“New Growth Theories”Endogenous Growth Models

J.D. HanKing’s University College

UWO

1. Problems of Neo-Classical Growth Model = Solow Model

• Convergence MPK eventually declines

• Technological Advances may eliminate convergence, but they are Exogenous in the model- The growth model itself does not explain the TA, and technical innovation happens out of blue, and is injected into Solow Model.

2. Endogenous Growth Model and New Explanatory Variable

• Endogenous Economic Growth Model• New Explanatory Variables - Human Capital with Knowledge; It is separate

Physical Capital with Technical Innovation; we can have an accumulation/evolution function for Human Capital

- Other variables measuring quality of human factors may be tried.

• No convergence – MPK does not have to decline if there is an increase in Human Capital

The contribution of this model is that it emphasizes the link between

Technical innovation, Human Capital, and Institutions including Government.

Cf. The previous Neo-Classical economists

emphasized the close relationship between Technical Innovation and Physical Capital.

Formal EG Model: Romer-Mankiew-Weil Model• Technological change is the result of the

intentional actions of people, such as Invention, and Research and Development

• Some institutions promote innovation and R & D, and others inhibit R & D.

• Romer supports Government-funding for Educational Institution and R & D.

http://www.stanford.edu/~promer/EconomicGrowth.pdf

Growth, Technology and EducationEngelbrecht – At an early stage of economic development, the level

of education plays important role in technological catch-up

– Productivity growth is more rapid where countries have higher levels of average schooling

– Human capital has largest effects when specific to subcategories important for technological diffusion (science, math, engineering)

3. Human Capital:

• What is it?

Human Capital Theory pioneered by Gary S. Becker

• (1964, 1993, 3rd ed.). Human Capital: A Theoretical and Empirical Analysis, with Special Reference to Education. Chicago, University of Chicago Press.

• human capital – “our knowledge, skills learning, talents and abilities.” (Definition by OECD) http://www.oecd.org/document/43/0,3343,en_21571361_37705603_37781227_1_1_1_1,00.html

Labor versus Human Capital• Labor- Quantity of workforce - physical - solated , invididual

• Human Capital -Quality of workforce -Intellectual - Between Humans, Institutional

Unlike physical labor (and the other factors of production), knowledge is:

• Expandable and self-generating with use: as doctors get more experience, their knowledge base will increase, as will their endowment of human capital. The economics of scarcity is replaced by the economics of self-generation.

• Transportable and shareable: knowledge can be moved and shared. This transfer does not prevent its use by the original holder. It is public goods.

Quantification of Human Capital

• Now economists want to find the measure of Haman Capital:

• They look at Education Indexes, such as the years of Schooling.

How to quantify Human Capital?• Education*• (years of )Schooling• Literacy

Evidence: Economic Growth and the Quality of Human Capital

• One standard deviationincrease in internationaltest scores (generalized)impacts growth rate by 1%per year• 1% rise in literary scorescompared to theinternational averageassociated with 2.5% risein productivity and 1.5%

Robert Barro; The American Economic in GDP per capitaReview; May 2001

4. Math of the Formal Model: Romer-Mankiew-Weil Model

• Instead of Y= A K L1- of conventional Neo-Classical Model

• proposes Y = A K H L

• Because of H, there is no Convergence;

an increase in H can cancels the decreasing MP.

H becomes the engine of growth

5. Empirical Testing of Endogenous Growth Model

• Run a restricted regression of log (dY) = α0 + α1 log (dK) + α2 log (dH) + α3 log (dL).

Empirical results are mixed • Remaining Ambiguity: If H is measured by a narrow concept of “Schooling”, it

delays but eventually shows the DMR again. http://www2.warwick.ac.uk/fac/soc/economics/seminars/macro/mankiw2.pdf

6. Limitations and Extension

A Lot of Remaining Ambiguity of Human Capital-not fully captured by a single, individual measure of

education eg) military services, and non-school training and

services are not formally included in education, but should be included in case of nation-wide compulsory military services.

-not only quantity of education but also quality of education

-some authors suggest that education system should be included

* Example of Extension into a ‘system’by Peter Howitt

– Education policies need to be appropriate to country’s position in relation to the frontier

- May explain discrepancies in correlations between education and growth

- Effects of liberal trade policy on domestic innovation

7. Some Other Less Formal Modelsof Endogenous Growth model

Example 1) Financial Developmentby King and Levine; by J.D. Han, et. al.

• Y = f( H, M3/Y; K, L) Y = f( H, M3/Y , G/Y, (M+X)/Y, I/Y, INF)

• Empirical results: H, M3/Y, IY are significant: /t-value/>1.96 INF, G/Y, (M+X)/Y are not significant.

Example 2)Curse of Natural Resources by Carlos Leite

http://ideas.repec.org/p/imf/imfwpa/99-85.html

Model: Y = f( R; K, L)Results: Resources have negative impacts on Y.

Conclusion: “Nature corrupts human beings”- Natural resources decrease Human capital.

Example 3) Quality of Government (or its lack)

• %Y = a + b X + c (Quality Index of Government)Results? Generally +ve correlation

• %Y = a + b X + d (Corruption Index of Government)Results? Mixed or + ve correlations between corruption and growth for some

countriesInterpretations? Corruption can improve economic efficiency in an imperfect world; Cultural differences in definition of corruption

Excellent References for Corruption

http://qcpages.qc.cuny.edu/Writing/Sun%20-%20PSCI%20384W%20S08.pdf • *TI Corruption Perception Index and Barometer, www.transparency.org

• *WB Governance Indicators, http://info.worldbank.org/governance/wgi2007/

• *WB and ERDB Business Environment and Enterprise Performance Surveys,

• http://info.worldbank.org/governance/beeps/ • *UN Interregional Crime and Justice Research Institute,

International Crime • Victims Surveys,

http://www.unicri.it/wwd/analysis/icvs/statistics.php

Example 3) One of More Comprehensive Models

• http://www.imf.org/external/pubs/ft/wp/2004/wp04217.pdf

Growth Technology

Human Captial

Capital

Labor (Forces)

Education:Schooling

Literacy

R & D: New Tech

Diffusion: Existing

Government Policy

Decreasing MP

Other Preliminary Variables:(No) CorruptionOrder (Crime Rate)

Formal Endogenous Growth Theory

Ad hoc Endogenous Growth Model

Summary

Example 4) Culture and Institution• Max Weber (19th century) said that ethics matters

for modern economic growth.• Gino Tabellini(2006)’s empirical works on

European countries:Culture (and Institution) matters persistently for sustainable economic growth in the long-run.

• From studies of East Asian economies, Tu Weiming at Harvard says that Neo-Confucian ethics matters in the long-run sustainable economic growth.

The Bottom line is

-There are a variety of Endogenous Growth Theories.

-They focus on ‘something inside or deeper’ than K, L, and T, which is called ‘Endogenous Factors’.

-Some focuses on Human Capital, and other focuses on Social Capital or Culture and Institutions.

-Somewhat convincing, but difficult to prove it definitely.