Classical Theories of Growth PDF

Classic theories of growth Figure 2.5 The growth of real output per person since 1750 Source: Data from Maddison Project Database  Johnson and Papageorgiou: What Remains of Cross-Country Convergence? 133 16,000...

Classic theories of growth Figure 2.5 The growth of real output per person since 1750 Source: Data from Maddison Project Database  Johnson and Papageorgiou: What Remains of Cross-Country Convergence? 133 16,000 14,000 12,000 Real GDP per capita, in PPP 10,000 8,000 6,000 4,000 2,000 0 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 Figure 1. Average Global per Capita GDP (1960–2010) Source: Penn World Tables version 7.1.  Johnson and Papageorgiou: What Remains of Cross-Country Convergence? 133 16,000 14,000 TABLE 1 Decadal Average per Capita GDP Growth (%) by Geographical Region Real GDP per capita, in PPP 12,000 10,000 Geographical 8,000 Region 1960s 1970s 1980s 1990s 2000s East 6,000 Asia and Pacific 3.9 3.3 3.2 3.0 3.6 Europe 4,000 and Central Asia 4.7 3.5 1.8 0.5 3.6 Latin 2,000 America and Caribbean 2.2 2.7 −0.6 1.5 2.2 Middle 0 East and North Africa 3.7 2.7 −0.9 2.0 2.0 North America 3.1 2.5 1.9 1.8 0.9 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 South AsiaFigure 1. Average Global per Capita GDP (1960–2010) 1.6 1.4 2.1 0.5 4.5 Sub-Saharan Africa Source: Penn World Tables version 7.1. 1.8 1.3 −0.2 −0.4 1.8 World TABLE 1 2.8 2.4 0.6 0.9 2.7 Decadal Average per Capita GDP Growth (%) by Geographical Region Geographical Region 1960s 1970s 1980s 1990s 2000s East Asia and Pacific Source: Penn World 3.9 Tables 3.3 version 3.2 7.1. 3.0 3.6 Europe and Central Asia 4.7 3.5 1.8 0.5 3.6 Latin America and Caribbean 2.2 2.7 −0.6 1.5 2.2 Middle East and North Africa 3.7 2.7 −0.9 2.0 2.0 North America 3.1 2.5 1.9 1.8 0.9 South Asia 1.6 1.4 2.1 0.5 4.5 Sub-Saharan Africa 1.8 1.3 −0.2 −0.4 1.8 into the 1980s but saw decelerating growth only seen previously in the 1960s in Europe. World 2.8 2.4 0.6 0.9 2.7 Source: Penn World Tables version 7.1. in the 1990s. This was followed by a dramatic Notable also is sub-Saharan Africa’s bounce  TABLE 2 Decadal Average per Capita GDP Growth (%) by Income and Exporter Groups 1960s 1970s 1980s 1990s 2000s Income Group HIC 4.7 3.3 2.4 2.1 1.7 MIC 2.8 3.4 0.4 1.4 3.4 LIC (all) 1.4 0.7 −0.2 −0.5 2.4 LIC (fragile) 1.7 0.7 −0.5 −1.5 1.3 LIC (non-fragile) 1.1 0.7 0.2 0.6 3.6 Exporter Group Commodity Exporters 2.1 2.0 −0.8 −0.4 3.0 Others 3.0 2.5 1.1 1.3 2.7 World 2.8 2.4 0.6 0.9 2.7 Source: Penn World Tables version 7.1. LIC < $1,036 GNI per capita (2021) MIC [LMIC: $1,036 and $4,045 UMIC: $4,046 and $12,535] HIC > $12,535 This content downloaded fromJohnson and Papageorgiou: What Remains of Cross-Country Convergence? 133 132.205.204.75 on Mon, 21 Aug 2023 19:54:42 +00:00 All use subject to https://about.jstor.org/terms 16,000  Johnson and Papageorgiou: What Remains of Cross-Country Convergence? 137 Johnson and Papageorgiou: What Remains of Cross-Country Convergence? 