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Cuong Le Van with the cooperation of Tu-Anh Nguyen ( CNRS,University Paris 1, PSE)

New Technology, Human Capital, Total Factor Productivity and Growth Process for Developing and Emerging Countries. Cuong Le Van with the cooperation of Tu-Anh Nguyen ( CNRS,University Paris 1, PSE). Introduction. Technological progress or TFP is crucial to growth

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Cuong Le Van with the cooperation of Tu-Anh Nguyen ( CNRS,University Paris 1, PSE)

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  1. New Technology, Human Capital, Total Factor Productivity and Growth Process for Developing and Emerging Countries Cuong Le Van with the cooperation of Tu-Anh Nguyen (CNRS,University Paris 1, PSE)

  2. Introduction • Technological progress or TFP is crucial to growth • Solow [1957]: capital intensity contributed for 12.3 per cent to the US economic growth and the remainder, 87.7 per cent, is due to increased productivity. (US data from 1909 to 1949) • Fabricant [1954]: about 90 per cent of the increase in output per capita is attributed to TFP. (US data from 1871--1951 )

  3. Introduction • Debates on impressive growth performance of NIEs • The endogenous growth supporters: productivity growth is the key factor. • NIEs have adopted technologies previously developed by more advanced economies (assimilation view) (Pack [1992]). • The supporters of the accumulation view stress the importance of physical and human capital accumulation • Krugman [1997] Asian growth could mostly be explained by high saving rates, good education and the movement of underemployment peasants into the modern sector. • No technological progress in Asian Economies: Young [1994, 1995], Kim and Lau [1994, 1996], etc.

  4. Introduction • Collins and Bosworth [1996] or Lau and Park [2003]):TFP gains actually matter in Asian NIEs growth and that future growth can be sustained • Stages of development: “Growth in the early stages may be primarily associated with physical and human capital accumulation, and significant potential for growth through catch-up may only emerge once a country has crossed some development threshold”. (Collins and Bosworth [1996]). • Lau and Park [2003] considers data of Asian economies: Hong Kong, Korea, Singapore, Taiwan, Indonesia, Malaysia, Thailand and G-5:W. Germany, UK, US, France, and Japan. • Technical progress plays no role in Asian economies until 1985 however it does in period 1986-1995 • For G-5 it always plays important role

  5. Introduction • Divergence of economic growth • Barro&Sala-i-Martin [1995], Barro [1997]: cross-countries empirical studies show that development patterns differ considerably between countries in the long run • Model of convex-concave technology can explain these differences: • Dechert and Nishimura [1983] prove the existence of threshold effect with poverty traps explaining alternatively "growth collapses" or taking-off. • Azariadis and Drazen [1990] propose an elaboration of the Diamond model that may have multiple stable steady states because the training technology has many thresholds. • Hung, Le Van and Michel [2008]: endogeneize these thresholds when consider an economy with many technology possibilities • We share the view of Dollar [1993] that divergence between countries is also due to differences in TFP

  6. Introduction • In this presentation we show • actually one can reconcile the views on the importance of physical capital, human capital and TFP. The first two are important in short and mid terms, the last is the core factor in long term. • A theoretical model to define an endogenous threshold of development from which a country is encouraged to adopt new technologies and human capital formation, and builds a part of its growth process on technological advances. Before reaching this threshold, the country must root its growth process in capital accumulation • the richer a country is, the higher share of investment in new technology and training and education • the share of investment in human capital will increase with the wealth while the one for physical capital will decrease

  7. Plan of the talk • The Solow Model • The Ramsey Model • About the non convergence between countries: An explanation with the convex-concave technology. • The Krugman--Solow controversy: an answer ∙ • How to escape from the poverty trap: how to improve the TFP? • 1. The Human Capital Model • 2. The Knowledge Accumulation Model • 3. New Technology, Human Capital and Growth: Theoretical Results and Evidence

  8. Ct, St, Yt, Kt, It denote respectively the consumption, the saving, the output, the capital stock, the investment and the labour at period t. The labour force grows with an exogenous rate n. The TFP grows at rate γ. The Solow model (1956) • We consider a simple intertemporal growth model for a closed economy.

