Development Economics Structural Change

Transcription

1 Development Economics Structural Change Andreas Schäfer University of Leipzig Institute of Theoretical Economics WS 10/11 Andreas Schäfer (University of Leipzig) Structural Change WS 10/11 1 / 36

2 Contents 5.1 Introduction 5.2 Early Contributions to the Literature 5.3 Structural Change and Balanced Growth 5.4 Other Theories of Structural Change Andreas Schäfer (University of Leipzig) Structural Change WS 10/11 2 / 36

3 5.1 Introduction Interest in poor nations of the world began to materialize following WWII. Economists had no apparatus available with which to analyze the process of economic growth in largely agrarian societies. Development theory and policy was characterized by two observations: 1 The Marhall Plan enabled Europe to rebuild and modernize their economies. 2 All modern industrialized countries were once underdeveloped agrarian countries. emphasis on role of accelerated capital accumulation: capital fundamentalism Andreas Schäfer (University of Leipzig) Structural Change WS 10/11 3 / 36

4 5.1 Introduction Rostow s Stages of Growth The transition from underdevelopment to development can be described by series of steps/stages through which all countries must proceed 1 Traditional society 2 Pre-conditions for take-off into self-sustaining growth 3 Take-off 4 Age of high mass consumption The underdeveloped countries had only to follow a set of rules of development. One of the principal strategies: mobilization of domestic and foreign saving. Andreas Schäfer (University of Leipzig) Structural Change WS 10/11 4 / 36

5 5.1 Introduction Rostow s Stages of Growth - Criticism Empirical evidence is not really supporting the theory of stages. Savings and investment are not a necessary condition but a sufficient condition for economic development. Rostow s theory assumes the existence of the same attitudes, arrangements and institutions for developed as well as for underdeveloped countries. The Marshall Plan was a success for Europe because the receiving countries possessed the necessary structural and institutional settings to convert new capital efficiently into higher levels of output. Nevertheless it is reasonable to ask how the developed economies of today did develop! Theory of structural change. Andreas Schäfer (University of Leipzig) Structural Change WS 10/11 5 / 36

6 5.1 Introduction - Kaldor facts Andreas Schäfer (University of Leipzig) Structural Change WS 10/11 6 / 36

7 5.1 Introduction - Kaldor facts Andreas Schäfer (University of Leipzig) Structural Change WS 10/11 7 / 36

8 5.1 Introduction - Kaldor facts Andreas Schäfer (University of Leipzig) Structural Change WS 10/11 8 / 36

9 5.1 Introduction - Kaldor facts Andreas Schäfer (University of Leipzig) Structural Change WS 10/11 9 / 36

10 5.1 Introduction - Kuznets facts Andreas Schäfer (University of Leipzig) Structural Change WS 10/11 10 / 36

11 5.1 Introduction - Kuznets facts Andreas Schäfer (University of Leipzig) Structural Change WS 10/11 11 / 36

12 5.1 Introduction - Kuznets facts Share of Share of total employment total consumption expenditure Agriculture declines declines Manufacturing stable stable Services increases increases Remark: this reflects the last hundred years. Prior to this period there has been a rise in manufacturing (see Laitner (2000)). Andreas Schäfer (University of Leipzig) Structural Change WS 10/11 12 / 36

13 5.2 Early Contributions to the Literature Lit.: Todaro and Smith (2006), Economic Development, Pearson (9th edition). One of the best-known early theoretical models of development that focused on structural change was formulated by Nobel laureate W.A. Lewis (Economic development with unlimited supplies of labour, Manchester School 22 (1954): ). Lewis-two-sector model became the work horse during the 1960s and early 1970s. In the Lewis-model, a underdeveloped economy consists out of a traditional, overpopulated rural subsistence sector and a high-productivity modern urban industrial sector. Primary focus of the model: process of labor transfer and the growth of output and employment in the modern sector. Andreas Schäfer (University of Leipzig) Structural Change WS 10/11 13 / 36

14 5.2 Early Contributions to the Literature The traditional agricultural sector Total output TP A is determined by changes in the quantity of labor employed in agriculture, L A, whereas the level of technology t A as well as the amount of capital KA is fixed. The marginal product of labor MP A is zero for finite levels of labor. That is additional amounts of labor do not affect the level of output after a certain threshold - surplus labor. The wage rate in agriculture equals the average product of labor, that is W A = TP A /L A. Andreas Schäfer (University of Leipzig) Structural Change WS 10/11 14 / 36

15 5.2 Early Contributions to the Literature The agricultural sector TP f L, K, t A A A A TPA TPA L A W A L A QA W A MPLA APLA Surpluslabor L A Andreas Schäfer (University of Leipzig) Structural Change WS 10/11 15 / 36

16 5.2 Early Contributions to the Literature The modern sector Total output in the modern sector denoted by TP Mi is produced again with labor L Mi, capital K Mi at a given level of technology, t M. Lewis allows capital to grow, as a result of the reinvestment of profits = capital incomes. The labor market in the modern sector is perfectly competitive. Andreas Schäfer (University of Leipzig) Structural Change WS 10/11 16 / 36

