Explaining modern growth It’s human capital….

Some figures Last millennium:  World population growth = 22-fold  Income per capita growth = 13-fold  World GDP growth = 300-fold  Income per capita growth = 50%  Life expectancy = 24 years 1820 onwards:  Income per capita growth = 8-fold  Life expectancy now = 66 years

No consensus Economic growth models have attempted to explain the change in growth rates but no consensus has emerged.

Regularities – modern times Per capita output grows over time and its growth rate does not tend to diminish Physical capital per worker grows over time The shares of labor and physical capital in national income are nearly constant The growth rate of output per worker differs substantially across countries.

Divergence Modern economic growth:  Divergence in relative productivity levels and living standards.  In the last century: income in the “less” developed countries have fallen far behind those in “developed” countries. Developed countries:  Strong convergence in per capita incomes within these countries  No obvious acceleration of overall growth rates over time.

What we see in the data Variability of growth rates over time Variability of growth rates between countries Convergence in richer countries

Growth rates over time

Growth between countries

Convergence club

Making a miracle by Lucas GDP per capita growth ( ) Philippines: 62% South Korea: 1200% GDP per capita growth, annual rate ( ) Philippines: 1.2% South Korea: 6.6%

East Asian miracle Features  Large exporters of manufactured goods of increasing sophistication.  Highly urbanized and increasingly well-educated.  High savings rates.  Pro-business governments.

Human capital The main engine of growth Main source of differences in living standards among nations. Physical capital plays an essential but subsidiary role. Expansion of the definition of HK: not only formal education but on the job.

Lucas’ contribution Human capital: additional input in production Labor force can accumulate human capital Accumulation of human capital involves a sacrifice of current utility

Why isn’t the whole world developed? By Easterlin Spread of economic growth depended on the diffusion of knowledge of new production techniques. Acquisition of knowledge closely associated with formal schooling. The expansion and establishment of formal schooling has depended in large part on political conditions and ideological influences. Since WWII, modern education systems have been established almost everywhere => spread of modern economic growth accelerated.

Slow spread of economic growth Why has technological change been limited to so few nations? Transfer of technology as an educational process:  Teachers’ side: readily access to new technology.  Students’ side: no native differences among nations in the native intelligence of their populations.  Problem: different incentives for learning.

Growth and schooling The more schooling, the easier to master new technological knowledge. Significant increases in formal schooling => improvement in the incentive structure.

Primary enrolment per 10,000

Education and growth More advanced nations educationally developed first. Cause-effect: effect of education on economic growth or vice-versa?

The political economy of growth Political roots to mass education  Colonialism  Monarchical rule  Catholic Church

Conclusions and predictions Expansion of formal schooling:  positive shift in the incentive structure Commitment to mass education:  Symptom of major shift in political power  Greater social mobility Once developing countries complete their demographic transition: long-term per capita growth as high as in developed countries.

Easterlin’s contributions Three aspects of knowledge facilitate growth  new knowledge is complementary to existing knowledge.  knowledge is non-rival.  knowledge is only partially excludable.

Data Source: World Development Indicators.

Data