  9. We can easily check that there exists a Balanced Growth Path (BGP) with rate g The Solow model (1956) • Actually, we have

  10. The Solow model (1956)

  11. 0 t The Solow model (1956)

  12. The Ramsey Model, 1928 • In Solow Model the saving rate and the rate of growth is exogenous. • Ramsey model (1928) can be used to endogeneize the rate of saving of the households. • Basic ideas of the model: • an infinitely lived consumer maximizes an intertemporal utility function of her intertemporal sequence of consumptions • At each date, her consumption is constrained by the maximum output produced by a stock of physical capital, and by the necessity of saving for obtaining a physical capital stock for the next period production process. • The main results are that, under some conditions, optimal sequences of capital stocks and of consumptions exist, and converge to an optimal steady state

  13. is given Where The Ramsey Model, 1928 • The compact form of the Ramsey model is:

  14. The Ramsey Model, 1928 • With assumptions:

  15. Hence: if the initial capital stock is non null, all economies will converge to its long-term steady state or be caught in poverty trap depends on the technology of production. • International Aid to developing countries is necessary to kick off • We will come back the issue of non-convergence between the countrieswith more details in the next section. The Ramsey Model, 1928 • Results:

  16. The optimal solution to the Ramsey model is a BGP with rate of growth • The rate of growth is positively related the non-impatience of the consumer (large β) and the TFP A. • The saving rate is constant and positively related to β and A, the patience of consumer and the level of technology The Ramsey Model, 1928

  17. The convex-concave production function

  18. The convex-concave production function

  19. The Solow-Krugman Controversy • Solowian supporters attribute the miracle economic growths in NIEs in second half of 20th century to adoption of technologies previously developed by more advanced economies. • Young [1994, 1995], Kim and Lau [1994, 1996] empirically found no technological progress (TFP) in these economies • Krugman's [1994] concludes that "it (high growth rate) was due to forced saving and investment, and long hours of works...” • Essentially, the so-called Solow-Krugman controversy is not a real one

  20. Where g is growth rate of capital stock and output at steady state and Ks is capital per effective workers at steady state. Tedious calculations show that The Solow-Krugman Controversy • The crucial equation of Solow model is:

  21. And the speed of convergence The Solow-Krugman Controversy • Now let's consider two economies which are identical in everything, except for technological progress: γ and γ′ and saving rate s and s’ • Define growth rates in these two economies as follows:

  22. If s < s’ and γ < γ′ then The Solow-Krugman Controversy • We get the result • If γ < γ′ and s = s’ then

  23. The Solow-Krugman Controversy • In dynamic transitional, the saving rate (hence capital accumulation) does matter for growth rate. • A permanent increase in saving rate not only raises the level of steady state but also increases the economic growth rate in transitional period. • In development process, the economies where rates of technological progress are higher will • converge faster to their own steady states. • grow faster not only in steady state but also in transitional period • The divergence in rates of technological progress among developing economies induces the divergence in growth among developing world

  24. Kt K0 0 t The Solow-Krugman Controversy

  25. Human capital growth model (Lucas 1988) • No physical capital • Only effective labor is used in production

  26. Human capital growth model (Lucas 1988) Meaning: without training (θt=1) the human capital depreciates with rate δ and if the worker devotes his whole time for training (θt=0), his human capital will grow at rate λ.

  27. Human capital growth model (Lucas 1988)

  28. Human capital growth model (Lucas 1988)

  29. The Romer Model (Romer, 1986) • S identical consumers and they own firms • Output of each firm: F(kt,Kt) • Kt is economywide knowledge, kt is firms specific knowledge • At equilibrium Kt = S*kt • Ass1: F(.,K) is concave with respect to the first variable and F(k,S*k) is convex in k • An investment of It creates additional knowledge • G(It,kt) = kt+1 - kt • Ass2:G is concave and homegeneous of degree one • Ass3: g(0) =0, g’(0) = +∞, g’(x) > 0, for all x > 0