17 5.2 Early Contributions to the Literature The modern sector with increasing levels of capital TPM 3 TPMi f LMi, K, t Mi M K K K K Mi M M M TPM 2 TPM 1 L1 L2 L3 WM MP MP LM 2 LM1 MPLM 3 L1 L2 L3 Andreas Schäfer (University of Leipzig) Structural Change WS 10/11 17 / 36

18 5.2 Early Contributions to the Literature The Lewis model of modern-sector growth TPM3 TPM2 TPM1 TPA W M Surpluslabor WA L M1 LM 2 LM 3 LA Andreas Schäfer (University of Leipzig) Structural Change WS 10/11 18 / 36

19 5.2 Early Contributions to the Literature As labor markets in the industrial sector are perfectly competitive, the downward sloped marginal product of labor curves are the profit maximizing demand curves for labor. W A is the subsistence income in the traditional sector. W M is the real wage in the modern/industrial sector. At this wage, supply of rural labor is perfectly inelastic. W M >W A implies that firms can employ as many workers as they wish without increasing in wages. Assuming a neoclassical production function in the modern sector, the reinvestment of capital incomes induces increasing levels of output at constant wages. The increase in physical capital moves the MP-schedule to the right raising the demand for labor. Employment expansion continues until all surplus rural labor is absorbed in the modern sector. Now, additional workers can be withdrawn from agriculture only at the cost of higher wages (MP LA 0). Andreas Schäfer (University of Leipzig) Structural Change WS 10/11 19 / 36

20 5.2 Early Contributions to the Literature Criticisms of the Lewis model Capital incomes are reinvested. There is no capital flight. Labor saving technical progress would increase capital income while labor income and employment levels remain constant. Assumption of rural surplus labor is generally not valid. Prior to the 1980s in almost all developing countries wages rose substantially, in absolute terms and relative to rural incomes. Diminishing returns in the the modern industrial sector are at least debateable. There is increasing evidence for increasing returns, posing special problems for policymaking. Andreas Schäfer (University of Leipzig) Structural Change WS 10/11 20 / 36

21 5.3 Structural Change and Balanced Growth Growth literature which make heavily use of BGP-models, generally disregards sectoral reallocation of labor. Literature on structural change ignores Kaldor facts (in part because it focuses on longer periods of time. Research question: is there a model that is consistent with both the Kaldor facts and massive sectoral labor reallocations? Andreas Schäfer (University of Leipzig) Structural Change WS 10/11 21 / 36

22 5.3 Structural Change and Balanced Growth Lit.: Kongsamut, P., S. Rebelo, and D. Xie (2001). Beyond Balanced Growth, Review of Economic Studies, Vol. 68, pp Production Output in agriculture: A(t) =B A F (φ(t) A K(t),N(t) A X(t)) (1) Output in services: S(t) =B S F (φ(t) S K(t),N(t) S X(t)) (2) A(t) and S(t) can only be used for consumption. Andreas Schäfer (University of Leipzig) Structural Change WS 10/11 22 / 36

23 5.3 Structural Change and Balanced Growth Production Output in manufacturing can be consumed (M(t)) or invested ( K(t)+δK(t)): M(t)+ K(t)+δK(t) =B M F (φ(t) M K(t),N(t) M X(t)) (3) The functions F (.,.) satisfy the neoclassical properties. Exogenous technological progress (labor augmenting): The shares of labor N i and capital φ i sum up to one Ẋ(t) =X(t)g. φ(t) A + φ(t) M + φ(t) S = 1 (4) N(t) A + N(t) M + N(t) S = 1. (5) Andreas Schäfer (University of Leipzig) Structural Change WS 10/11 23 / 36

24 5.3 Structural Change and Balanced Growth Resource constraint The Production functions of different sectors are proportional, such that relative prices of agriculture and services are given by The economy s resource constraint reads as p A = B M B A (6) p S = B M. B S (7) M(t)+ K(t)+δK(t)+P A A(t)+P S S(t) =B M F (K(t),X(t)). (8) Andreas Schäfer (University of Leipzig) Structural Change WS 10/11 24 / 36

25 5.3 Structural Change and Balanced Growth Preferences In this setting, sectoral movements must originate from differences in the income elasticities of demand for the different goods. Income elasticity of demand agricultural good: < 1 manufacturing goods: =1 services: > 1 Moreover preferences are time-separable, such that U(t) = 0 e ρt [(A(t) Ā)β M(t) γ (S(t)+ S) θ ] 1 σ 1 dt, (9) σ where β + γ + θ =1,andσ, β, γ, θ, ρ, Ā, S. Andreas Schäfer (University of Leipzig) Structural Change WS 10/11 25 / 36

26 5.3 Structural Change and Balanced Growth Equilibrium In equilibrium profit maximizing behavior induces r = B M F 1 (k, 1) δ, (10) where k K X. Equality of marginal utilities induces P A (A(t) Ā) = M(t) (11) β γ P S (S(t)+ S) = M(t) θ γ. (12) Optimal path for consumption of manufacturing goods is given by the Keynes-Ramsey rule Ṁ(t) M(t) = r ρ σ. (13) Andreas Schäfer (University of Leipzig) Structural Change WS 10/11 26 / 36

