Basics of growth

Question 1

Is growth good for the poor?

Answer 1

Yes.

Dollar and Kraay - Approx 1:1 relationship in incomes between bottom 20% and rest, with growth

Sala-i-Martin - Poverty has decreased by 617million people at $1/day line from 1970-2006

Quah - simple arithmetic, inequality decreased, primarily due to growth in India and China

Pritchett - growth more important than redistributive programs, growth gains are 100-1000x than spending $1bn on antipoverty interventions (compared to Banerjoo experiment in “Science”)

Question 2

Problems with GDP measurement?

Answer 2

• No unpaid care work, and associated gender bias
• Doesn’t account for externalities, eg. pollution
• Less reliable in developing countries
• – less statistical capacity
• – more informality

Question 3

Alternatives to GDP?

Answer 3

Young - uses real consumption of a more inclusive basket: finds that living standards 3x in SSA

Henderson et al. - night light data, significant under and over estimation.

Raworth - Donut economics

Question 4

Historical theories of growth?

Answer 4

Malthusian growth - as technology increases, so productivity increases, so people have more children, so per capita incomes stay the same. Land is the constraint. Kremer says that population increases are a good proxy for tech increases, historically. Eg: Ireland invented the potato, increased pop size without income increases.

Post-Malthusian growth - tech advances at a rate such that there are small per capita income increases

Demographic transition - emergence from Malthusian trap as rate of population increase falls.

Question 5

Primary theories of growth

Answer 5

• Harrod-Domar
• Solow/Neoclassical
• Augmented Solow
• Endogenous growth

Question 6

Explain the main features and implications of the Harrod-Domar model?

Answer 6

Assumes capital, investment and output are all proportionate. So, holds that if developing countries got a capital injection, investment and output would subsequently increase and everyone would get richer (financing gap).

However, capital is often consumed, as investing is a function of incentives to invest in the future. Also created perverse incentives (lower saving > larger gap > more aid).

Despite aid increasing significantly, $5bn-$45bn (1960-1990), only 6/88 countries invested new capital.

Also, arbitrary restrictions on capital and labour in the model, otherwise indefinite unemployment predicted.

Question 7

Explain the main features and implications of the Solow/Neoclassical model?

Answer 7

Addresses arbitrary restrictions on capital and labour in the Harrod-Domar model by making capital and labour endogenous.

Y=A*f(K,L)

Accounts for diminishing marginal returns

• More and more capital required to increase productivity for each marginal worker
• Eventually people won’t be willing to save so much, consumption will need to decrease
• So, capital accumulation can only lead to LEVEL increases in income, long-run growth rate not affected.
• Only technology (A) can impact rate
• – But the model offers no explanation on how this happens

Question 8

Explain the main features and implications of the Augmented Solow model?

Answer 8

Mankiw, Romer and Weil. Much the same as Solow: endogenous capital-labour, diminishing marginal returns

Just now accounts for human capital: e.g. investment in education can lead to level increases in growth

Long-run growth rate still determined by technological progress

Question 9

Explain the main features and implications of Endogenous Growth Theory?

Answer 9

Growth is an endogenous function of policy incentives.

Accounts for spillovers and externalities

• Non-rival goods means that ideas don’t get used up; public good.
• Some people unrelated to the production of ideas benefit; spillovers

So, spillovers and externalities affect incentives regarding human and physical capital

• investment in HC/PC delivers increasing returns at increasing levels of HC/PC at an aggregate level
• but only at an aggregate level: people will underinvest otherwise
• so, broad scope for policy to encourage investment
• – eg. R&D, educ subsidies

Question 10

What are the implications of Endogenous Growth Theory with regard to poverty traps?

Answer 10

Implies vicious and virtuous cycles. Eg. a low level of education reduces incentives to invest. Public policy can then shift incentives to break out of the poverty trap.

Question 11

What are the implications of Endogenous Growth Theory with regard to population size?

Answer 11

More population > more knowledge transfer > more development

Diamond - five societies separated by melting of polar ice caps, where Flinders Island pop died out but Eurasia-Africa was deeply productive.

Question 12

How do Gailor and Weil explain the escape of the Malthusian trap?

Answer 12

1. At the start, same mechanism as Malthusian growth
2. Rate of technological progress increases as population increases (spillovers)
3. Parents switch to child quality: have less children in response to technological change
   - – this happens as “backward observation” is less helpful; parents are incentivized to invest in their kids’ education to keep up
4. Virtuous/vicious cycle: more education incentives more education

Question 13

What’s the empirical evidence on Solow vs Endogenous growth models?

Answer 13

Young - E. Asia miracle largely due to capital accumulation, so the level change in income explained nicely by Solow

Krugman - agrees

Klenow and Rodriguez-Clare - Output growth from investment should be counted as productivity growth: explained better by Endogenous

Hsieh - agrees: high TFP explains E Asian miracle

Fernald and Nieman - heterogenous firms means Hsieh estimates will only apply to unfavored (no subsidy/tax incentive/political connection) firms