Aghion and Howitt - The Economics of Growth

Aghion and Howitt - The Economics of Growth

(Parte 1 de 6)

The MIT Press Cambridge, Massachusetts London, England

Philippe Aghion and Peter Howitt with the collaboration of Leonardo Bursztyn

© 2009 Massachusetts Institute of Technology

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Library of Congress Cataloging-in-Publication Data

Aghion, Philippe. The economics of growth / Philippe Aghion and Peter W. Howitt. p. cm. Includes bibliographical references and index. ISBN 978-0-262-01263-8 (hardcover : alk. paper) 1. Economic development. I. Howitt, Peter. I. Title. HD82.A5452 2009 338.9—dc22 2008029818

Contents

Preface xvii

Why This Book? xvii For Whom? xviii Outline of the Book xix Acknowledgments xxi

Introduction 1 I.1 Why Study Economic Growth? 1 I.2 Some Facts and Puzzles 1 I.2.1 Growth and Poverty Reduction 1 I.2.2 Convergence 2 I.2.3 Growth and Inequality 4 I.2.4 The Transition from Stagnation to Growth 5 I.2.5 Finance and Growth 5 I.3 Growth Policies 6 I.3.1 Competition and Entry 7 I.3.2 Education and Distance to Frontier 8 I.3.3 Macroeconomic Policy and Growth 10 I.3.4 Trade and Growth 10 I.3.5 Democracy and Growth 1 I.4 Four Growth Paradigms 12 I.4.1 The Neoclassical Growth Model 12 I.4.2 The AK Model 13 I.4.3 The Product-Variety Model 14 I.4.4 The Schumpeterian Model 15

PART I: BASIC PARADIGMS OF GROWTH THEORY 19

1 Neoclassical Growth Theory 21 1.1 Introduction 21 1.2 The Solow-Swan Model 21 1.2.1 Population Growth 24 1.2.2 Exogenous Technological Change 27 1.2.3 Conditional Convergence 29 1.3 Extension: The Cass-Koopmans-Ramsey Model 31 1.3.1 No Technological Progress 31 viii

1.3.2 Exogenous Technological Change 37 1.4 Conclusion 39 1.5 Literature Notes 39

Appendix 1A: Steady State and Convergence in the Cass-Koopmans-Ramsey Model 40

Appendix 1B: Dynamic Optimization Using the Hamiltonian 43 Problems 45

2 The AK Model 47 2.1 Introduction 47 2.1.1 The Harrod-Domar Model 48 2.2 A Neoclassical Version of Harrod-Domar 49 2.2.1 Basic Setup 49 2.2.2 Three Cases 51 2.3 An AK Model with Intertemporal Utility Maximization 52 2.3.1 The Setup 53 2.3.2 Long-Run Growth 54 2.3.3 Welfare 5 2.3.4 Concluding Remarks 5

2.4 The Debate between Neoclassical and AK Advocates, in a Nutshell 56

2.5 An Open-Economy AK Model with Convergence 60 2.5.1 A Two-Sector Closed Economy 61 2.5.2 Opening up the Economy with Fixed Terms of Trade 62 2.5.3 Closing the Model with a Two-Country Analysis 64 2.5.4 Concluding Comment 6 2.6 Conclusion 6 2.7 Literature Notes 67 Problems 67

3 Product Variety 69 3.1 Introduction 69 3.2 Endogenizing Technological Change 69 3.2.1 A Simple Variant of the Product-Variety Model 70 3.2.2 The Romer Model with Labor as R&D Input 74 3.3 From Theory to Evidence 7 3.3.1 Estimating the Effect of Variety on Productivity 7

Contents

3.3.2 The Importance of Exit in the Growth Process 79 3.4 Conclusion 80 3.5 Literature Notes 81 Problems 82

4 The Schumpeterian Model 85 4.1 Introduction 85 4.2 A One-Sector Model 85 4.2.1 The Basics 85 4.2.2 Production and Profi ts 86 4.2.3 Innovation 87 4.2.4 Research Arbitrage 8 4.2.5 Growth 89 4.2.6 A Variant with Nondrastic Innovations 90 4.2.7 Comparative Statics 91 4.3 A Multisector Model 92 4.3.1 Production and Profi t 92 4.3.2 Innovation and Research Arbitrage 94 4.3.3 Growth 95 4.4 Scale Effects 96 4.5 Conclusion 9 4.6 Literature Notes 100 Problems 101

