New Growth Thoeries Flashcards
Lant Pritchett
Divergence Big Time
Pritchett’s core argument is that the idea of convergence, where poorer countries grow faster and catch up to richer ones, is a misinterpretation of historical data.
Evidence of Divergence:
He uses data to demonstrate that the gap in per capita income between the richest and poorest countries has grown substantially, not shrunk, over time.
Absolute Convergence
developing countries, regardless of their particular characteristics, will eventually catch up with the developed countries and match them in per capita output.
Conditional Convergence
Developing countries, with similar foundational characteristics like policies and insitutional frameworks will converge, ie less developed countries will catch up to others in developmental identifiers
Eg. post ww2 oecd countries
Convergence + Divergence
Divergence = Tendency for per capita incomes/total
output to grow faster in richer as opposed to poorer
countries
Convergence = Tendency for per capita incomes/total
output to grow faster in poorer as opposed to richer
countries
Absolute Beta Convergence
assumptions and graph
Assumptions:
If assume group closed countries (unrealistically) have
same s, n, x and δ and same production function.
Then have same steady-state
Graph:
x = growth yhat
y = khat*
dep + x + n = constant
savings * f(kat)/kat = downwards sloping curve dipping
x axis goes
kpoor krich k*
Poor countries, those with lower 𝑘hat
0, predicted to grow
faster. Why? Avg product capital f(𝑘)/𝑘 relatively high. Thus
gross investment sf(𝑘)/𝑘 also high so growth rate of 𝑘 high.
Absolute Beta Convergence: Key Relationship
There is an inverse relationship between
growth of capital per effective unit of labour,
and capital per effective unit of labour
Conditional Beta Convergence
Assumptions and graph
Each country has its own parameters
If parameters between countries are similar, they they can be represented on the same line
Countries grow faster, the further away they are from their OWN steady state k peul
So poor country would grow faster if faced with the savings function of the rich
Conditional Beta Convergence: Key Relationship
Any reduction in k peul -> (+) avg product k peul,
BUT, only with respect to their own steady state
Population Weighted Convergence
parameters associated with population demographics
Sectoral Convergence
the tendency of different economic sectors to become more similar or aligned in their performance, characteristics, or trends over time.
Unconditional Convergence (Patel et Al)
Convergence Timeline
since mid-90s economic growth unambiguously converging unconditionally!
60s - 95: -ve beta (divergence)
95 - now: +ve beta (convergence)
driven by relative success of poorer nations as opposed to richer nations slowing down
HOWEVER, very slow. Avg ctry 170 years to close gap between current and ss income.
Unconditional Convergence
Middle Income trap
cross-sectional convergence exhibits inverted U-shaped pattern
Middle/Low-income countries growing faster than
developed since 1990s
Middle income countries growing fastest of all!
Unconditional Convergence
New era of unconditional convergence
associated with ↓ growth volatility and ↑ growth
persistence
– Suggestive of changes in underlying growth
processes?
What does beta mean
implies a ‘half life’ of closing the steady state gap.
- Estimated β = 0.00425! -> 170 years
Endogenous Growth Theory
- Effectively aims to explain differences in Solow Residual
- increasing (+) rts
- Public and private investments in human capital generate technological spillovers and productivity improvements
*assumes there are external markets for public and private investments
Lucas Paradox
Despite the fact that poor countries have a lower level of K/L, capital does not flow from developed countries to developing countries.
The endogenous growth theory provides that the high ROR are offest by poor investments in ‘human capital’
