individuals can save in two forms, physical and human capital y = k α h1−α all per capita terms k (t + 1) − k (t ) = sy (t ) h (t + 1) − h (t ) = qy (t ) with q the amount spent on education This model will reach a steady state as well Bill Gibson University of Vermont Endogenous growth Convergence Human capital Developing countries have shortage of skilled and excess supply of unskilled Must augment growth model so that individuals can save in two forms, physical and human capital y = k α h1−α all per capita terms k (t + 1) − k (t ) = sy (t ) h (t + 1) − h (t ) = qy (t ) with q the amount spent on education This model will reach a steady state as well Example Compute the rate of growth of k if the ratio of human to physical capital is r Bill Gibson University of Vermont Endogenous growth Convergence Human capital Developing countries have shortage of skilled and excess supply of unskilled Must augment growth model so that individuals can save in two forms, physical and human capital y = k α h1−α all per capita terms k (t + 1) − k (t ) = sy (t ) h (t + 1) − h (t ) = qy (t ) with q the amount spent on education This model will reach a steady state as well Example Compute the rate of growth of k if the ratio of human to physical capital is r Answer: k (t +1)−k (t )t ) k (t ) = sr 1−α Bill Gibson University of Vermont Endogenous growth Convergence Human capital If both growth at the same rate r = q/s Bill Gibson University of Vermont Endogenous growth Convergence Human capital If both growth at the same rate r = q/s k (t +1)−k (t ) k (t ) = sr 1−α Bill Gibson University of Vermont Endogenous growth Convergence Human capital If both growth at the same rate r = q/s k (t +1)−k (t ) k (t ) = sr 1−α k (t +1)−k (t ) k (t ) = s (q/s )1−α Bill Gibson University of Vermont Endogenous growth Convergence Human capital If both growth at the same rate r = q/s k (t +1)−k (t ) k (t ) = sr 1−α k (t +1)−k (t ) = s (q/s )1−α k (t ) k̂ = ĥ = s α q 1−α Bill Gibson University of Vermont Endogenous growth Convergence Human capital If both growth at the same rate r = q/s k (t +1)−k (t ) k (t ) = sr 1−α k (t +1)−k (t ) = s (q/s )1−α k (t ) k̂ = ĥ = s α q 1−α Example Let α = 0.4 The propensity to save in the form of physical capital is s = 0.2 while that of human capital is 0.35. What is the steady state rate of growth of income per capita? Bill Gibson University of Vermont Endogenous growth Convergence Human capital If both growth at the same rate r = q/s k (t +1)−k (t ) k (t ) = sr 1−α k (t +1)−k (t ) = s (q/s )1−α k (t ) k̂ = ĥ = s α q 1−α Example Let α = 0.4 The propensity to save in the form of physical capital is s = 0.2 while that of human capital is 0.35. What is the steady state rate of growth of income per capita? Answer:k̂ = ĥ = 0.20.4 (0.35).6 = 0.28 So that ŷ = 0.28 Bill Gibson University of Vermont Endogenous growth Convergence Implications Possible for there to be diminishing returns to capital (both kinds) and still no convergence Bill Gibson University of Vermont Endogenous growth Convergence Implications Possible for there to be diminishing returns to capital (both kinds) and still no convergence If they have similar savings and technological parameters they grow at the same rate Bill Gibson University of Vermont Endogenous growth Convergence Implications Possible for there to be diminishing returns to capital (both kinds) and still no convergence If they have similar savings and technological parameters they grow at the same rate Might be relatively constant returns to physical and human capital combined. Bill Gibson University of Vermont Endogenous growth Convergence Implications Possible for there to be diminishing returns to capital (both kinds) and still no convergence If they have similar savings and technological parameters they grow at the same rate Might be relatively constant returns to physical and human capital combined. World behaves as if there were constant returns to scale as in HD Bill Gibson University of Vermont Endogenous growth Convergence Implications Possible for there to be diminishing returns to capital (both kinds) and still no convergence If they have similar savings and technological parameters they grow at the same rate Might be relatively constant returns to physical and human capital combined. World behaves as if there were constant returns to scale as in HD Both rates of savings now have obvious connections to savings Bill Gibson University of Vermont Endogenous growth Convergence Implications Possible for there to be diminishing returns to capital (both kinds) and still no convergence If they have similar savings and technological parameters they grow at the same rate Might be relatively constant returns to physical and human capital combined. World behaves as if there were constant returns to scale as in HD Both rates of savings now have obvious connections to savings Even in the steady-state! Bill Gibson University of Vermont Endogenous growth Convergence Solves empirical problem? Recall that coefficients on savings and population growth higher than they should be Bill Gibson University of Vermont Endogenous growth Convergence Solves empirical problem? Recall that coefficients on savings and population growth higher than they should be Upwardly biased since increase in income causes more income Bill Gibson University of Vermont Endogenous growth Convergence Solves empirical problem? Recall that coefficients on savings and population growth higher than they should be Upwardly biased since increase in income causes more income More income causes more investment in human capital Bill Gibson University of Vermont Endogenous growth Convergence Solves empirical problem? Recall that coefficients on savings and population growth higher than they should be Upwardly biased since increase in income causes more income More income causes more investment in human capital This biases the coefficient on savings in an upward direction Bill Gibson University of Vermont Endogenous growth Convergence Solves empirical problem? Recall that coefficients on savings and population growth higher than they should be Upwardly biased since increase in income causes more income More income causes more investment in human capital This biases the coefficient on savings in an upward direction Population coef also biased upward since rise in population reduces Bill Gibson University of Vermont Endogenous growth Convergence Solves empirical problem? Recall that coefficients on savings and population growth higher than they should be Upwardly biased since increase in income causes more income More income causes more investment in human capital This biases the coefficient on savings in an upward direction Population coef also biased upward since rise in population reduces per capita income and thus savings in both forms Bill Gibson University of Vermont Endogenous growth Convergence Solves empirical problem? Recall that coefficients on savings and population growth higher than they should be Upwardly biased since increase in income causes more income More income causes more investment in human capital This biases the coefficient on savings in an upward direction Population coef also biased upward since rise in population reduces per capita income and thus savings in both forms Example Which regression coefficient is likely to be larger? Bill Gibson University of Vermont Endogenous growth Convergence Solves empirical problem? Recall that coefficients on savings and population growth higher than they should be Upwardly