5 Capital, Innovation, and Growth Accounting 105 5.1 Introduction 105 5.2 Measuring the Growth of Total Factor Productivity 106 5.2.1 Empirical Results 107 5.3 Some Problems with Growth Accounting 109 5.3.1 Problems in Measuring Capital, and the Tyranny of Numbers 109 5.3.2 Accounting versus Causation 112 5.4 Capital Accumulation and Innovation 113 5.4.1 The Basics 114 5.4.2 Innovation and Growth 116 5.4.3 Steady-State Capital and Growth 116 5.4.4 Implications for Growth Accounting 118

Contents

5.5 Conclusion 119 5.6 Literature Notes 119 Appendix: Transitional Dynamics 120 Problems 121

PART I: UNDERSTANDING THE GROWTH PROCESS 127

6 Finance and Growth 129 6.1 Introduction 129 6.2 Innovation and Growth with Financial Constraints 130 6.2.1 Basic Setup 130 6.2.2 Innovation Technology and Growth without Credit Constraint 132 6.2.3 Credit Constraints: A Model with Ex Ante Screening 132 6.2.4 A Model with Ex Post Monitoring and Moral Hazard 134 6.3 Credit Constraints, Wealth Inequality, and Growth 136 6.3.1 Diminishing Marginal Product of Capital 136 6.3.2 Productivity Differences 139 6.4 The Empirical Findings: Levine’s Survey, in a Nutshell 142 6.4.1 Cross-Country 143 6.4.2 Cross-Industry 145 6.5 Conclusion 147 6.6 Literature Notes 147 Problems 148

7 Technology Transfer and Cross-Country Convergence 151 7.1 Introduction 151 7.2 A Model of Club Convergence 152 7.2.1 Basics 152 7.2.2 Innovation 153 7.2.3 Productivity and Distance to Frontier 154 7.2.4 Convergence and Divergence 156 7.3 Credit Constraints as a Source of Divergence 158 7.3.1 Theory 159 7.3.2 Evidence 161 7.4 Conclusion 163 7.5 Literature Notes 165 Problems 166

Contents

8 Market Size and Directed Technical Change 169 8.1 Introduction 169 8.2 Market Size in Drugs 169 8.2.1 Theory 169 8.2.2 Evidence 171 8.3 Wage Inequality 173 8.3.1 The Debate 174 8.3.2 The Market-Size Explanation 176 8.4 Appropriate Technology and Productivity Differences 182 8.4.1 Basic Setup 182 8.4.2 Equilibrium Output and Profi ts 183 8.4.3 Skill-Biased Technical Change 184 8.4.4 Explaining Cross-Country Productivity Differences 185 8.5 Conclusion 186 8.6 Literature Notes 187 Problems 188

9 General-Purpose Technologies 193 9.1 Introduction 193 9.2 Explaining Productivity Slowdowns 196 9.2.1 General-Purpose Technologies in the Neoclassical Model 196 9.2.2 Schumpeterian Waves 198 9.3 GPT and Wage Inequality 204 9.3.1 Explaining the Increase in the Skill Premium 204 9.3.2 Explaining the Increase in Within-Group Inequality 206 9.4 Conclusion 210 9.5 Literature Notes 211 Problems 212

10 Stages of Growth 217 10.1 Introduction 217 10.2 From Stagnation to Growth 217 10.2.1 Malthusian Stagnation 217 10.2.2 The Transition to Growth 2 10.2.3 Commentary 224 10.3 From Capital Accumulation to Innovation 226 10.3.1 Human-Capital Accumulation 226

Contents xii

10.3.2 Physical-Capital Accumulation 227 10.4 From Manufacturing to Services 230 10.5 Conclusion 232 10.6 Literature Notes 232 Problems 233

1 Institutions and Nonconvergence Traps 237 1.1 Introduction 237 1.2 Do Institutions Matter? 238 1.2.1 Legal Origins 239 1.2.2 Colonial Origins 240 1.3 Appropriate Institutions and Nonconvergence Traps 243 1.3.1 Some Motivating Facts 243

1.3.2 A Simple Model of Distance to Frontier and Appropriate Institutions 246

1.4 Conclusion 258 1.5 Literature Notes 261 Problems 263

PART I: GROWTH POLICY 265

12 Fostering Competition and Entry 267 12.1 Introduction 267 12.2 From Leapfrogging to Step-by-Step Technological Progress 267 12.2.1 Basic Environment 268 12.2.2 Technology and Innovation 269

