1. Growth empirics or how do we use growth theory in practice Silvia Dal Bianco Advanced Macroeconomics Pavia, A.Y. 2010-2011

2. (some of) the relevant questions Growth determinants: which factors seem to explain observed differences in growth? Convergence question: are contemporary differences in aggregate economies transient over sufficiently long time horizons? Catch-all question: why is it that so many people are still poor?

3. 1) Growth determinants or model uncertainty Canonical cross-country regression: X= variables stemming from the original Solow growth model (i.e. saving rates) Z= variables not included in the original framework (i.e. institutions –from corruption to democracy-, geography, inflation, infrastructure, religion, openess (real and financial), stability, …

4. Which of them are significant? Overview, Steven Durlauf, and Jonathan Temple (2005) Growth Econometrics, Handbook of economic growth, Appendix 2. around 150 Variables listed!!!Growth Econometrics How to choose the relevant ones? Levine and Renelt (1992, AER): extreme bound analysis  only initial GDP and investment ratio are “robust” Sala-i-Martin et al.(2004, AER): bayesian averaging of classical estimates found instead

6. 2) Convergence debate Which definition of convergence? Which econometric technique should be used? Struggling empirical evidence: twin peaks dynamics. The resurgence of the Galton’s fallancy and non-parametric approach (Quah, JEG 1993)

7. Example: cross-regional convergence in Italy and convergence driving force Convergence driving forces: capital stock accumulation or technological catch-up? Regional data, 1980-2003 The evidence of cross-regional convergence is challenged by the twin peak dynamics Result: supportive evidence for technological conditional convergence

12. 3) Why some countries are STILL so poor? Are they trapped?  Poverty traps: Theory  Start with Fundamental Equation of “Solow-Swan”: ◦ Δk=sf(k) - (δ+n) k or ◦ Δk/k=sf(k)/k - (δ+n) ◦ If s and n are constant, and f(.) is neoclassical (concave with inada conditions), then UNIQUE AND STABLE STEADY STATE  Poverty Trap Theory: instead of unique and stable steady state, THREE STEADY STATES and Lower and Upper steady states stable and middle one unstable

13. Poverty traps: Theory continued 1.Savings trap (savings rate is close to zero for poor countries for subsistence reasons and then shuts up as income increases) 2.Nonconvexity in the production function (there are increasing returns for some range of k) 3.Demographic trap (impoverished families choose to have lots of children)

14. Savings and non-convexity trap δ+n s(k)f(k)/k Stable Unstable

15. Demographic Trap s(k)f(k)/k δ+n Stable Unstable k

16. Solution to poverty trap: AID BIG PUSH STRATEGIES Big problem: we do not know whether aid is effective 1.Aid has some positive effects on growth (Jeffrey Sachs 2004) and needs to be multiplied. 2.Aid has effect on growth, only under some circumstances (conditional aid) 1.Conditional on Policies (Craig, Burnside and Dollar (2000), Dalgaard and Tarp (2004)) 2.Conditional on type: 1.Infrastructures [Clemens, Radelet, and Bhavnani (2004)] 2.Education [Michaelova and Weber (2006) and Dreher, Nunnenkamp and Thiele (2007)] 3.Health [Mishra and Newhouse (2007)] 3.Aid has NO effect on growth or may even undermine it (Peter Bauer (1972), Bill Easterly (2006))

17. Aid in Africa, Easterly (2003, JEP)

18. Why aid might not work? Is there space for development economics?  Corruption trap (Easterly, 2006)  More generally: misalignment of incentives. We have donors, WB Bureaucrats, African Bureaucrats, African citizens  All of them have different interests and different incentives and the main baseline problem is that we are not sure on what African citizens need!  Do they need nets against malaria or HIV vaccines?  How development economists can help development?  Frontier in this field is “randomized field experiment”: http://www.povertyactionlab.org/http://www.povertyactionlab.org/