  30. The Romer Model (Romer, 1986) • For simplicity we assume S = 1. • Let . The problem becomes: • β and u satisfy assumptions in Ramsey section • Ass4: • Ass5: • Ass6:

  31. The Romer Model (Romer, 1986) • Theorem 4: There exists an optimal path with grows without bound. • This result is based on many crucial ingredients: (i) the private technology f(.,K) is concave, the quality of the knowledge technology is very good (g′(0) = +∞). • Le Van and Saglam (2004) weaken these assumptions: • Ass1’: • Ass3’:

  32. The Romer Model (Romer, 1986) • We have the following results • Hence: fixed costs in the production induce a poverty trap. • if the quality of knowledge technology is good enough, it can be passed over

  33. The Romer Model (Romer, 1986)

  34. New Technology, Human Capital an Growth • Consider an economy with three sectors: • Domestic sector produces an aggregate good Yd • New technology sector with output Ye • Education sector characterized by a function h(T) where T is the expenditure on training and education. • The output Ye is used by domestic sector to increase its total productivity

  35. New Technology, Human Capital an Growth • Φ(.) is a non decreasing function satisfies • Kd, Ke, Ld, Le and Aebe the physical capital, the technological capital, the low-skilled labor, the high-skilled labor and the total productivity, respectively • 0 < αd < 1, 0 < αe < 1 • Price of capital goods in term of consumption goods is numeraire • λ >1 is price of Ke in term of consumption goods.

  36. New Technology, Human Capital an Growth • Denote: • h is the human capital production technology; • is number of skilled workers in new technology sector; Le is effective labor; • is number of non-skilled workers in domestic sector • S is available of money to spend on all kinds of capital • For simplicity we assume T is measured in capital goods, then we have the budget constraint:

  37. New Technology, Human Capital an Growth • Social planner maximizes following program

  38. New Technology, Human Capital an Growth • Assume: h(.) is an increasing concave function and h(0) > 0 • Define θ and μ as share of expenditure on new technology and education, θ + μ ≤ 1: • Suppose that function Φ(x) is a constant in an initial phase and increasing linear afterwards:

  39. 0 x X New Technology, Human Capital and Growth

  40. New Technology, Human Capital an Growth • Let’s denote θ(S) and μ(S) the optimal shares. We have

  41. New Technology, Human Capital an Growth • We now consider an economy with one infinitely lived representative consumer who has an intertemporal utility function with discount factor β < 1. • The utility function u is strictly concave, strictly increasing and satisfies the Inada condition: u’(0) = +∞, u(0) = 0. • At each period, her savings will be used to invest Kd or/and Ke and/or to T. • We suppose the capital depreciation rate equals 1 and growth rate of population is 0 and

  42. New Technology, Human Capital an Growth • The social planner will solve the following dynamic growth model

  43. New Technology, Human Capital an Growth • The main results of this section is:

  44. New Technology, Human Capital an Growth • Recall that • Ae is the productivity of the new technology sector • λ is the price of the new technology capital • αe is capital share in new technology production sector • is number of skilled workers • ais a spill-over indicator which embodies the level of social capital and institutional capital in the economy, indicates the effectiveness of the new technology product x on the productivity

  45. A look at evidence • Recall that Lau and Park (2003) shows that can not reject the hypothesis of no technological progress in East Asia NIEs until 1986. • Since 1986 when these economies started investing heavily on R&D, technological progress plays significant role in growths of these economies • This evidence supports our prediction that there exists threshold for investing in new technology in process of economic development.

  46. A look at evidence • Nevertheless, the question of threshold of investment in human capital is rarely raised in literature • We use pooled time-series aggregate data of educational attainment for 71 non-oil exporting, developing economies compiled by Barro and Lee (2000). • Real GDP per capita (y) (in PPP): in Penn World table 6.2 • We use five alternative variables to measure human capital • completed primary school (l1) • completed secondary school (l2) • completed higher secondary school (l3) • average schooling years of labor force (A)

  47. A look at evidence • We run two simple OLS regression equation: • These equations are tested for two sub-samples: • First with GDP per capita is not more than 1000 (75 observations) • Second with GDP per capita more than 1000 (533 observations) (1) (2)

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