12.2.3 Equilibrium Profi ts and Competition in Level and Unlevel Sectors 269

12.2.4 The Schumpeterian and “Escape-Competition” Effects 271 12.2.5 Composition Effect and the Inverted U 272 12.2.6 Empirical Evidence 274 12.3 Entry 274 12.3.1 The Environment 276 12.3.2 Technology and Entry 276 12.3.3 Equilibrium Innovation Investments 277 12.3.4 The Effect of Labor Market Regulations 278 12.3.5 Main Theoretical Predictions 279

Contents xiii

12.3.6 Evidence on the Growth Effects of Entry 279 12.3.7 Evidence on the Effects of (De)Regulating Entry 280 12.4 Conclusion 281 12.5 Literature Notes 282 Problems 283

13 Investing in Education 287 13.1 Introduction 287 13.2 The Capital Accumulation Approach 288 13.2.1 Back to Mankiw, Romer, and Weil 288 13.2.2 Lucas 292 13.2.3 Threshold Effects and Low-Development Traps 295 13.3 Nelson and Phelps and the Schumpeterian Approach 297 13.3.1 The Nelson and Phelps Approach 297

13.3.2 Low-Development Traps Caused by the Complementarity between R&D and Education Investments 300

13.4 Schumpeter Meets Gerschenkron 302

13.4.1 A Model of Distance to Frontier and the Composition of Education Spending 302

13.4.2 Cross-Country and Cross-U.S.-State Evidence 307 13.5 Conclusion 311 13.6 Literature Notes 312 Problems 314

14 Reducing Volatility and Risk 319 14.1 Introduction 319 14.2 The AK Approach 321 14.2.1 The Jones, Manuelli, and Stacchetti Model 321 14.2.2 Counterfactuals 324 14.3 Short-versus Long-Term Investments 326 14.3.1 The Argument 326 14.3.2 Motivating Evidence 327 14.3.3 The AABM Model 329 14.3.4 Confronting the Credit Constraints Story with Evidence 339 14.3.5 An Alternative Explanation for the Procyclicality of R&D 340 14.4 Risk Diversifi cation, Financial Development, and Growth 341 14.4.1 Basic Framework 341

Contents xiv

14.4.2 Analysis 343 14.4.3 Equilibrium Dynamics 345 14.5 Conclusion 347 14.6 Literature Notes 348 Problems 349

15 Liberalizing Trade 353 15.1 Introduction 353 15.2 Preliminary: Back to the Multisector Closed-Economy Model 355 15.2.1 Production and National Income 355 15.2.2 Innovation 357 15.3 Opening Up to Trade, Abstracting from Innovation 358 15.3.1 The Experiment 358 15.3.2 The Effects of Openness on National Income 360 15.4 The Effects of Openness on Innovation and Long-Run Growth 363 15.4.1 Step-by-Step Innovation 363 15.4.2 Three Cases 364 15.4.3 Equilibrium Innovation and Growth 365 15.4.4 Scale and Escape Entry 365 15.4.5 The Discouragement Effect of Foreign Entry 366 15.4.6 Steady-State Aggregate Growth 367 15.4.7 How Trade Can Enhance Growth in All Countries 368 15.4.8 How Trade Can Reduce Growth in One Country 369 15.5 Conclusion 371 15.6 Literature Notes 372 Problems 374

16 Preserving the Environment 377 16.1 Introduction 377 16.2 The One-Sector AK Model with an Exhaustible Resource 377 16.3 Schumpeterian Growth with an Exhaustible Resource 379 16.4 Environment and Directed Technical Change 381 16.4.1 Basic Setup 381 16.4.2 Equilibrium Outputs and Profi ts 382 16.4.3 Taxing Dirty Production 384 16.4.4 Equilibrium Innovation 385 16.4.5 Growth and the Cost of Taxing Dirty Output 387