biased since increase in income causes more income More income causes more investment in human capital This biases the coefficient on savings in an upward direction Population coef also biased upward since rise in population reduces per capita income and thus savings in both forms Example Which regression coefficient is likely to be larger? Answer: An increase in physical savings is only an increase in one of two kinds of savings while an increase in population decreases two kinds of capital Bill Gibson University of Vermont Endogenous growth Convergence Summary of Solow with human capital = L(t ) = A(t ) = ke = ye = k˙e = h˙e = Y K α H β (AL)1−α− β L(0)e nt A(0)e πt K /AL Y /AL sye − (n + π + δ)ke qye − (n + π + δ)he s 1− β q β 1−α1−β ) n+π+δ ss 1− β q 1−α 1−αα−β = ( ) n+π+δ ke∗ = ( he∗ Bill Gibson University of Vermont Endogenous growth Convergence The estimated equation-HC ln y = ln A(0) + πt + + − α ln s 1−α−β β ln q 1−α−β α ln(n + π + δ) 1−α ln y = β 0 + β 1 t + β 2 ln s + β 3 ln(n + π + δ) + β 4 ln q Bill Gibson University of Vermont between SCHOOL and the population growth rate is -0.38. Thus, Endogenous growth accumulation could alter substantially human-capital including Convergence of physical-capital accumulation and populathe estimated impact tion growth on income per capita. Results C. Results Table II presents regressions of the log of income per capita on the log of the investment rate, the log of n + g + 8, and the log of the percentage of the population in secondary school. The humancapital measure enters significantly in all three samples. It also TABLE II OF THEAUGMENTED SOLOWMODEL ESTIMATION Dependent variable: log GDP per working-age person in 1985 Sample: Observations: CONSTANT ln(I/GDP) ln(n + g +5) ln(SCHOOL) R2 s.e.e. Restricted regression: CONSTANT ln(I/GDP) - ln(n + g + 5) ln(SCHOOL) - ln(n + g + 5) R2 s.e.e. Test of restriction: p-value Implied a Implied , Non-oil 98 6.89 (1.17) 0.69 (0.13) -1.73 (0.41) 0.66 (0.07) 0.78 0.51 Intermediate 75 7.81 (1.19) 0.70 (0.15) -1.50 (0.40) 0.73 (0.10) 0.77 0.45 OECD 22 8.63 (2.19) 0.28 (0.39) -1.07 (0.75) 0.76 (0.29) 0.24 0.33 7.86 (0.14) 0.73 (0.12) 0.67 (0.07) 0.78 0.51 7.97 (0.15) 0.71 (0.14) 0.74 (0.09) 0.77 0.45 8.71 (0.47) 0.29 (0.33) 0.76 (0.28) 0.28 0.32 0.41 0.31 (0.04) 0.28 (0.03) 0.89 0.29 (0.05) 0.30 (0.04) 0.97 0.14 (0.15) 0.37 (0.12) Note. Standard errors are in parentheses. The investment and population growth rates are averages for the period 1960-1985. (g + 8) is assumed to be 0.05. SCHOOL is the average percentage of the working-age population in secondary school for the period 1960-1985. Bill Gibson University of Vermont Endogenous growth Convergence Comparing rich and poor countries In DCs there is a shortage of unskilled labor Bill Gibson University of Vermont Endogenous growth Convergence Comparing rich and poor countries In DCs there is a shortage of unskilled labor This lowers the rate of return to physical capital Bill Gibson University of Vermont Endogenous growth Convergence Comparing rich and poor countries In DCs there is a shortage of unskilled labor This lowers the rate of return to physical capital But large supplies of human capital also increase the rate of return on capital Bill Gibson University of Vermont Endogenous growth Convergence Comparing rich and poor countries In DCs there is a shortage of unskilled labor This lowers the rate of return to physical capital But large supplies of human capital also increase the rate of return on capital Hence rate of return affected in two opposite ways Bill Gibson University of Vermont Endogenous growth Convergence Comparing rich and poor countries In DCs there is a shortage of unskilled labor This lowers the rate of return to physical capital But large supplies of human capital also increase the rate of return on capital Hence rate of return affected in two opposite ways Net effect might be small Bill Gibson University of Vermont Endogenous growth Convergence Comparing rich and poor countries In DCs there is a shortage of unskilled labor This lowers the rate of return to physical capital But large supplies of human capital also increase the rate of return on capital Hence rate of return affected in two opposite ways Net effect might be small Diminishing returns to each individual input still exists Bill Gibson University of Vermont Endogenous growth Convergence Comparing rich and poor countries In DCs there is a shortage of unskilled labor This lowers the rate of return to physical capital But large supplies of human capital also increase the rate of return on capital Hence rate of return affected in two opposite ways Net effect might be small Diminishing returns to each individual input still exists Conditional convergence after controlling for human capital, poor countries tend to grow faster Bill Gibson University of Vermont Endogenous growth Convergence Comparing rich and poor countries In DCs there is a shortage of unskilled labor This lowers the rate of return to physical capital But large supplies of human capital also increase the rate of return on capital Hence rate of return affected in two opposite ways Net effect might be small Diminishing returns to each individual input still exists Conditional convergence after controlling for human capital, poor countries tend to grow faster Conditional divergence after controlling for initial levels of per capital income. Bill Gibson University of Vermont Endogenous growth Convergence Unconditional convergence Two countries with same savings, depreciation and technical progress rates Bill Gibson University of Vermont Endogenous growth Convergence Unconditional convergence Two countries with same savings, depreciation and technical progress rates If population growth rate also the same: will converge to the same level of y Bill Gibson University of Vermont Endogenous growth Convergence Unconditional convergence Two countries with same savings, depreciation and technical progress rates If population growth rate also the same: will converge to the same level of y No remanence or hysteresis: path dependency Bill Gibson University of Vermont Endogenous growth Convergence Unconditional convergence Two countries with same savings, depreciation and technical progress rates If population growth rate also the same: will converge to the same level of y No remanence or hysteresis: path dependency Just divide up the time path: start one country a line 1 and the next at 100 Bill Gibson University of Vermont Endogenous growth Convergence Unconditional convergence Two countries with same savings, depreciation and technical progress rates If population growth rate also the same: will converge to the same level of y No remanence or hysteresis: path dependency Just divide up the time path: start one country a line 1 and the next at 100 Both will converge to the same income per capita Bill Gibson University of Vermont Endogenous growth Convergence Unconditional convergence Two countries with same savings, depreciation and technical progress rates If population growth rate also the same: will converge to the same level of y No remanence or hysteresis: path dependency Just divide up the time path: start one country a line 1 and the next at 100 Both will converge to the same income per capita Shorter time for the richer country Bill Gibson University of Vermont Endogenous growth Convergence Unconditional convergence Two countries with same savings, depreciation and technical progress rates If population growth rate also the same: will