Summary

Two sources of growth• Growth in steady state (=n)• Variation in growth in moving to steady state

• ? No growth in per capita GDP in steady state???

2 questions: log in to m.socrative.com

1.In the simple Solow-Swann growth model, a decrease in I/Y will a) Increase the growth of GDP permanentlyb) Decrease the growth of GDP in the

short run onlyc) Have no effect on growth d) Decrease the growth of GDP permanentlye) Increase the growth of GDP in the

short run only

Question 2

In the simple Solow-Swann growth model, an increase in I/Y willa)Increase GDP per capita permanentlyb)Decrease GDP per capita in the

short run onlyc)Have no effect on GDP per capita d)Decrease GDP per capita permanentlye)Increase GDP per capita in the

short run only

Model extension: effective labour different to actual

labour• E = effective labour and it grows at a rate ‘e’ due to growth in actual labour force (ie population growth, ‘n’ ) and growth in the effectiveness of each unit of actual labour (λ) due to technological change and investments in human capital (eg via education)

• Aggregate production function with constant returns to scale Y= F(K,E) and Y/E =y’ = f(k’) where k’=K/E

Analysis of capital to effective labour ratio (k’)

∆k’/k’ = ∆K/K - ∆E/E’ = sY/K – (n+λ) = sy’/k’ – (n+λ)Þ ∆k’/k’> (<) 0 when sy’/k’ > (<) (n+λ)

i.e. when sy’> (<) (n+λ)k’

Production functiony’

y’=f(k’)

k’

First part of condition: sy’

y’

y’=f(k’)

sy’

k’

Second part: (n+λ)k’

y‘

y’* y’ =f(k’)

(n+λ)k’ sy’

k’* k’

Model implications I

• Steady state = [y’*,k’*]=> ∆K/K = ∆E/E = n+ λ=> ∆Y/Y = n+ λ Þ ∆y/y = λ (i.e. growth in per capita GDP in steady state)

• Two sources of growth differences: growth in steady state cf growth in moving to steady state

Model implication II: change in I/Y

y’ y’** y’=f(k’) y’* (n+λ)k’ s’y’

sy’

k’* k’** k’

Model implications II

• New steady state = [y’**,k’**]=> ∆K/K = ∆E/E = n+ λ=> ∆Y/Y = n+ λ Þ ∆y/y = λi.e. same characteristics but NB transitionally higher ∆y/y than λ

Summary: Solow-Swann model of growth

• Growth differences • Either because moving to steady state (due to catch-up or change in I/Y)

• Or to differences in steady state (λ)

Some evidence

• Catch up• When it happens (and doesn’t happen)

Some evidence on when slowdown occurs

2 questions: log in to m.socrative.com

1.In the extended Solow-Swann growth model, a decrease in I/Y will a) Increase the growth of GDP permanentlyb) Decrease the growth of GDP in the

short run onlyc) Have no effect on growth d) Decrease the growth of GDP permanentlye) Increase the growth of GDP in the

short run only

Question 2

In the extended Solow-Swann growth model, an increase in I/Y willa)Increase GDP per capita permanentlyb)Decrease GDP per capita in the

short run onlyc)Have no effect on GDP per capita d)Decrease GDP per capita permanentlye)Increase GDP per capita in the

short run only

Summary

• Solow-Swann and 2 sources of growth difference: steady state differences and/or transitional differences

• Some evidence on ‘catch-up’(e.g. Europe and Asian Tigers during last 50 years), but weak for low per capita income countries.

• Poor countries: different production function and/or different λ?

Summary continued

• Growth as a process of transformation and the role of policy and institutions (and geography?)

• How do you acquire new technology? How easily do resources move from agriculture to industry?

• How are educational systems and infrastructure developed?

Institutions and human capital and technological change

• Incentives to change and the politics of winners and losers…

• Price signals: if demand and/or production conditions change is there an incentive to adapt?

• Well defined property rights (that align rewards with valued efforts) ---why trade or make investments?

• ‘good’ government----investments in public goods (roads, clean water, public health, etc), investments in education and social insurance, non-distortionary taxes, stable macroeconomic environment, etc.

• Social capital----do people trust each other?• i.e. quality of institutions matter

Some evidence on the association

Association isn’t causation

• Reverse influence of GDP/capita on institutions

• Rich countries more easily afford education systems, infrastructure and a predictable legal system

• Rich countries more easily afford transfer payments for those who ‘lose’

Policy and institutions matter: how to test

• North Korea and South Korea• East and West Germany• China post Mao

China

Reform in China: markets and property rights

• 1980s: agricultural reform with market prices and ability to buy and sell on market once quotas have been filled

• Delegation of ownership: town and village enterprises

• mid 1990s: state owned enterprises allowed to become bankrupt and become shareholding enterprises

• Late 1990s: private enterprise and trade liberalisation

What are the exogenous determinants of institutions?

•Acemoglu and Robinson (2001, 2012) •Legal origins •Fractionalisation

Acemoglu and Robinson: settler mortality

Reduced form relationship

Scatter of first stage

Summary

• Solow-Swann and two sources of difference in growth rates (transition to steady state and λ in steady state)

• Institutions and policy critically affect country production functions and values of λ

• Difficulty disentangling the simultaneous relationship between institutions and growth