27 5.3 Structural Change and Balanced Growth Equilibrium Marginal rate of technical subsitution is equal across sectors, hence φ A N A = φm N M = φs =1. (14) N S Andreas Schäfer (University of Leipzig) Structural Change WS 10/11 27 / 36

28 5.3 Structural Change and Balanced Growth Balanced Growth Path Suppose that Ā = S =0. From the aggregate resource constraint it becomes clear that A(t),M(t),S(t),K(t) must grow at rate g along the BGP. Factor market equilibrium and Keynes-Ramsey rule imply B M F 1 (k, 1) δ = σg + ρ. (15) the economy will follow a BGP whenever k is consistent with a real interest rate that leads households to choose to expand their consumption of A, S, M at rate g. Andreas Schäfer (University of Leipzig) Structural Change WS 10/11 28 / 36

29 5.3 Structural Change and Balanced Growth Generalized Balanced Growth Path Suppose that Ā, S >0. From (11) and (12) imply that A and S do not grow at constant rates even if the real interest rate is constant. For Ā, S >0 balanced growth does not exist. Definition: A generalized balanced growth path is a trajectory along which the real interest rate is constant. Rewriting the resource constraint gives: M(t) K(t)+δK(t)+P A A(t)+P S S(t) =B M F (k, 1)X(t). (16) RHS expands at rate g. LHS M, K and δk grow at rate g, but A and S do not! Andreas Schäfer (University of Leipzig) Structural Change WS 10/11 29 / 36

30 5.3 Structural Change and Balanced Growth Generalized Balanced Growth Path Suppose: ĀB S = SB A (knife-edge condition, but convergence to GBG is it is violated!), this implies P s S PA Ā =0. (17) This allows us to write the resource constraint as M(t) + K(t)+δK(t)+P A (A(t) Ā)+P S(S(t)+ S) = B M F (k, 1)X(t). Since A(t) Ā and S(t)+ S grow at rate g, all terms grow at rate g. Andreas Schäfer (University of Leipzig) Structural Change WS 10/11 30 / 36

31 5.3 Structural Change and Balanced Growth Results A generalized BGP exists whenever ĀB S = SB A. The GBG exhibits constant relative prices, constant aggregate labor income share, constant growth rate for aggregate output and capital, constant capital-output ratio and time-varying sectoral growth rates and employment shares. Growth rates of output in agriculture and services: Ȧ(t) A(t) Ṡ(t) S(t) = g A(t) Ā, (18) A(t) S(t)+ S = g S(t) (19) Andreas Schäfer (University of Leipzig) Structural Change WS 10/11 31 / 36

32 5.4 Structural Change and Balanced Growth Results Evolution of labor shares: Ṅ A Ā (t) = g B A X(t)F (k, 1), (20) Ṅ M (t) = 0, (21) N S (t) = S g B S X(t)F (k, 1), (22) The share of labor in agriculture declines, while the share in services increases. As the economy grows, the importance of Ā and S declines and the economy converges to a standard BGP (USA: sectoral reallocation of labor out of agriculture has been limited since the 1970 s; slowdown in the expansion of employment in in services.) Andreas Schäfer (University of Leipzig) Structural Change WS 10/11 32 / 36

33 5.4 Structural Change Results Andreas Schäfer (University of Leipzig) Structural Change WS 10/11 33 / 36

34 5.4 Other Theories of Structural Change The theory presented in the former section was demand based. That is, different demand elasticities with respect to income induced structural change. Structural change can also be generated through (either) factor accumulation and (or) technological progress which affects sectors to a different extend. Hence, structural change can also be induced through the technology side of an economy. Andreas Schäfer (University of Leipzig) Structural Change WS 10/11 34 / 36

35 5.4 Other Theories of Structural Change In the literature two (competing) explanations have been put forward for structural change 1 Technology based explanation: structural change is attributed to different growth rates of total factor productivity (TFP) over different sectors 2 Utility based explanation: requires different income elasticities for different goods. Hence, structural change may result even with equal TFP growth in all sectors. A very recent example for the first channel is the paper by Ngai and Pissarides (2006), Structural Change in a Multi-Sector Model of Growth, American Economic Review. They confirm William Baumol s (1967) claims about structural change who divided the economy in two sectors, a progressive one that uses new technology and a stagnant that uses labor as the only input. Andreas Schäfer (University of Leipzig) Structural Change WS 10/11 35 / 36

36 5.4 Other Theories of Structural Change Another candidate of the second channel is the paper by Foellmi and Zweimller (2006), Income Distribution and Demand-Induced Innovations, RES, 73, Endogenous growth is driven by introduction of new goods into a hierarchic utility function. General concern: the theory of structural change explains the development patterns of developed countries, but doesn t shed much light on the causes which trap underdeveloped countries in poverty. Andreas Schäfer (University of Leipzig) Structural Change WS 10/11 36 / 36