converge to the same level of y No remanence or hysteresis: path dependency Just divide up the time path: start one country a line 1 and the next at 100 Both will converge to the same income per capita Shorter time for the richer country This will happen independent of their starting values–history doesn’t matter Bill Gibson University of Vermont Endogenous growth Convergence Data on convergence Should have a strong negative correlation between growth and starting income per capita Bill Gibson University of Vermont Endogenous growth Convergence Data on convergence Should have a strong negative correlation between growth and starting income per capita Poorer countries should in 1870 should grow faster Bill Gibson University of Vermont Endogenous growth Convergence Data on convergence Should have a strong negative correlation between growth and starting income per capita Poorer countries should in 1870 should grow faster Convergence says countries should all go to their steady states Bill Gibson University of Vermont Endogenous growth Convergence Data on convergence Should have a strong negative correlation between growth and starting income per capita Poorer countries should in 1870 should grow faster Convergence says countries should all go to their steady states Steady states should be approximately the same! Bill Gibson University of Vermont Endogenous growth Convergence Data on convergence Should have a strong negative correlation between growth and starting income per capita Poorer countries should in 1870 should grow faster Convergence says countries should all go to their steady states Steady states should be approximately the same! Baumol looked at 16 countries: got negative relationship Bill Gibson University of Vermont Endogenous growth Convergence Data on convergence Should have a strong negative correlation between growth and starting income per capita Poorer countries should in 1870 should grow faster Convergence says countries should all go to their steady states Steady states should be approximately the same! Baumol looked at 16 countries: got negative relationship Selection bias Japan, Finland, Sweden, Norway, Germany, Italy, Austria, France Canada Denmark, US, Netherlands, Switzerland, Belgium, UK Australia Bill Gibson University of Vermont Endogenous growth Convergence Data on convergence Should have a strong negative correlation between growth and starting income per capita Poorer countries should in 1870 should grow faster Convergence says countries should all go to their steady states Steady states should be approximately the same! Baumol looked at 16 countries: got negative relationship Selection bias Japan, Finland, Sweden, Norway, Germany, Italy, Austria, France Canada Denmark, US, Netherlands, Switzerland, Belgium, UK Australia Did not include countries like Argentina, Chile, Spain, Portugal...also did not weight by population Bill Gibson University of Vermont Endogenous growth Convergence DeLong’s study Early measurement error bolstered case for convergence Bill Gibson University of Vermont Endogenous growth Convergence DeLong’s study Early measurement error bolstered case for convergence Case for absolute converge not supported. Bill Gibson University of Vermont Endogenous growth Convergence DeLong’s study Early measurement error bolstered case for convergence Case for absolute converge not supported. Or is it: have break out countries: first four Tigers: South Korea, Singapore, Taiwan, Hong Bill Gibson University of Vermont Endogenous growth Convergence DeLong’s study Early measurement error bolstered case for convergence Case for absolute converge not supported. Or is it: have break out countries: first four Tigers: South Korea, Singapore, Taiwan, Hong Ray: “Disparity in relative incomes has remained the same, because the poorest countries have grown at the same rate as the richest” Bill Gibson University of Vermont Endogenous growth Convergence DeLong’s study Early measurement error bolstered case for convergence Case for absolute converge not supported. Or is it: have break out countries: first four Tigers: South Korea, Singapore, Taiwan, Hong Ray: “Disparity in relative incomes has remained the same, because the poorest countries have grown at the same rate as the richest” Wrong! China has changed that Bill Gibson University of Vermont Endogenous growth Convergence DeLong’s study Early measurement error bolstered case for convergence Case for absolute converge not supported. Or is it: have break out countries: first four Tigers: South Korea, Singapore, Taiwan, Hong Ray: “Disparity in relative incomes has remained the same, because the poorest countries have grown at the same rate as the richest” Wrong! China has changed that Do relative growth rates matter? Bill Gibson University of Vermont Endogenous growth Convergence Unconditional THE EMPIRICS OF ECONOMICGROWTH A. co 66 Unconditional 0 (0 Q) 4 -- 427 ~~00 2 2 00 0 ~~~~~0 o 0 -~0 0 0 Oo 0O 0 R ? 0 0 0 o 0 00 Oo0 ? -2 5,5 s 6,5 7,5 8,5 9.5 Log output per working age adult:1960 B. ~~ ~~0 0 0 0 o0c~ O? ???0 08 8 6 060 W, 4 = Conditionalon saving and populationgrowth 2 _CP 0 o Bill Gibson D 0 University of Vermont 10.5 0 Oo0 Endogenous 00 growth Convergence -~0 ? -2 5,5 s 6,5 8,5 Conditional on savings and7,5pop growth 9.5 10.5 Log output per working age adult:1960 B. Conditionalon saving and populationgrowth ~~ ~~0 0 0 0 o0c~ O? ???0 08 8 6 060 W, 4 _CP = 2 o 020 0 o D 0 0 5s,5 6.5 7, 5 8.5 9.5 10,5 Log output per working age adult:1960 LO C.Conditionalon saving, populationgrowthand humancapital 6 0~~~~~~ ? 2 0~~~~~~ 0 ? O??b 9 Bill Gibson 0 lb8 University of Vermont o 020 Endogenous growth Convergence 0 Conditional 5on and7, 5pop growth and s,5 savings 6.5 8.5 9.5 H 10,5 Log output per working age adult:1960 LO C.Conditionalon saving, populationgrowthand humancapital 6 0~~~~~~ 0 ? 2 0~~~~~~ ? w ? 0 O??b 9 lb8 -2 5.5 6.5 7.5 8.5 9.5 Log output per working age adult:1960 FIGUREI Unconditional versusConditional Convergence Bill Gibson University of Vermont 10.5 Endogenous growth Convergence Conclusions Perfectly possible for there to be diminishing returns to physical capital but no covergence. Bill Gibson University of Vermont Endogenous growth Convergence Conclusions Perfectly possible for there to be diminishing returns to physical capital but no covergence. Rate of savings and rate of investment in human capital have growth rate effects, not just level effects. Bill Gibson University of Vermont Endogenous growth Convergence Conclusions Perfectly possible for there to be diminishing returns to physical capital but no covergence. Rate of savings and rate of investment in human capital have growth rate effects, not just level effects. Pace of growth determined within the model Bill Gibson University of Vermont Endogenous growth Convergence Conclusions Perfectly possible for there to be diminishing returns to physical capital but no covergence. Rate of savings and rate of investment in human capital have growth rate effects, not just level effects. Pace of growth determined within the model If we have unskilled labor, constant returns disappears Bill Gibson University of Vermont Endogenous growth Convergence Conclusions Perfectly possible for there to be diminishing returns to physical capital but no covergence. Rate of savings and rate of investment in human capital have growth rate effects, not just level effects. Pace of growth determined within the model If we have unskilled labor, constant returns disappears Example Why is the