1. society
2. work
3. unemployment

Growth Review, into Development
Sang Yoon (Tim) Lee
Universität Mannheim
April 20, 2015
last updated: April 12, 2015
Tim Lee (U Mannheim)
Economic Growth
April 20, 2015
1 / 14
This Week and Next
1
Review of Growth Models
2
Elements needed in a model that can explain the Industrial Revolution
Tim Lee (U Mannheim)
Economic Growth
April 20, 2015
2 / 14
What have we learned?
Basic Solow model (savings, population, technology)
Human capital variants of the Solow model (part of unexplained growth comes
from population “skills”)
Technological change variants of the Solow models (part of population has to
build the technology)
Growth in an open economy (population has to learn the outside technology)
Endogenous growth and externalities (linearity)
Tim Lee (U Mannheim)
Economic Growth
April 20, 2015
3 / 14
Where did we come from?
1
We wanted to explain growth and development
2
Growth: explaining modern growth facts, with emphasis on already
developed economies
3
Development: taking already developed economies as a benchmark,
explore growth in less developed economies or study
preindustrialization development
Tim Lee (U Mannheim)
Economic Growth
April 20, 2015
4 / 14
What have we accomplished so far?
Basic Solow model:
1
Backbone of all the other growth models
2
Explains growth through exogenous increases in productivity,
population, and savings (accumulation of physical capital, i.e.
investment)
3
Reproduces growth facts for developed countries - most countries have
maintained a stable growth rate of 2-3%
Existence of a BGP hinges on DRS in production with respect to capital/labor
BGP growth rate equal to exogenously assumed technology growth rate
Endogenous growth models assume something else that determines
technology growth rate
Tim Lee (U Mannheim)
Economic Growth
April 20, 2015
5 / 14
What have we accomplished so far?
Human Capital:
1
Extends Solow model by cracking part of A: “human capital” (whatever
that is!)
2
Briefly discussed health, but primary factor considered was education
3
Minor extensions are not very different from Solow model, links growth
to education instead of attributing everything to technology
4
Model with endogenous human capital could explain sustained
differences between rich and poor countries:
1
2
initial levels of human capital leads to permanent differences!
education share lead to different BGP growth rates
⇒ Endogenous human capital model in 4 hinges on the linearity
assumption of human capital accumulation
Tim Lee (U Mannheim)
Economic Growth
April 20, 2015
6 / 14
What have we accomplished so far?
Technology:
1
The basic setup just includes a research sector
2
Spillover effects, increasing returns to scale, and congestion effects in
technology development
3
The basic setup was extended to include monopolistic intermediate
goods providers
4
Consequently, we could discuss the optimal allocation of labor into the
research sector
Important discussion on spillovers and externalities
As long as φ < 1, long run technology growth rate did not depend on γ!
φ = 1 is a special case where it does!
Tim Lee (U Mannheim)
Economic Growth
April 20, 2015
7 / 14
What have we accomplished so far?
Romer model opened ways to connect human capital to technology:
1
Simple open economy model where capital is traded freely doesn’t seem
to explain everything
2
If technology is embedded within human capital, this opens a way to
clarify the direction of causality
3
Poor countries can catch up to richer countries by taking advantage of
already existing technology (human capital)
Tim Lee (U Mannheim)
Economic Growth
April 20, 2015
8 / 14
What have we accomplished so far?
Single Country Growth:
1
Convergence toward a BGP in a single country can be studied directly
using the production function
2
“Jumps” can be analyzed as a single country heading toward a new BGP
Growth Accounting:
1
Can use BGP solutions for empirical cross-country regressions; or
2
Neoclassical production function for time series or panel regressions
3
Cross-country differences in physical capital accumulation explains
about 30% of differences in income per capita
4
Human capital accumulation can explain about 40% - still 30% remains
5
Technology model doesn’t work well empirically (yet)
Tim Lee (U Mannheim)
Economic Growth
April 20, 2015
9 / 14
Where do we go from here?
1
Solow model and variants helps us understand modern economies
2
But how did we arrive here in the first place?
3
Problem of causality - maybe wealth causes
savings/education/health/technology, not the other way around?
4
All models we studied have causality problems
5
Technology transfer model: poor country gets something from rich
country, can invest more in education to develop - but how did the rich
country get rich in the first place?
