Economic Development: Theory and Policy

Transcription

1 Economic Development: Theory and Policy Andreas Schäfer Center of Economic Research at ETH (CER-ETH) and University of Leipzig Institute of Theoretical Economics WS 14/15 Andreas Schäfer (CER-ETH and UL) Unified Growth Theory WS 14/15 1 / 59

2 Contents 1. Introduction 2. Unified Growth Theory 3. Poverty Traps 4. Inequality and Growth 4. The Role of Institutions for Economic Development 6. Pollution and Growth Andreas Schäfer (CER-ETH and UL) Unified Growth Theory WS 14/15 2 / 59

3 Contents - Unified Growth Theory Introduction - Unified Growth Theory Historical Evidence The Theory The Model - Production of Final Output The Model - Preferences and Budget Constraints The Model - Production of Human Capital Optimization Some Results Technological Progress.1.10 Effective Resources.1.11 Technology and Education.1.12 Dynamics Andreas Schäfer (CER-ETH and UL) Unified Growth Theory WS 14/15 3 / 59

4 2.1.1 Introduction - Literature Oded Galor, 2005, From Stagnation to Growth: Unified Growth Theory, Handbook of Economic Growth, Elsevier. Oded Galor, 2011, Unified Growth Theory, Princeton. Andreas Schäfer (CER-ETH and UL) Unified Growth Theory WS 14/15 4 / 59

5 2.1.1 Introduction - Unified Growth Theory Transition from stagnation to sustained economic growth unprecedented increase in income per capita Change in the distribution of wealth across the globe Variation in the timing of the take-off from stagnation to growth led to a divergence of income across the globe The ratio of income per capita between the richest and the poorest of the world has been increased in 1820: 3/1 in 2000: 18/1 Change in the world distribution of population generated by the decline in population growth in Europe and North America and the delay of the demographic transition in the less developed regions Interaction between the transition from stagnation to growth and the demographic transition Andreas Schäfer (CER-ETH and UL) Unified Growth Theory WS 14/15 5 / 59

6 2.1.1 Introduction - Unified Growth Theory The evolution of economies over the major portion of human history was marked by Malthusian Stagnation increases in income generated by technological progress and land expansion induced and increase in population growth stagnant income per capita cross-country differences in technologies were reflected in population densities but not in levels of standards of living The increased role of human capital in the second phase of the Industrial Revolution induced the demographic transition, such that the decline in population growth and the associated increase in technological progress and human capital formation paved the way for sustained economic growth. Andreas Schäfer (CER-ETH and UL) Unified Growth Theory WS 14/15 6 / 59

7 2.1.1 Introduction - Unified Growth Theory Unified Growth Theory seeks to capture the transition from stagnation to growth within a single theory and argues that the understanding of the contemporary growth process will be limited unless research sticks to disjoint theories explaining only fragments of the development process of human history Moreover the hurdles faced by less developed countries would remain obscure unless we have a clear understanding about the factors that promoted a transition to sustained economic growth in the developed world Andreas Schäfer (CER-ETH and UL) Unified Growth Theory WS 14/15 7 / 59

8 2.1.1 Introduction - Unified Growth Theory Main characteristics of of the process of development captured by UGT 1. The epoch Malthusian stagnation 2. The escape from Malthusian stagnation and the increase in population growth and income per capita 3. The emergence of human capital formation 4. The demographic transition 5. The era of sustained economic growth 6. The divergence in income per capita across the globe According to UGT the emergence of multiple growth regimes is due to the existence of variations in the position of countries across the distinct growth regimes (phases of development). Different timing in the take-off is responsible for the Great Divergence Andreas Schäfer (CER-ETH and UL) Unified Growth Theory WS 14/15 8 / 59

9 2.1.1 Introduction - Unified Growth Theory Unified Growth Theory and the phenomenon of the Great Divergence What accounts for the sudden take-off from stagnation to growth in some countries in the world and the persistent stagnation in others? Why has the positive link between income per capita and population growth reversed its course in some economies but not in others? Why have the differences in per capita incomes across countries increased so markedly in the last two centuries? Has the transition to a state of sustained economic growth in advanced economies adversely affected the process of development in less-developed economies? Andreas Schäfer (CER-ETH and UL) Unified Growth Theory WS 14/15 9 / 59

10 2.1.1 Introduction - Unified Growth Theory Unified Growth Theory and the phenomenon of the Great Divergence What accounts for the sudden take-off from stagnation to growth in some countries in the world and the persistent stagnation in others? Why has the positive link between income per capita and population growth reversed its course in some economies but not in others? Why have the differences in per capita incomes across countries increased so markedly in the last two centuries? Has the transition to a state of sustained economic growth in advanced economies adversely affected the process of development in less-developed economies? Andreas Schäfer (CER-ETH and UL) Unified Growth Theory WS 14/15 10 / 59

11 2.1.2 Historical Evidence Source: Galor (2005) Andreas Schäfer (CER-ETH and UL) Unified Growth Theory WS 14/15 11 / 59

12 2.1.2 Historical Evidence - Fertility, Mortality and Life Expectancy Ambiguous relationship between fertility and mortality during the Malthusian epoch Increasing incomes per capita induced declining mortality rates and increasing fertility rates Increased mortality increased fertility rates such that the number of surviving offspring was maintained constant and compatible to the amount of available resources. Early urbanization ( ) induced a drop in life expectancies at birth. A decline in mortality along with an increase in life expectancy started in England around 1740 Andreas Schäfer (CER-ETH and UL) Unified Growth Theory WS 14/15 12 / 59