coefficient on labor so much larger than on savings in MRW regressions? Bill Gibson University of Vermont Endogenous growth Convergence Conclusions Perfectly possible for there to be diminishing returns to physical capital but no covergence. Rate of savings and rate of investment in human capital have growth rate effects, not just level effects. Pace of growth determined within the model If we have unskilled labor, constant returns disappears Example Why is the coefficient on labor so much larger than on savings in MRW regressions? Answer: Savings does not account for HC accumultion! Increase in s only affects one kind of capital. Population growth lowers per capital income and therefore affects both forms of accumulation Bill Gibson University of Vermont Endogenous growth Convergence Conclusions Perfectly possible for there to be diminishing returns to physical capital but no covergence. Bill Gibson University of Vermont Endogenous growth Convergence Conclusions Perfectly possible for there to be diminishing returns to physical capital but no covergence. Rate of savings and rate of investment in human capital have growth rate effects, not just level effects. Bill Gibson University of Vermont Endogenous growth Convergence Conclusions Perfectly possible for there to be diminishing returns to physical capital but no covergence. Rate of savings and rate of investment in human capital have growth rate effects, not just level effects. Pace of growth determined within the model Bill Gibson University of Vermont Endogenous growth Convergence Conclusions Perfectly possible for there to be diminishing returns to physical capital but no covergence. Rate of savings and rate of investment in human capital have growth rate effects, not just level effects. Pace of growth determined within the model If we have unskilled labor, constant returns disappears Bill Gibson University of Vermont Endogenous growth Convergence Conclusions Perfectly possible for there to be diminishing returns to physical capital but no covergence. Rate of savings and rate of investment in human capital have growth rate effects, not just level effects. Pace of growth determined within the model If we have unskilled labor, constant returns disappears Example Why is the coefficient on labor so much larger than on savings in MRW regressions? Bill Gibson University of Vermont Endogenous growth Convergence Conclusions Perfectly possible for there to be diminishing returns to physical capital but no covergence. Rate of savings and rate of investment in human capital have growth rate effects, not just level effects. Pace of growth determined within the model If we have unskilled labor, constant returns disappears Example Why is the coefficient on labor so much larger than on savings in MRW regressions? Answer: Savings does not account for HC accumultion! Increase in s only affects one kind of capital. Population growth lowers per capital income and therefore affects both forms of accumulation Bill Gibson University of Vermont Endogenous growth Convergence Conclusions Human capital also explains why rates of return to physical capital may not be as high in LDCs as in DCs. Bill Gibson University of Vermont Endogenous growth Convergence Conclusions Human capital also explains why rates of return to physical capital may not be as high in LDCs as in DCs. Rich countries as a result can grow faster Bill Gibson University of Vermont Endogenous growth Convergence Conclusions Human capital also explains why rates of return to physical capital may not be as high in LDCs as in DCs. Rich countries as a result can grow faster Diminishing returns to capital offset by accumulating human capital Bill Gibson University of Vermont Endogenous growth Convergence Conclusions Human capital also explains why rates of return to physical capital may not be as high in LDCs as in DCs. Rich countries as a result can grow faster Diminishing returns to capital offset by accumulating human capital Rate of growth of the economy is s α q 1−α Bill Gibson University of Vermont Endogenous growth Convergence Conclusions Human capital also explains why rates of return to physical capital may not be as high in LDCs as in DCs. Rich countries as a result can grow faster Diminishing returns to capital offset by accumulating human capital Rate of growth of the economy is s α q 1−α Model predicts no tendency to unconditional convergence Bill Gibson University of Vermont Endogenous growth Convergence Conclusions Human capital also explains why rates of return to physical capital may not be as high in LDCs as in DCs. Rich countries as a result can grow faster Diminishing returns to capital offset by accumulating human capital Rate of growth of the economy is s α q 1−α Model predicts no tendency to unconditional convergence Convergence conditional on human capital possible Bill Gibson University of Vermont Endogenous growth Convergence Conclusions Human capital also explains why rates of return to physical capital may not be as high in LDCs as in DCs. Rich countries as a result can grow faster Diminishing returns to capital offset by accumulating human capital Rate of growth of the economy is s α q 1−α Model predicts no tendency to unconditional convergence Convergence conditional on human capital possible Example How do we know that the human capital augmented Solow model is correct? Bill Gibson University of Vermont Endogenous growth Convergence Conclusions Human capital also explains why rates of return to physical capital may not be as high in LDCs as in DCs. Rich countries as a result can grow faster Diminishing returns to capital offset by accumulating human capital Rate of growth of the economy is s α q 1−α Model predicts no tendency to unconditional convergence Convergence conditional on human capital possible Example How do we know that the human capital augmented Solow model is correct? Answer: China! (Also S. Korea, Taiwan, Singapore, Hong Kong) Bill Gibson University of Vermont Endogenous growth Convergence Barro’s regression Used Summers-Heston data set Bill Gibson University of Vermont Endogenous growth Convergence Barro’s regression Used Summers-Heston data set haty = β 0 + β 1 GDP1965 + β 2 S + β z Z Bill Gibson University of Vermont Endogenous growth Convergence Barro’s regression Used Summers-Heston data set haty = β 0 + β 1 GDP1965 + β 2 S + β z Z β 1 < 0 and significant (t − score > 2) Bill Gibson University of Vermont Endogenous growth Convergence Barro’s regression Used Summers-Heston data set haty = β 0 + β 1 GDP1965 + β 2 S + β z Z β 1 < 0 and significant (t − score > 2) β 2 > 0 and significant Bill Gibson University of Vermont Endogenous growth Convergence Barro’s regression Used Summers-Heston data set haty = β 0 + β 1 GDP1965 + β 2 S + β z Z β 1 < 0 and significant (t − score > 2) β 2 > 0 and significant High income per capita in themselves slow growth rates Bill Gibson University of Vermont Endogenous growth Convergence Barro’s regression Used Summers-Heston data set haty = β 0 + β 1 GDP1965 + β 2 S + β z Z β 1 < 0 and significant (t − score > 2) β 2 > 0 and significant High income per capita in themselves slow growth rates Higher endowments of human capital speed growth up Bill Gibson University of Vermont Endogenous growth Convergence Barro’s regression Used Summers-Heston data set haty = β 0 + β 1 GDP1965 + β 2 S + β z Z β 1 < 0 and significant (t − score > 2) β 2 > 0 and significant High income per capita in themselves slow growth rates Higher endowments of human capital