Beyond classical growth theory Human capital, Endogenous growth Growth and development

Beyond classical growth theory Last week we saw the Solow model  The most well-known neo-classical growth model This week we explore the limits of this model and go through the extensions that have been brought to it  Endogenous growth theory  The link with development

Beyond classical growth theory Growth and Convergence Endogenous growth Growth and Development

Growth and convergence Empirical analysis of growth (%Δ real GDP) Country Germany * Canada United States France Italy Japan United Kingdom

Growth and convergence The sources of growth (USA, %Δ annual average) Growth rate of GDP Labour L Capital K TFP (Solow Residual)

Growth and convergence ARG AUS AUT BDI BEL BEN BFA BGD BOL BRA BRB CAN CHE CHL CHN CIV CMR COG COL COM CPV CRI DNK DOM DZA ECU EGY ESP ETH FIN FRA GAB GBR GHA GIN GMB GNB GNQ GRC GTM HKG HND IDN IND IRL IRN ISL ISR ITA JAM JOR JPN KEN KOR LKA LSO LUX MAR MDG MEX MLI MOZ MUS MWI MYS NER NGA NIC NLD NOR NPL NZL PAK PAN PER PHL PRT PRY ROM RWA SEN SGP SLV SWE SYC SYR TCD TGO THA TTO TUR TZA UGA URY USA VEN ZAF ZMB Average annual growth rate GDP per capita (1960) Source: Penn Tables 6.1 Convergence (All countries)

Growth and convergence ARG AUS AUT BEL CAN CHE DNK ESP FIN FRA GBR GRC IRL ISL ISR ITA JPN LUX NLD NOR NZL PRT SWE USA Average annual growth rate GDP per capita (1960) Source: Penn Tables 6.1 Convergence (OECD Countries)

Growth and convergence Source: Penn Tables 6.1 Convergence (Non OECD countries)

Growth and convergence Convergence, as predicted by the Solow model, is not a universal phenomenon.  Not all countries seem to be converging… Disparities between groups of countries can be explained by differences in the determinants of the steady state.  Rate of investment  Growth rate of the population  Level of technology Convergence only occurs between countries that have the same steady state!

Beyond classical growth theory Growth and Convergence Endogenous growth Growth and Development

Endogenous growth The Solow model has got several limits First, the convergence problem, which shows that countries are not converging in general  In particular, certain countries are actually losing ground compared to the OECD. Secondly, there is the Solow paradox:  “Computers are everywhere, except in the productivity statistics.”  The great IT revolution does not seem to have brought gains in productivity and growth.

Endogenous growth Measurement problem on the qualitative evolution of GDP?  The composition of GDP has changed: services are important  This is a limited explanation The slowdown in research ?  The returns to research are reducing (the easy discoveries have been made)  Entrance into the age of complexity The price of basic commodities (Oil, minerals, etc.)?  These cause productivity losses for a given amount of capital and labour.  However, from 1986 until recently, prices have been relatively low.

Endogenous growth What is ‘Endogenous growth’ ?  For proponents of this theory, one needs to go beyond the stylised approach of Solow and the exogenous rate of technological progress.  The first to do so was Paul Romer in the mid- 1980’s, who managed to combine the complex reality of technological progress and the production function approach that is central to neoclassical theory.  The growth rate of technology becomes a function of the level of output of the economy.

Endogenous growth Endogenous growth theories often call upon the idea of knowledge externalities.  Knowledge is a public good  Its social benefit is greater than its private benefit  As a result there is an incentive problem with a role for public intervention. The micro-econometrics of R&D support this concept: the social return of R&D is two to three times the private return (Griliches, Mansfield).

Endogenous growth Endogenising technical change leads in fact to accounting for the qualitative variation of factors over time:  The characteristics of capital and labour in 1970 and 2009 are not the same! What affects the quality of these factors? 1.Education 2.Health 3.Infrastructure (Networks in particular) 4.Political Institutions 5.Research and development

Beyond classical growth theory Growth and Convergence Endogenous growth Growth and Human development

The Human Development Indicator aims to measure the level of development of a country. The HDI is calculated by the United Nations Development Program (UNDP). It is a composite indicator:  Life expectancy at birth  The level of schooling  The schooling rate  The rate of adult literacy  The GDP per capita It is given by a number between 0 and 1. The closer the HDI to 1, the higher the level of development of a country.

Growth and Human development The club of Rome and the limits to growth:  Founded on the 8 th of April 1968, it is an international NGO regrouping scientists, economists, national and international civil servants and representatives of industry from 53 countries.  The goal of the club is to find practical solutions to planetary problems and to provide advocacy to world leaders about important global issues.  In 1972 :  “The limits to growth” (aka the Meadows report) aims to substitute equilibrium to growth.  In 1974 :  “Mankind at the turning point” introduces the concepts of sustainable development and ecological footprint.

Growth and Human development Within this context, the idea of a human development that is ethically separate from economic growth is becoming more popular. Sustainable development : satisfy the needs of the present generation without reducing the capacity of future generations of satisfying theirs  Antoine de Saint Exupéry “We do not inherit the earth from our ancestors, we borrow it from our children” The recommendations of “zero-growth”:  Relocalise activity (New definition of space)  Reduce the importance with working (J. Rifkins, the end of work)  Develop new associative links  Stop reasoning in terms of GDP (HDI, A. Sen)

Growth and Human development However, economics can actually contribute a lot to a sustainable development: Forecasts must not rely on current technology (see the example of Malthus) GDP is the sum of added value, but the sources of value added change over time. (Service economy) Sustainable development and growth of GDP are complementary:  Growth is required to increase the standards of living of entire populations, particularly the poorest.  What is required given the ecological constraints is a change in the behaviour of economic agents. GDP measures added value: it can grow at the same time as the qualitative aspect (Sustainability) changes.