Tim Lee (U Mannheim)
Economic Growth
April 20, 2015
10 / 14
Back to the Origins
1
Remember, before industrial revolution, we were all poor - GDP per
capita appx. $100 at most
2
Not only were we all poor, but we were always poor - almost zero
economic growth for thousands of years
3
How did the industrial revolution happen? (in an economic context, not
historical)
4
We will use a different model - specifically one that focuses on land (for
agriculture and food) and population
Tim Lee (U Mannheim)
Economic Growth
April 20, 2015
11 / 14
Economic Growth in Historical Perspective
• Income per capita in world regions from 0 to 2000 (Maddison 2003):
30000
25000
20000
15000
10000
5000
0
0
500
1000
Western Europe
Western Offshoots
Asia
Africa
1500
Latin America
2000
Economic Growth in Historical Perspective
• Income per capita in world regions from 0 to 2000 (Maddison 2003):
30000
25000
20000
15000
10000
5000
0
0
500
1000
Western Europe
Western Offshoots
Asia
Africa
1500
Latin America
2000
Economic Growth in Historical Perspective
• Income per capita in world regions from 0 to 2000 (Maddison 2003):
30000
25000
20000
15000
10000
5000
0
0
500
1000
Western Europe
Western Offshoots
Asia
Africa
1500
Latin America
2000
Economic Growth in Historical Perspective
• Income per capita in world regions from 0 to 2000 (Maddison 2003):
30000
25000
20000
15000
10000
5000
0
0
500
1000
Western Europe
Western Offshoots
Asia
Africa
1500
Latin America
2000
Economic Growth in Historical Perspective
• Income per capita in world regions from 0 to 2000 (Maddison 2003):
30000
25000
20000
15000
10000
5000
0
0
500
1000
Western Europe
Western Offshoots
Asia
Africa
1500
Latin America
2000
Economic Growth in Historical Perspective
• Income per capita in world regions from 0 to 2000 (Maddison 2003):
30000
25000
20000
15000
10000
5000
0
0
500
1000
Western Europe
Western Offshoots
Asia
Africa
1500
Latin America
2000
Economic Growth in Historical Perspective
• Income per capita in world regions from 0 to 2000 (Maddison 2003):
30000
25000
20000
15000
10000
5000
0
0
500
1000
Western Europe
Western Offshoots
Asia
Africa
1500
Latin America
2000
Economic Growth in Historical Perspective
• Income per capita in world regions from 0 to 2000 (Maddison 2003):
30000
25000
20000
15000
10000
5000
0
0
500
1000
Western Europe
Western Offshoots
Asia
Africa
1500
Latin America
2000
Economic Growth in Historical Perspective
• Income per capita in world regions from 1500 to 2000,
logarithmic scale (Maddison 2003):
30000
3000
300
1500
1600
1700
1800
Western Europe
Western Offshoots
Asia
Africa
1900
Latin America
2000
Long-Run Growth and Demographic Change
• All industrialized countries underwent the demographic
transition.
• Population growth in world regions from 1500 to 2000
(Maddison 2003):
3.5
3
2.5
2
1.5
1
0.5
0
1500
1600
1700
1800
Western Europe
1900
2000
Long-Run Growth and Demographic Change
• All industrialized countries underwent the demographic
transition.
• Population growth in world regions from 1500 to 2000
(Maddison 2003):
3.5
3
2.5
2
1.5
1
0.5
0
1500
1600
1700
Western Europe
1800
1900
Western Offshoots
2000
Long-Run Growth and Demographic Change
• All industrialized countries underwent the demographic
transition.
• Population growth in world regions from 1500 to 2000
(Maddison 2003):
3.5
3
2.5
2
1.5
1
0.5
0
1500
1600
Western Europe
1700
1800
Western Offshoots
1900
Asia
2000
Africa
Things needed to be explain
1
Zero economic growth - need a model of stagnation
2
Escape from stagnation - need a model of Industrial Revolution
3
New questions regarding growth:
I
I
From agriculture to industry - need land
From low to high, back to low population growth - need birth and death
4
We will find that we should consider food and education as well
5
Things we won’t address: political change, social change
Tim Lee (U Mannheim)
Economic Growth
April 20, 2015
13 / 14
Outline for Rest of the Course
Maltusian model of income and population
1
Everyone was equally poor for a long time
2
Productivity differences are reflected in population density rather than
income per capita
⇐ growth constrained by land
Escape from Malthusian trap
1
Add the rise of a new industry (not constrained by land)
2
Induces a demographic transition
3
But this model itself is empiricaly implausible, so
Transition to Solow model
1
Add new education and fertility choices (quantity-quality tradeoff) for
more realistic demographic changes
2
Food constraints to fit observed patterns of sectoral composition and
productivities
Tim Lee (U Mannheim)
Economic Growth
April 20, 2015
14 / 14