133 Convergence 16,000 (by income group) 14,000 per capita GDP growth rate 1960−2010 GNQ 6 CHN Real GDP per capita, in PPP 12,000 TWN KOR BWA Middle Income SGP 10,000 HKG Low Income THAMYS 8,000 4 High Income LKA ROM IDN JPNSYC CYP 6,000 EGY MAR IND PAN PRT IRL is this for the recent period? CPV DOM MUS GRC ESP LUX PRI TTO NOR PAK ISR LSO BRA TURCHL FIN BELAUT 4,000 TZA MRT ITA FRA GBR 2 MOZ SYR COL MEX DNK CAN NLD ISL SWE AUS USA NPLCOGPHL PRY ECU IRN URY CRI 2,000 FJI GTM PER GAB MWI MLI PNG ZAF NZL CHE BFA ETH TCD UGA NAM SLV BRB BGDGHA HNDJOR BEN DZA BOL 0 RWA CIV JAM VEN KEN CMR 1960 BDICOM 1965 ZWE GMB 1970 ZMB NGA 1975 1980 1985 1990 1995 2000 2005 2010 0 TGO GNB GIN SEN HTI NIC Figure MDG 1. Average Global per Capita GDP (1960–2010) CAF NER Source: Penn World Tables version 7.1. −2 ZAR 0 5,000 TABLE 1 10,000 15,000 20,000 Decadal Average per Capita GDP Growth (%) by Geographical Region Geographical Region 1960s 1970s 1980s 1960 1990sper capita 2000s GDP East Asia and Pacific 3.9 3.3 3.2 3.0 3.6 Europe and Central Asia 4.7 3.5 1.8 0.5 3.6 Latin America and Caribbean 2.2 2.7 −0.6 1.5 2.2 Middle East and North Africa North America 3.7 3.1 Figure 4. Growth Against Initial Income 2.7 2.5 −0.9 1.9 2.0 1.8 2.0 0.9 South Asia 1.6 1.4 2.1 0.5 4.5 Sub-Saharan Africa 1.8 1.3 −0.2 −0.4 1.8 Notes: Income definition based on PPP converted GDP per capita (chain series), at 2005 constant prices. Fitted World values Local are shown but not globalfor 2.8 each group. 2.4 convergence 0.6 0.9 2.7 Source: Penn World Tables version 7.1. Source: Penn World Tables 7.1.  138 Journal of Economic Literature, Vol. LVIII (March 2020) Per capita Income Distribution (In logarithms) 0.3 0.2 Density 2010 median: US$6,682 0.1 1960 1960 median: US$2,161 2010 0 6 8 10 12 log of real per capita GDP Figure 5. Cross-country Income Distribution against log per Capita GPD (1960, 2010) Notes: Income definition based on PPP converted GDP per capita (chain series), at 2005 constant prices. Vertical lines denote median of values for respective year. Sample of countries constant across years. The densities shown are standard kernel density estimators calculated using the Epanechnikov kernel. Source: Penn World Tables 7.1. good news: media income per capita improved 133 bad news: flatter the world hasand moremore become elongated distribution disbursed over Johnson and Papageorgiou: What Remains of Cross-Country Convergence? about one-third of the LICs. Fragile states are this period as the distribution elongated and defined as countries facing political fragility, 16,000  140 Journal Top ten of Economic Literature, Vol. LVIII (March 2020) Bottom ten Johnson and Papageorgiou: What Remains of Cross-Country Convergence? 133 16,000 TABLE 3 14,000 Country Rankings for Each Decade by per Capita GDP Growth (%) Real GDP per capita, in PPP 12,000 Decade avg. GDP Decade avg. GDP 10,000 Decade Rank Country (per capita) growth (%) Rank Country (per capita) growth (%) 8,000 1960s 1 Japan 8.98 93 China −0.32 2 Mauritania 8.16 94 Rwanda −0.74 −0.79 6,000 3 Greece 7.75 95 Algeria 4,000 4 Romania 7.73 96 Mauritius −0.96 5 Morocco 7.68 97 Haiti −1.51 −1.58 2,000 6 Hong Kong 7.48 98 Guinea 0 7 Spain 6.92 99 Senegal −1.76 −2.13 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 8 Iran 6.51 100 Nigeria 9 per Capita Figure 1. Average Global Cyprus GDP (1960–2010) 6.47 101 Bangladesh −2.14 Source: Penn World Tables version 7.1. 10 Portugal 5.92 102 Mali −2.25 1970s 1 Botswana 10.85 111 Madagascar −1.44 2TABLERomania 8.99 112 Central Africa −1.69 −1.85 1 3 Growth Decadal Average per Capita GDP Singapore (%) by Geographical Region 7.76 113 Liberia Geographical Region 1960s 4 Iraq1970s 1980s 1990s 7.75 2000s 114 Congo, Dem. Republic −1.94 East Asia and Pacific 3.9 5 Korea3.3 3.2 3.0 3.67.19 115 Chad −3.32 Europe and Central Asia Latin America and Caribbean 4.7 2.2 3.5 6 Malaysia 2.7 1.8 −0.6 0.5 1.5 3.6 2.27.1 116 Uganda −3.84 Middle East and North Africa 3.7 7 Swaziland 2.7 −0.9 2.0 2.06.82 117 Zambia −3.88 −4.25 North America 3.1 2.5 1.9 1.8 0.9 South Asia 1.6 8 Hong 1.4 Kong2.1 0.5 4.56.71 118 Nicaragua Sub-Saharan Africa 1.8 1.3 9 Bulgaria −0.2 −0.4 1.8 6.51 119 Lebanon −5.2 World 2.8 10 Indonesia 2.4 0.6 0.9 2.76.34 120 Cambodia −6.52 Source: Penn World Tables version 7.1. 