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ENDOGENOUS GROWTH THEORIES. Chapter 8 Cypher & Dietz. Neoclassical Growth Models: the Solow Growth Model. Y(t) =A(t)K(t) 1-a L(t) a where 0 < a < 1; in a perfectly competitive setting where each factor input is entitled to a return equal to its own marginal product,
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ENDOGENOUS GROWTH THEORIES Chapter 8 Cypher & Dietz
Neoclassical Growth Models: the Solow Growth Model Y(t) =A(t)K(t)1-a L(t)a where 0<a<1; in a perfectly competitive setting where each factor input is entitled to a return equal to its own marginal product, a = income share of labor 1-a = income share of capital. This production function is such that • K and L are subject to diminishing returns in the short term. • production is subject to constant returns to scale in the long term. y = Y/L = (s/n)a/1-a where s=savings rate; n=exogenous population growth rate
Implications of the Neoclassical Growth Model for Developing Countries The Model predicts CONVERGENCE: • Developing economies will sooner or later catch up with developed economies. • This result follows directly from the assumption of diminishing returns to capital. Convergence is based on two strong assumptions: • All countries have access to the same technology • All countries share similar savings (and investment) rates
from the Neoclassical Growth Model to Developmentalist Theories of Development Solow’s theoretical structure lent credence to Developmentalist Theories → Growth depends on • expansion of industrial capital stock; and • the rate of savings. • “the big push”; “balanced vs. unbalanced growth”, etc. • Both optimistic in development potential and eventual convergence (decreasing income gap)
The Income Convergence Controversy:An Institutionalist Economic Perspective Path Dependence Vicious circles Virtuous circles However, Path Dependence is not ultimately binding
Endogenous Growth Models as an Answer to the Income Convergence Controversy • Empirical research found that over 50% of the growth rate of a country can not be accounted for by changes in the use of capital and labor, leaving the unexplained Solow residual as the major determinant of growth rates. • ENDOGENOUS GROWTH Models emerge in the 1980s as an effort to account for the unexplained residual through a host of other factors such as education, R&D, technology and so on.
Endogenous Growth Models Y = F(R,K,H) Y= total output; R= research & development; K= physical K; H= human K Let Kt = combined stock of human, physical and research capital; Assuming • constant returns to scale as well as • constant marginal returns to K stock, the EG Models suggest the so-called AK production function Y = aKt To capture the endogeneity of the growth process, the aggregate production function can berewritten as Y = A(Kt)Kt A(Kt) = induced/endogenous tech. Change imparted to the economy by the stock of physical, human and research K particular to that country
Endogenous Growth Models • Endogenous Growth Models are different from the Neoclassical Growth Models in that • No assumption of physical K to be the dominant determining factor in spurring economic growth, other factors such as human K is integrated; • drop the assumption of diminishing returns to reproducible factors of production; • Technology is not assumed to be exogenous but rather endogenous. As such in EG Models sustained growth is possible even without a change in the savings rate or an exogenous boost to technology Therefore EG Models are able to explain the sustained or even increasing income gap between developed and developing economies.