Contents

16.4.6 Evidence of Directed Technical Change Effects in the Energy Sector 389

16.4.7 Concluding Remarks 390 16.5 Literature Notes 391

Appendix: Optimal Schumpeterian Growth with an Exhaustible Resource 392

Problems 395

17 Promoting Democracy 399 17.1 Introduction 399 17.2 Democracy, Income, and Growth in Existing Regressions 399

17.2.1 Irrelevance Results When Controlling for Country Fixed Effects 400

17.2.2 No Apparent Correlation between Democracy and Public Policy 400

17.3 Democracy, Entry, and Growth: A Simple Model 401 17.3.1 Production and Profi ts 402 17.3.2 Entry and Incumbent Innovation 402 17.3.3 Politics and the Equilibrium Probability of Entry 405 17.3.4 Main Prediction 407

17.4 Evidence on the Relationship between Democracy, Growth, and Technological Development 407

17.4.1 Data and Regression Equation 407 17.4.2 Basic Results 408 17.5 Democracy, Inequality, and Growth 410 17.5.1 The Model 410 17.5.2 Solving the Model 411 17.5.3 Discussion 413 17.6 Conclusion 414 17.7 Literature Notes 414 Problems 415

CONCLUSION 417

18 Looking Ahead: Culture and Development 419 18.1 What We Have Learned, in a Nutshell 419 18.2 Culture and Growth 420

Contents xvi

18.2.1 Regulation and Trust 422 18.2.2 Investing in Children’s Patience 425 18.3 Growth and Development 429 18.3.1 Growth through the Lens of Development Economics 429 18.3.2 The Case for Targeted Growth Policy 434 18.4 Conclusion 439 Appendix: Solving the Doepke-Zilibotti Model 441

Appendix: Basic Elements of Econometrics 443 A.1 The Simple Regression Model 443 A.2 The Ordinary Least Squares Estimator 4 A.3 Multiple Regression Analysis 446 A.4 Inference and Hypothesis Testing 447 A.5 How to Deal with the Endogeneity Problem 449 A.6 Fixed-Effects Regressions 452 A.7 Reading a Regression Table 453

References 457 Index 477

Contents

Preface

Why This Book?

To learn about economic growth you need formal theory, for organizing the facts, clarifying causal relationships, and drawing out hidden implications. In growth economics, as in other areas of economics, an argument that is not disciplined by a clear theoretical framework is rarely enlightening.

Our experience with graduates and undergraduates at Brown and Harvard has taught us, however, that the theory needed to understand the substantive issues of economic growth is much simpler than what is found in most modern textbooks. You do not need to master all the subtleties of dynamic programming and stochastic processes in order to learn what is essential about such issues as crosscountry convergence, the effects of fi nancial development on growth, and the consequences of globalization. The required tools can be acquired quickly by anyone equipped with elementary calculus and probability theory.

These considerations are what motivated us to write The Economics of Growth.

We believe that what is going on at the frontiers of research on economic growth can also be made accessible to undergraduates, as well as to policy makers who have not been to graduate school for many years, even though gaining this access requires learning some basic tools and models. Although there are many other excellent books on growth economics,1 those that focus on theory are either too removed from policy and empirical applications or too involved with formal technicalities to be useful or interesting to the uninitiated reader wanting to learn about the substantive issues, while other books that focus on substantive issues are not as concerned with formal models as is necessary. None of them present the main facts and puzzles, propose simple tools and models to explain these facts, acquaint the reader with frontier material on growth—both theoretical and empirical— or initiate the reader into thinking about growth policy. What follows is our attempt to fi l this gap.

To bring the reader up to date on the frontiers of the subject, we have had to write a comprehensive book. In the fi rst part we introduce all the major growth paradigms (neoclassical, AK, product-variety, and Schumpeterian), and then in subsequent chapters we show how these paradigms can be used to analyze various aspects of the growth process and to think about the design of growth policy. The

1. For example, Weil (2008), C. Jones (1998), Barro and Sala-i-Martin (1995a), Helpman (2004), and Acemoglu (2008a, forthcoming). Modesty does not prevent us from also including Aghion and Howitt (1998a).

xviii Preface book is also comprehensive in its account of the most recent contributions and debates on growth: in particular, we acquaint the reader with the literature on directed technical change and its applications to wage inequality; we provide simple presentations of recent models of industrialization and the transition to modern economic growth; we show simple models of trade, competition, and growth with fi rm heterogeneity; we analyze the relationships between growth and fi nance, between growth, volatility and risk, between growth and the environment, and between growth and education; we refl ect on the recent debates on institutions versus human capital as determinants of growth; and we introduce the reader to the nascent literature on growth and culture.

(Parte 1 de 6)

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