speed growth up Little statistical leverage however since high income per capita countries also have high human capital levels Bill Gibson University of Vermont Endogenous growth Convergence Internal and External Technological Change Internal: Gains from knowledge that are created by deliberate diversion of resources Bill Gibson University of Vermont Endogenous growth Convergence Internal and External Technological Change Internal: Gains from knowledge that are created by deliberate diversion of resources New products or innovation in production technologies Bill Gibson University of Vermont Endogenous growth Convergence Internal and External Technological Change Internal: Gains from knowledge that are created by deliberate diversion of resources New products or innovation in production technologies Classic trade off of less today for more tomorrow Bill Gibson University of Vermont Endogenous growth Convergence Internal and External Technological Change Internal: Gains from knowledge that are created by deliberate diversion of resources New products or innovation in production technologies Classic trade off of less today for more tomorrow Returns are captured in form of higher profits Bill Gibson University of Vermont Endogenous growth Convergence Internal and External Technological Change Internal: Gains from knowledge that are created by deliberate diversion of resources New products or innovation in production technologies Classic trade off of less today for more tomorrow Returns are captured in form of higher profits External Technology diffused from other countries- Bill Gibson University of Vermont Endogenous growth Convergence Internal and External Technological Change Internal: Gains from knowledge that are created by deliberate diversion of resources New products or innovation in production technologies Classic trade off of less today for more tomorrow Returns are captured in form of higher profits External Technology diffused from other countriesComplicated: might slow down internal (appropriate technolgy) tech change Bill Gibson University of Vermont Endogenous growth Convergence Internal and External Technological Change Internal: Gains from knowledge that are created by deliberate diversion of resources New products or innovation in production technologies Classic trade off of less today for more tomorrow Returns are captured in form of higher profits External Technology diffused from other countriesComplicated: might slow down internal (appropriate technolgy) tech change Or: process of diffusion might spur tech change Bill Gibson University of Vermont Endogenous growth Convergence Internal and External Technological Change Internal: Gains from knowledge that are created by deliberate diversion of resources New products or innovation in production technologies Classic trade off of less today for more tomorrow Returns are captured in form of higher profits External Technology diffused from other countriesComplicated: might slow down internal (appropriate technolgy) tech change Or: process of diffusion might spur tech change Example What is the principal means of technical change in your country: internal or external Bill Gibson University of Vermont Endogenous growth Convergence Internal and External Technological Change Internal: Gains from knowledge that are created by deliberate diversion of resources New products or innovation in production technologies Classic trade off of less today for more tomorrow Returns are captured in form of higher profits External Technology diffused from other countriesComplicated: might slow down internal (appropriate technolgy) tech change Or: process of diffusion might spur tech change Example What is the principal means of technical change in your country: internal or external Answer: It varies from country to country Bill Gibson University of Vermont Endogenous growth Convergence Deliberate Technical Change Technological frontier already exists in Platonic form as “blueprints” Bill Gibson University of Vermont Endogenous growth Convergence Deliberate Technical Change Technological frontier already exists in Platonic form as “blueprints” Y (t ) = E (t )γ K (t )α (uH )1−α Bill Gibson University of Vermont Endogenous growth Convergence Deliberate Technical Change Technological frontier already exists in Platonic form as “blueprints” Y (t ) = E (t )γ K (t )α (uH )1−α where E = rate of technical change and given by E (t + 1) − E (t ) = a (1 − u )H E (t ) Bill Gibson University of Vermont Endogenous growth Convergence Deliberate Technical Change Technological frontier already exists in Platonic form as “blueprints” Y (t ) = E (t )γ K (t )α (uH )1−α where E = rate of technical change and given by E (t + 1) − E (t ) = a (1 − u )H E (t ) Where a is a positive constant. Physical capital grow according to Solow Bill Gibson University of Vermont Endogenous growth Convergence Deliberate Technical Change Technological frontier already exists in Platonic form as “blueprints” Y (t ) = E (t )γ K (t )α (uH )1−α where E = rate of technical change and given by E (t + 1) − E (t ) = a (1 − u )H E (t ) Where a is a positive constant. Physical capital grow according to Solow Example How could the growth rate be maximized? Bill Gibson University of Vermont Endogenous growth Convergence Deliberate Technical Change Technological frontier already exists in Platonic form as “blueprints” Y (t ) = E (t )γ K (t )α (uH )1−α where E = rate of technical change and given by E (t + 1) − E (t ) = a (1 − u )H E (t ) Where a is a positive constant. Physical capital grow according to Solow Example How could the growth rate be maximized? Answer: Market will not do it...need a benevolent planner Bill Gibson University of Vermont Endogenous growth Convergence Externalities Externality: trade between A and B affects C. Bill Gibson University of Vermont Endogenous growth Convergence Externalities Externality: trade between A and B affects C. Railroad example: plus towns with train stations −towns without Bill Gibson University of Vermont Endogenous growth Convergence Externalities Externality: trade between A and B affects C. Railroad example: plus towns with train stations −towns without Are technological advances externalities? Bill Gibson University of Vermont Endogenous growth Convergence Externalities Externality: trade between A and B affects C. Railroad example: plus towns with train stations −towns without Are technological advances externalities? Not in the standard model: technology is part of the endowment Bill Gibson University of Vermont Endogenous growth Convergence Externalities Externality: trade between A and B affects C. Railroad example: plus towns with train stations −towns without Are technological advances externalities? Not in the standard model: technology is part of the endowment Externalities have no impact on firms: only on consumers Bill Gibson University of Vermont Endogenous growth Convergence Externalities Externality: trade between A and B affects C. Railroad example: plus towns with train stations −towns without Are technological advances externalities? Not in the standard model: technology is part of the endowment Externalities have no impact on firms: only on consumers Discovery that “wipes out existing patent and inflicts losses on patent holders” Bill Gibson University of Vermont Endogenous growth Convergence Externalities Externality: trade between A and B affects C. Railroad example: plus towns with train stations −towns without Are technological advances