1980s 1 China 7.34 116 Togo −3.27  TABLE 4 Number of Years Required for Selected Low- Income Countries to Achieve Middle-Income assumes that average annual Status growth for the past decade prevails indefinitely MIC Country Year threshold approximately $3000 Vietnam 2.5 Lao 3.7 Moldova 6.5 Sudan 7.6 Cambodia 9.5 Ghana 13.1 Kyrgyzstan 14.4 Papua New Guinea 14.8 Tajikistan 18.1 Johnson and Papageorgiou: What Remains of Cross-Country Convergence? 133 Nigeria 20.0 16,000 Nicaragua 22.0 14,000 Bangladesh 24.9 ita, in PPP 12,000 10,000  Johnson and Papageorgiou: What Remains of Cross-Country Convergence? 133 16,000 142 Journal of Economic Literature, Vol. LVIII (March 2020) 14,000 A: Correlations of per capita GDP growth in consecutive decades (all countries) Growth rate of Real GDP per capita, in PPP 12,000 10 all countries in Mean growth during this decade 10,000 8,000 5 sample against 6,000 previous decade 4,000 0 2,000 Unpredictable 0 growth from one 1960 −5 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 decade to Figure 1. Average Global per Capita GDP (1960–2010) another Source: Penn World Tables version 7.1. −10 −10 −5 0 5 10 TABLE 1 Mean growth during previous decade Decadal Average per Capita GDP Growth (%) by Geographical Region Geographical Region 1960s 1970s 1960s versus 1970s 1980s 1990s 1970s 2000s versus 1980s East Asia and Pacific 3.9 3.3 1980s3.2versus 1990s 3.0 1990s versus 3.6 1900s Europe and Central Asia 4.7 3.5 1.8 45−degree line 0.5 3.6 Latin America and Caribbean 2.2 2.7 −0.6 1.5 2.2 Middle East and North Africa 3.7 2.7 −0.9 2.0 2.0 North America 3.1 2.5 1.9 1.8 0.9 South Asia 1.6 1.4 2.1 0.5 4.5 Sub-Saharan Africa 1.8 1.3 −0.2 −0.4 1.8 Figure 7a.ofCorrelations B: Correlations of pergrowth per capita GDP Capita in GDP Growth indecades consecutive Consecutive Decades (All Countries) (LICs) World 2.8 2.4 0.6 0.9 2.7 Notes: Source: Penn 5Income World definition Tables version 7.1. based on PPP converted GDP per capita (chain series), at 2005 constant prices. First decade growth rate showed on x axis. decade Source: Penn World Tables 7.1. into the 1980s but saw decelerating growth only seen previously in the 1960s in Europe. in the 1990s. This was followed by a dramatic Notable also is sub-Saharan Africa’s bounce  1980s versus 1990s 1990s versus 1900s 45−degree line Johnson and Papageorgiou: What Remains of Cross-Country Convergence? 143 B: Correlations of per capita GDP growth in consecutive decades (LICs) LIC countries only 5 Mean growth during this decade Growth even more unstable 0 growth rate in some decade poor indicator of growth in following decade −5 −10 −10 −5 0 5 10 Mean growth during previous decade 1960s versus 70s 1970s versus 1980s 1980s versus 90s 1990s versus 00s 45−degree line Figure 7b. Correlations of per Capita GDP Growth in Consecutive Decades (LICs) Notes: Income definition based on PPP converted GDP per capita (chain series), at 2005 constant prices. First decade growth rate shown on x axis. Coefficient of correlation (Pearson): 1960s vs. 1970s (0.011); 1970s vs. 1980s (−0.118); 1980s vs. 1990s (0.025); 1990s vs. 2000s (−0.212). Source: Penn World Tables 7.1. Convergence - “Based on these very