RELEVANT QUESTIONS ON GROWTH AND POVERTY REDUCTION In the last class we argued that, with important reservations, high growth could potentially reduce the number of people living under a dollar a day, increase literacy rates, reduce infant mortality rates… We also discussed the role of investment or capital accumulation in two alternative scenarios (H-D and Solow) In today’s class: Further Inquiries On The Role Of Capital Accumulation Or Investment For High Growth 1) Why is there so much pessimism about aid-financed investment for high growth? 2) Why is there so much pessimism about “transitional” capital accumulation for fast growth in poor countries? 3) Why growth models based on capital accumulation cannot deliver long-term growth and convergence simultaneously?

1.Easterly argues that: a) There is no positive statistical association between aid and investment b) There is no positive statistical association between investment and growth Hence, the predictions “financial gap” model initiated by H-D are fundamentally wrong

2. He also argues that: a) Based on Romer (1987), and contrary to Solow’s predictions, poor countries were not growing any faster than rich countries b) Based on Pritchett (1997) that there has been a strong process of divergence of national incomes c)Contrary to Young (1992) empirical findings on Korea, Taiwan, Korea, and Hong Kong, high growth in these countries was not due to capital accumulation but to “technical progress”, and d)Criticizes the Luddite fallacy…. So, let’s revisit technical progress in the H-D and Solow models

3. a. Long – run growth Regardless of how “developed” the country is, g is the same → H-D or AK can explain long-run growth but not convergence

3.b

→ The Solow or Neoclassical model can explain convergence, but not long –run growth Growth models based on capital accumulation cannot explain growth and convergence simultaneously But this is counterfactual. In particular: -Barro & Sala-i-Martin (1995) show convergence among US states, and positive growth (2 to 3 percent) -Capital accumulation based models cannot account for “club convergence” → Next class: Endogenous growth ( DR, Chap. 4 & Carlin-Soskice, Chap. 14)