externalities? Not in the standard model: technology is part of the endowment Externalities have no impact on firms: only on consumers Discovery that “wipes out existing patent and inflicts losses on patent holders” Private and social marginal benefits and costs diverge Bill Gibson University of Vermont Endogenous growth Convergence Externalities Externality: trade between A and B affects C. Railroad example: plus towns with train stations −towns without Are technological advances externalities? Not in the standard model: technology is part of the endowment Externalities have no impact on firms: only on consumers Discovery that “wipes out existing patent and inflicts losses on patent holders” Private and social marginal benefits and costs diverge Example Where does technological change come from in economic theory? Bill Gibson University of Vermont Endogenous growth Convergence Externalities Externality: trade between A and B affects C. Railroad example: plus towns with train stations −towns without Are technological advances externalities? Not in the standard model: technology is part of the endowment Externalities have no impact on firms: only on consumers Discovery that “wipes out existing patent and inflicts losses on patent holders” Private and social marginal benefits and costs diverge Example Where does technological change come from in economic theory? Answer: Economics largely silent on the issue. Bill Gibson University of Vermont Endogenous growth Convergence Romer Model Let E = rate of technical change and given by Y (t ) = E (t )K (t )α L1−α Bill Gibson University of Vermont Endogenous growth Convergence Romer Model Let E = rate of technical change and given by Y (t ) = E (t )K (t )α L1−α K ∗ is average capital stock E (t ) = aK ∗ (t ) β Bill Gibson University of Vermont Endogenous growth Convergence Romer Model Let E = rate of technical change and given by Y (t ) = E (t )K (t )α L1−α K ∗ is average capital stock E (t ) = aK ∗ (t ) β Example How can we use this model to show that there is underinvestment Bill Gibson University of Vermont Endogenous growth Convergence Romer Model Let E = rate of technical change and given by Y (t ) = E (t )K (t )α L1−α K ∗ is average capital stock E (t ) = aK ∗ (t ) β Example How can we use this model to show that there is underinvestment Answer: A benevolent planner would invest more if she knew that TC in one of her industries would spillover to the rest Bill Gibson University of Vermont Endogenous growth Convergence Implications Constant returns to scale can exist at level of firm Bill Gibson University of Vermont Endogenous growth Convergence Implications Constant returns to scale can exist at level of firm Increasing returns at the level of the economy as a whole Bill Gibson University of Vermont Endogenous growth Convergence Implications Constant returns to scale can exist at level of firm Increasing returns at the level of the economy as a whole Consider case where all production functions are similar Bill Gibson University of Vermont Endogenous growth Convergence Implications Constant returns to scale can exist at level of firm Increasing returns at the level of the economy as a whole Consider case where all production functions are similar We then have IRS Y (t ) = aK (t )α+ β L1−α Bill Gibson University of Vermont Endogenous growth Convergence Implications Constant returns to scale can exist at level of firm Increasing returns at the level of the economy as a whole Consider case where all production functions are similar We then have IRS Y (t ) = aK (t )α+ β L1−α Example With IRS diminishing returns are impossible? Bill Gibson University of Vermont Endogenous growth Convergence Implications Constant returns to scale can exist at level of firm Increasing returns at the level of the economy as a whole Consider case where all production functions are similar We then have IRS Y (t ) = aK (t )α+ β L1−α Example With IRS diminishing returns are impossible? Answer: No IRS simply means that doubling inputs more than doubles outputs Bill Gibson University of Vermont Endogenous growth Convergence Complementarities If firm is planning investment must forecast future productivity Bill Gibson University of Vermont Endogenous growth Convergence Complementarities If firm is planning investment must forecast future productivity In Roemer model ρ depends on future path of average capital accumulation Bill Gibson University of Vermont Endogenous growth Convergence Complementarities If firm is planning investment must forecast future productivity In Roemer model ρ depends on future path of average capital accumulation Example Write down the payoff matrix in a coordination game Bill Gibson University of Vermont Endogenous growth Convergence Complementarities If firm is planning investment must forecast future productivity In Roemer model ρ depends on future path of average capital accumulation Example Write down the payoff matrix in a coordination game Answer: I= I ∼I Bill Gibson I ∼I 1, 1 −1, 0 0, −1 0, 0 University of Vermont Endogenous growth Convergence Complementarities Question for policy: how to induce the I , I Nash equilibrium Bill Gibson University of Vermont Endogenous growth Convergence Complementarities Question for policy: how to induce the I , I Nash equilibrium Think of each firm as choosing its own savings rate, s Bill Gibson University of Vermont Endogenous growth Convergence Complementarities Question for policy: how to induce the I , I Nash equilibrium Think of each firm as choosing its own savings rate, s Average rate of investment then is not exogenous Bill Gibson University of Vermont Endogenous growth Convergence Complementarities Question for policy: how to induce the I , I Nash equilibrium Think of each firm as choosing its own savings rate, s Average rate of investment then is not exogenous Outcome of all individual choices Bill Gibson University of Vermont Endogenous growth Convergence Complementarities Question for policy: how to induce the I , I Nash equilibrium Think of each firm as choosing its own savings rate, s Average rate of investment then is not exogenous Outcome of all individual choices Gives rise to multiple equilibria Bill Gibson University of Vermont Endogenous growth Convergence Complementarities Question for policy: how to induce the I , I Nash equilibrium Think of each firm as choosing its own savings rate, s Average rate of investment then is not exogenous Outcome of all individual choices Gives rise to multiple equilibria Example Are complementarities the same as externalities? Bill Gibson University of Vermont Endogenous growth Convergence Complementarities Question for policy: how to induce the I , I Nash equilibrium Think of each firm as choosing its own savings rate, s Average rate of investment then is not exogenous Outcome of all individual choices Gives rise to multiple equilibria Example Are complementarities the same as externalities? Answer: No! The former induces behavior on the part of the agent that experiences the externality Bill Gibson University of Vermont Endogenous growth Convergence Savings rate of the ith firm 12 10 8 6 4 2 2 4 6 8 Economywide anticipated investment rates Bill Gibson University of Vermont 10 Endogenous growth Convergence Multiple equilibria Not just an equilibrium of action, but an equilibrium of beliefs Bill Gibson University of Vermont Endogenous growth Convergence Multiple equilibria Not just an equilibrium of action, but an equilibrium of beliefs At first intersection firms are pessimistic