basic facts, broad-based international convergence is hard to witness, but there are countries that have enjoyed very successful convergence experiences. Those typically come from the middle stages of economic development, and mostly from South and East Asia, with notable examples being China and South Korea—China managed a leap from negative growth in the 1960s to become the highest growing county in the world in the course of the next few decades, while South Korea was propelled from low-income status to high-income status within the short span of fifty years. However, the majority of the poorer countries, mostly in Africa but else- where too, show no movement in closing the gap that has been increasing as more advanced economies grow at a faster pace….” (Johnson and Papageorgiou, p.145) Conclusions “With the exception of some early studies that have been criticized extensively due to econometric problems, there is a broad consensus of no evidence supporting absolute convergence in cross-country per capita incomes—that is poor countries do not seem to be unconditionally catching up to rich ones. (Johnson and Papageorgiou, p.165) “Our reading of the evidence, then, is that recent optimism in favor of rapid and sustainable convergence is unfounded. The last two decades of an unprecedented wave of growth in many LICs and emerging markets led to many analysts claiming prematurely, in our view, success with slogans such as “lions on the move,” “the next convergence,” and “no shortage of economic growth in Africa” (Roxburgh et al. 2010; Spence 2011; Economist 2013, respectively). Many observers are led to believe that “this time is different.” We have come to the conclusion that with the exception of a few countries in Asia that exhibited transformational growth, most of the economic achievements in developing economies have been the result of removing inefficiencies, especially in governance and in political institutions. But as is now well known, these are merely one-off level effects that, while not unimportant, and in fact necessary in the process of development, nonetheless do not stimulate ongoing economic growth.. (Johnson and Papageorgiou, p.166) Development as economic growth 1950s-onwards What are the conditions needed for economic growth? - Harrod-Domar model - Lewis model - Neoclassical growth model Also in this lecture: -Neocolonial dependence theory Harrod-Domar model Investment leads to growth Y: output K: capital stock L: labour stock A: fixed technological coefficient B: fixed technological coefficient c: capital-output ratio s: saving ratio No substitutability in the factors of production Harrod-Domar model aggregate production function with fixed technological coefficients 𝑌 = 𝐹(𝐾; 𝐿) = min{𝐴𝐾; 𝐵𝐿} Capital is the limiting factor : AK < BL 𝑌 = 𝐴𝐾 The Harrod-Domar Growth Model output 𝑌 = 𝐴𝐾 !" efficiency of capital utilization !# = 𝐴 = 𝑌/𝐾 $ the capital-output ratio =𝑐 % net saving 𝑆 = 𝑠𝑌 = 𝐼 net investment dotK = 𝐼 − 𝑑𝐾 The Harrod-Domar Growth Model The Harrod-Domar Growth Model The Harrod-Domar Growth Model To grow: save and invest a certain proportion of GDP; d=0 The Harrod-Domar Growth Model Improved efficiency=> faster growth ; d=0  Structural Change Models 1960s- 1970s+ Used modern economic theory + econometrics Focus on transformation (internal) domestic economy Agricultural to industrialized manufacturing and service economy Generate rapid, sustained economic growth  Structural Change Models 1960s- 1970s+ Used modern