On the Mechanics of Economic Development

1. On the Mechanics of Economic Development By Robert E. Lucas Discussant: Wang Xiongjian Oct 2, 2004

2. Overview of the Theory of Economic Development • Stylized facts on economic development -- levels and rates of growth of national incomes: 1) great diversity of per capita income levels across countries; 2) diversity of rates of growth of real per capita GNP; 3) relationship between growth rates and income levels. …

3. Overview of the Theory of Economic Development • What should a successful theory of economic development explain: 1) sustained income growth; 2) sustained or increasing inequality; 3) trade-related growth phenomenon; 4) demographic transition; …

4. Overview of the Theory of Economic Development • Central questions of economic growth and development (Charles I. Jones 1995) : 1) the world distribution of per capita incomes and the levels of development; 2) what is the engine of economic growth? 3) “growth miracles”– catch up phenomenon in economic growth.

5. The basic idea of the paper • To see if modern growth theory could also be adapted for use as a theory of economic development. • growth theory: for highly successful society; • development theory: the relationships between economies with sustained growth and those remain stagnant.

6. The basic idea of the paper • To provide some kind of framework for organizing facts, for judging which represent opportunities and which necessities.

7. What has the paper done? • Three growth models: 1) Neo-classical growth model: physical capital accumulation and technological change; 2) human capital accumulation through schooling; 3) Specialized human capital accumulation through learning-by-doing.

8. What has the paper done? • Neo-classical growth model: • key assumption: factor mobility; • fits U.S. data well; • however, predicts the tendency toward income equalization (because of diminishing return); • fails to explain the flow of factors from poorer countries to richer ones; … It is not an adequate model of economic development.

9. What has the paper done? • Human capital and growth: • motivation: to obtain a theoretical account of cross-country differences in income levels and growth rates;

10. What has the paper done? • Human capital and growth – content : • Romer (1986) – externality of the stock of knowledge, human capital; increasing returns; • Uzawa (1965) – physical capital k and human capital h; constant returns;

11. What has the paper done? • Human capital and growth – content : • one-sector model: interaction of physical and human capital accumulation;

12. What has the paper done? • Human capital and growth – content : • Features of the model: there exist balanced paths and each country’s relative income position is dictated by its initial situation, and inequality persists; • the engine of growth: human capital.

13. What has the paper done? • Learning-by-doing and comparative advantage: • motivation: model the evolution of national incomes in a two-good world;

14. What has the paper done? • Learning-by-doing and comparative advantage: • connects trade volumes with knowledge acquisition. Accumulation of human capital Economic growth International trade

15. What has the paper done? • Learning-by-doing and comparative advantage: • assumption: the production of one good results in productivity-improving learning, the other does not;

16. What has the paper done? • Learning-by-doing and comparative advantage: • results: the dynamics work to intensify static comparative advantages over time, and incomes become ever unequal; • can not explain catch-up growth.

17. What has the paper succeeded in? • Providing a framework for analyzing endogenous growth; • Providing possible answers to the engine of endogenous growth ; • Explaining the diversities in income levels across countries; • Combining growth with trades among countries;

18. What are the deficiencies? • No demographic transition in the models provided – taking population growth as given; • No answer to the “growth miracles” question; • Still ad hoc assumption in the model; • No answer to the mobility of productive factors;

19. Comments • In fact, it is unfair to require all these matters related to economic development be settled within one model; • No monetary policy and fiscal policy;

20. Methodology • “There is no point in arguing over a model’s assumptions until one is clear on what question it will be used to answer.”

21. Methodology • “A model as explicit as this one, by the very nakedness of its simplifying assumptions, invites criticism and suggests refinements to itself. This is exactly why we prefer explicitness, or why I think we ought to.”

22. Methodology • “The role of theory is not to catalogue the obvious, but to help us to sort out effects that are crucial, quantitatively, from those that can be set aside.”

23. The end