about other firms Bill Gibson University of Vermont Endogenous growth Convergence Multiple equilibria Not just an equilibrium of action, but an equilibrium of beliefs At first intersection firms are pessimistic about other firms The low investment on the part of firm as result of belief is justified Bill Gibson University of Vermont Endogenous growth Convergence Multiple equilibria Not just an equilibrium of action, but an equilibrium of beliefs At first intersection firms are pessimistic about other firms The low investment on the part of firm as result of belief is justified In general complementarities give rise to multiple equilibria Bill Gibson University of Vermont Endogenous growth Convergence Multiple equilibria Not just an equilibrium of action, but an equilibrium of beliefs At first intersection firms are pessimistic about other firms The low investment on the part of firm as result of belief is justified In general complementarities give rise to multiple equilibria An economy and its clone can give rise to two different growth rates Bill Gibson University of Vermont Endogenous growth Convergence Multiple equilibria Not just an equilibrium of action, but an equilibrium of beliefs At first intersection firms are pessimistic about other firms The low investment on the part of firm as result of belief is justified In general complementarities give rise to multiple equilibria An economy and its clone can give rise to two different growth rates Example What is economic theory of this example? Bill Gibson University of Vermont Endogenous growth Convergence Multiple equilibria Not just an equilibrium of action, but an equilibrium of beliefs At first intersection firms are pessimistic about other firms The low investment on the part of firm as result of belief is justified In general complementarities give rise to multiple equilibria An economy and its clone can give rise to two different growth rates Example What is economic theory of this example? Answer: Self-fulfilling prophesy Bill Gibson University of Vermont Endogenous growth Convergence Total Factor Productivity Take production function Y = f (K , L) Bill Gibson University of Vermont Endogenous growth Convergence Total Factor Productivity Take production function Y = f (K , L) Take total differential dY = Bill Gibson ∂f ∂f dK + dL ∂K ∂L University of Vermont Endogenous growth Convergence Total Factor Productivity Take production function Y = f (K , L) Take total differential ∂f ∂f dK + dL ∂K ∂L Note that MPK = r and MPL = w dY = Bill Gibson University of Vermont Endogenous growth Convergence Total Factor Productivity Take production function Y = f (K , L) Take total differential ∂f ∂f dK + dL ∂K ∂L Note that MPK = r and MPL = w Divide by Y dY dK K dL L =r +r Y K Y L Y dY = Bill Gibson University of Vermont Endogenous growth Convergence Total Factor Productivity Take production function Y = f (K , L) Take total differential ∂f ∂f dK + dL ∂K ∂L Note that MPK = r and MPL = w Divide by Y dY dK K dL L =r +r Y K Y L Y dY = In share terms Ŷ = αK̂ + (1 − α)L̂ Bill Gibson University of Vermont Endogenous growth Convergence Total Factor Productivity Now fit this equation to data Bill Gibson University of Vermont Endogenous growth Convergence Total Factor Productivity Now fit this equation to data Shares are 30-60 percent for wages Marquetti’s data Bill Gibson University of Vermont Endogenous growth Convergence Total Factor Productivity Now fit this equation to data Shares are 30-60 percent for wages Marquetti’s data In most countries Ŷ > αK̂ + (1 − α)L̂ Bill Gibson University of Vermont Endogenous growth Convergence Total Factor Productivity Now fit this equation to data Shares are 30-60 percent for wages Marquetti’s data In most countries Ŷ > αK̂ + (1 − α)L̂ Therefore have to Ŷ = αK̂ + (1 − α)L̂ + T where T = total factor productivity growth Bill Gibson University of Vermont Endogenous growth Convergence Total Factor Productivity Now fit this equation to data Shares are 30-60 percent for wages Marquetti’s data In most countries Ŷ > αK̂ + (1 − α)L̂ Therefore have to Ŷ = αK̂ + (1 − α)L̂ + T where T = total factor productivity growth Have to be careful with population growth as a proxy for labor force growth Bill Gibson University of Vermont Endogenous growth Convergence Total Factor Productivity Now fit this equation to data Shares are 30-60 percent for wages Marquetti’s data In most countries Ŷ > αK̂ + (1 − α)L̂ Therefore have to Ŷ = αK̂ + (1 − α)L̂ + T where T = total factor productivity growth Have to be careful with population growth as a proxy for labor force growth Must also correct for labor force quality human capital and aggregating capital growing at different rates is always tricky Bill Gibson University of Vermont Endogenous growth Convergence Total Factor Productivity Now fit this equation to data Shares are 30-60 percent for wages Marquetti’s data In most countries Ŷ > αK̂ + (1 − α)L̂ Therefore have to Ŷ = αK̂ + (1 − α)L̂ + T where T = total factor productivity growth Have to be careful with population growth as a proxy for labor force growth Must also correct for labor force quality human capital and aggregating capital growing at different rates is always tricky Factors must be paid the marginal products Bill Gibson University of Vermont Endogenous growth Convergence Total Factor Productivity Example Growth rate of the labor force is 1.5 percent. Depreciation is 3 percent. The capital-output ratio, is about 2.3. The share of investment from the SAM, is 19 percent. Share of profit 0.40. Output growth has been about 4.5 percent over the past decade. Compute TFPG. Bill Gibson University of Vermont Endogenous growth Convergence Total Factor Productivity Example Growth rate of the labor force is 1.5 percent. Depreciation is 3 percent. The capital-output ratio, is about 2.3. The share of investment from the SAM, is 19 percent. Share of profit 0.40. Output growth has been about 4.5 percent over the past decade. Compute TFPG. Answer: Bill Gibson University of Vermont Endogenous growth Convergence Total Factor Productivity Example Growth rate of the labor force is 1.5 percent. Depreciation is 3 percent. The capital-output ratio, is about 2.3. The share of investment from the SAM, is 19 percent. Share of profit 0.40. Output growth has been about 4.5 percent over the past decade. Compute TFPG. Answer: step 1: dK /K = I /K − δ = (I /Y )(Y /K ) − δ = 0.19(1/2.3) − 0.03 = 0.526 Bill Gibson University of Vermont Endogenous growth Convergence Total Factor Productivity Example Growth rate of the labor force is 1.5 percent. Depreciation is 3 percent. The capital-output ratio, is about 2.3. The share of investment from the SAM, is 19 percent. Share of profit 0.40. Output growth has been about 4.5 percent over the past decade. Compute TFPG. Answer: step 1: dK /K = I /K − δ = (I /Y )(Y /K ) − δ = 0.19(1/2.3) − 0.03 = 0.526 step 2: 4.5 = 0.4(5.26) + 0.6(1.5) + T → T = 1.5 Bill Gibson University of Vermont Endogenous growth Convergence Sources of Growth East Asia over the 1965-90 period grew faster than any other region in history of world Bill Gibson University of Vermont Endogenous growth Convergence Sources of Growth East Asia over the 1965-90 period grew faster than any other region in history of world Includes: Japan, Hong Kong, S. Korea, Taiwan, Signapore, Indonesia, Thailand and Malaysia Bill Gibson University of Vermont Endogenous growth Convergence Sources of Growth East Asia over the 1965-90 period grew faster than any other region in history of world