economic theory + econometrics Focus on transformation (internal) domestic economy Agricultural to industrialized manufacturing and service economy Generate rapid, sustained economic growth The Lewis Model The Lewis Model The Lewis Model The Lewis Model International-Dependence Revolution 1970s + new interest Radical, political Institutional, political, and economic rigidities Dependence and dominance relationships between developing and developed countries Focus on poverty, employment opportunities, inequality in growth Three schools of thought: neocolonial dependence model, false- paradigm model, dualistic development thesis International-Dependence Revolution 1970s + new interest Radical, political Institutional, political, and economic rigidities Dependence and dominance relationships between developing and developed countries Focus on poverty, employment opportunities, inequality in growth Three schools of thought: neocolonial dependence model, false-paradigm model, dualistic development thesis The Neocolonial Dependence Model The center : developed countries The periphery : developing countries Elites a small privileged ruling class in developing country high incomes, social status, political power ex: landlords, military rulers, salaried public officials benefit from the international system of inequality serve and are rewarded by international special interest groups ex: multinational corporations, the World Bank, the IMF discourage reform efforts and perpetuate underdevelopment The Neocolonial Dependence Model underdevelopment due to highly unequal international capital system of rich-poor country relationships Underdevelopment is externally-induced The international system of inequality unequal power relationships between “center” and “periphery” Dominant countries exploit dependent countries Developed world nations + domestic elites directly and indirectly control dependent developing nations’ economies The Neocolonial Dependence Model The Neocolonial Dependence Model Neoclassical Free-Market Counterrevolution 1980s -1990s Underdevelopment caused by poor resource allocation Incorrect pricing policies State intervention Economic efficiency and economic growth Eliminate government regulations and price distortions (factor, product and financial markets) Privatize state-owned enterprises Promote free trade and export expansion Promote foreign investment from developed nations Free market analysis Markets alone are efficient Competition is effective Technology is freely available and nearly costless Information is freely available and nearly costless Government intervention is distortionary Public Choice Theory Politicians, bureaucrats, citizens and states are purely self-interested and use power and authority to selfish ends Market-friendly Approach Recognizes market imperfects and role of government intervention  Solow neoclassical exogenous growth model (time-permitting) Version we will look at: - continuous time - labour augmenting technology - solution: steady state level of per capita effective capital khat* Solow neoclassical exogenous growth model Solow neoclassical exogenous growth model Solow neoclassical exogenous growth model Solow neoclassical exogenous growth model Solow neoclassical exogenous growth model Solow neoclassical exogenous growth model Solow neoclassical exogenous growth model Solow neoclassical exogenous growth model Solow neoclassical exogenous growth model Solow neoclassical exogenous growth model