Includes: Japan, Hong Kong, S. Korea, Taiwan, Signapore, Indonesia, Thailand and Malaysia Eclipsed now by China Bill Gibson University of Vermont Endogenous growth Convergence Sources of Growth East Asia over the 1965-90 period grew faster than any other region in history of world Includes: Japan, Hong Kong, S. Korea, Taiwan, Signapore, Indonesia, Thailand and Malaysia Eclipsed now by China Very high savings rates (LA + 20) Bill Gibson University of Vermont Endogenous growth Convergence Sources of Growth East Asia over the 1965-90 period grew faster than any other region in history of world Includes: Japan, Hong Kong, S. Korea, Taiwan, Signapore, Indonesia, Thailand and Malaysia Eclipsed now by China Very high savings rates (LA + 20) All but Thailand had primary school enrollments rates higher than for other countries of their income class. Bill Gibson University of Vermont Endogenous growth Convergence Sources of Growth East Asia over the 1965-90 period grew faster than any other region in history of world Includes: Japan, Hong Kong, S. Korea, Taiwan, Signapore, Indonesia, Thailand and Malaysia Eclipsed now by China Very high savings rates (LA + 20) All but Thailand had primary school enrollments rates higher than for other countries of their income class. Was TFP a major factor in their growth Bill Gibson University of Vermont Endogenous growth Convergence Sources of Growth East Asia over the 1965-90 period grew faster than any other region in history of world Includes: Japan, Hong Kong, S. Korea, Taiwan, Signapore, Indonesia, Thailand and Malaysia Eclipsed now by China Very high savings rates (LA + 20) All but Thailand had primary school enrollments rates higher than for other countries of their income class. Was TFP a major factor in their growth World Bank: Yes! Called it “productivity based catching up” Bill Gibson University of Vermont Endogenous growth Convergence Sources of Growth East Asia over the 1965-90 period grew faster than any other region in history of world Includes: Japan, Hong Kong, S. Korea, Taiwan, Signapore, Indonesia, Thailand and Malaysia Eclipsed now by China Very high savings rates (LA + 20) All but Thailand had primary school enrollments rates higher than for other countries of their income class. Was TFP a major factor in their growth World Bank: Yes! Called it “productivity based catching up” Example Is the World Bank right about your country? Bill Gibson University of Vermont Endogenous growth Convergence Sources of Growth East Asia over the 1965-90 period grew faster than any other region in history of world Includes: Japan, Hong Kong, S. Korea, Taiwan, Signapore, Indonesia, Thailand and Malaysia Eclipsed now by China Very high savings rates (LA + 20) All but Thailand had primary school enrollments rates higher than for other countries of their income class. Was TFP a major factor in their growth World Bank: Yes! Called it “productivity based catching up” Example Is the World Bank right about your country? Answer: It depends on the data! Bill Gibson University of Vermont Endogenous growth Convergence The East Asian Miracle Most explanations of the link between TFP growth and exports emphasize such static factors as economies of scale and capacity utilization. While these may account for an initial surge of productivity soon after the start of an export push, they are insufficient to explain continuing high TFP growth rates. Bill Gibson University of Vermont Endogenous growth Convergence The East Asian Miracle Rather, the relationship between exports and productivity growth may arise from exports’ role in helping economies adopt best-practice technologies. High levels of labor force cognitive skills permit better firm-level adoption, adaptation and mastery of technology. Thus exports and human capital interact to provide a particularly rapid phase of productivity-based catching up. Bill Gibson University of Vermont Endogenous growth Convergence Sources of growth essential to know How did this happen in so many countries at once Bill Gibson University of Vermont Endogenous growth Convergence Sources of growth essential to know How did this happen in so many countries at once Is it good “old fashioned” accumulation of human and physical capital? Bill Gibson University of Vermont Endogenous growth Convergence Sources of growth essential to know How did this happen in so many countries at once Is it good “old fashioned” accumulation of human and physical capital? Do exports play an essential role Bill Gibson University of Vermont Endogenous growth Convergence Sources of growth essential to know How did this happen in so many countries at once Is it good “old fashioned” accumulation of human and physical capital? Do exports play an essential role shows that 2/3 of this super growth can be attributed to human and physical capital Bill Gibson University of Vermont Endogenous growth Convergence Sources of growth essential to know How did this happen in so many countries at once Is it good “old fashioned” accumulation of human and physical capital? Do exports play an essential role shows that 2/3 of this super growth can be attributed to human and physical capital 1/3 from TFP-says WB Bill Gibson University of Vermont Endogenous growth Convergence Sources of growth essential to know How did this happen in so many countries at once Is it good “old fashioned” accumulation of human and physical capital? Do exports play an essential role shows that 2/3 of this super growth can be attributed to human and physical capital 1/3 from TFP-says WB Excellent study by Young (1995) reduced the estimates considerably! Bill Gibson University of Vermont Endogenous growth Convergence Sources of growth essential to know How did this happen in so many countries at once Is it good “old fashioned” accumulation of human and physical capital? Do exports play an essential role shows that 2/3 of this super growth can be attributed to human and physical capital 1/3 from TFP-says WB Excellent study by Young (1995) reduced the estimates considerably! Numbers are not high but well above the rest of the world Bill Gibson University of Vermont Endogenous growth Convergence Ferreira, de Abreu Pessoa and Veloso Full Sample GDP-hat 1.68% Excluding disasters 2.24% East Asian Miracles 5.68% Miracles 4.57% Fast Growth 2.60% Medium Growth 1.65% Slow Growth 0.69% Disasters -1.09% Capital 1% 68% 1% 60% 3% 49% 2% 49% 2% 58% 1% 63% 1% 123% 0% -17% Labor 1% 42% 1% 32% 1% 14% 1% 17% 1% 26% 1% 41% 1% 108% 1% -54% China Bill Gibson University of Vermont TFP -0.17% -10.00% 0.18% 8.00% 2.09% 37.00% 1.55% 34.00% 0.43% 16.00% -0.06% -4.00% -0.90% -130.00% -1.86% 171.00% 2.26-4% Endogenous growth Convergence Countries East Asian Miracles Fast Taiwan Barbados Hong Kong Ireland S Korea Portugal Singapore Pakistan Italy Miracles Malaysia Botswana Finland Taiwan Austria Korea Spain Singapore Greece Hong Kong Syria Thailand Turkey Indonesia Brazil Cyprus Paraguay Medium Netherlands Ecuador Nepal Israel USA Tunisia Guatemala France Panama Lesotho Iceland Belgium Sweden Mauritius Jordan Norway Australia Zimbabwe Malawi Dominican South Africa Republic Philippines United KingdomCanada Kingdom Denmark Germany Kenya Fiji Bangladesh Uruguay Bill Gibson Slow New Zealand Switzerland Bolivia Trinidad & Tobago El Salvador Mexico Senegal Cameroon Honduras Disasters Chile Zambia Costa Rica Central African Republic Uganda Peru Tanzania Guyana Papua New Guinea Mozambique Togo Niger Iran Venezuela Ghana Nicaragua Argentina Congo Jamaica University of Vermont