13 2.1.2 Historical Evidence - Fertility, Mortality and Life Expectancy Source: Galor (2005) Andreas Schäfer (CER-ETH and UL) Unified Growth Theory WS 14/15 13 / 59

14 2.1.2 Historical Evidence - Fertility, Mortality and Life Expectancy Source: Galor (2005) Andreas Schäfer (CER-ETH and UL) Unified Growth Theory WS 14/15 14 / 59

15 2.1.2 Historical Evidence - Differential Timing of Take-off Source: Galor (2005) Andreas Schäfer (CER-ETH and UL) Unified Growth Theory WS 14/15 15 / 59

16 2.1.2 Historical Evidence - Output and Population Growth Malthusian regime: positive link between income and fertility such that income per capita remained constant Post-Malthusian regime: positive link between income and fertility but increasing income per capita Modern Growth regime: negative link between population growth and income per capita Andreas Schäfer (CER-ETH and UL) Unified Growth Theory WS 14/15 16 / 59

17 2.1.2 Historical Evidence - Output and Population Growth Source: Galor (2005) Andreas Schäfer (CER-ETH and UL) Unified Growth Theory WS 14/15 17 / 59

18 2.1.2 Historical Evidence Source: Galor (2005) Andreas Schäfer (CER-ETH and UL) Unified Growth Theory WS 14/15 18 / 59

19 2.1.2 Historical Evidence - Demographic Transition Source: Galor (2005) Andreas Schäfer (CER-ETH and UL) Unified Growth Theory WS 14/15 19 / 59

20 2.1.2 Historical Evidence - Demographic Transition Source: Galor (2005) Andreas Schäfer (CER-ETH and UL) Unified Growth Theory WS 14/15 20 / 59

21 2.1.2 Historical Evidence - Demographic Transition Source: Galor (2005) Andreas Schäfer (CER-ETH and UL) Unified Growth Theory WS 14/15 21 / 59

22 2.1.2 Historical Evidence - Industrialization and Human Capital Formation Source: Galor (2005) Andreas Schäfer (CER-ETH and UL) Unified Growth Theory WS 14/15 22 / 59

23 2.1.2 Historical Evidence - The Great Divergence Source: Galor (2005) Andreas Schäfer (CER-ETH and UL) Unified Growth Theory WS 14/15 23 / 59

24 2.1.2 Historical Evidence - Shift in World Population Shares Source: Galor (2005) Andreas Schäfer (CER-ETH and UL) Unified Growth Theory WS 14/15 24 / 59

25 2.1.2 Historical Evidence - Industrialization Source: Galor (2005) Andreas Schäfer (CER-ETH and UL) Unified Growth Theory WS 14/15 25 / 59

26 2.1.3 The Theory Lit.: Oded Galor and David N. Weil, Population Technology, and Growth: From Malthusian Stagnation to the Demographic Transition and beyond.american Economic Review, Sep. 2000, Vol. 90(4), pp Oded Galor, From Stagnation to Growth: Unified Growth Theory. Handbook of Economic Growth, 2005, North-Holland. capture the process of development over the entire course of human history. That is, capturing the epoch of Malthusian stagnation that characterized most of human history, the contemporary era of modern growth and the forces that triggered the transition between the two regimes. What is the justification for the selective use of observations which characterize only the contemporary growth process? Andreas Schäfer (CER-ETH and UL) Unified Growth Theory WS 14/15 26 / 59

27 2.1.3 The Theory The Malthusian model has two key components: 1 Fixed factor of production (land) implying decreasing returns to scale for all other factors. 2 Positive effect of the standard of living on the growth rate of population. Malthus: when population size is small, the standard of living is high, and population will grow as a natural result of passion between sexes. When population size is high, the standard of living is low. Population will be reduced by preventive checks or positive checks (disease, malnutrition, etc.). Andreas Schäfer (CER-ETH and UL) Unified Growth Theory WS 14/15 27 / 59

28 2.1.3 The Theory Implications of the Malthusian model: In the absence of technological progress or in the availability of land the size of population will be self-equilibrating, increases in available resources will be offset by the size of population, countries with superior technologies will have denser populations, but a similar standard of living (China). These predictions are consistent with the evolution of of technology, population, and output per capita for most of human history. Maddison (1982): growth rate of per-capita GDP between 500 and 1500 was zero. Andreas Schäfer (CER-ETH and UL) Unified Growth Theory WS 14/15 28 / 59

29 2.1.3 The Theory The Post-Malthusian Regime: The Malthusian mechanism linking higher income to higher population growth is still at work, but the diluting effect on resources per capita was counteracted by technological progress. In western Europe population growth was 40 percent as large as total output growth between , and only 20 percent as large between Andreas Schäfer (CER-ETH and UL) Unified Growth Theory WS 14/15 29 / 59

30 2.1.3 The Theory The Modern Growth Regime: is characterized by steady growth in both income per capita and the level of technology. there is a negative relationship between the level of output and the growth rate of population. In England live births per 1,000 women aged fell from in to in (Wrigley, 1969). The reversal of the Malthusian relationship corresponded to an increase in the resources invested in each child. The average number of years of schooling in England and Wales rose from 2.3 for a cohort born between to 9.1 for the cohort born between Andreas Schäfer (CER-ETH and UL) Unified Growth Theory WS 14/15 30 / 59

31 2.1.3 The Theory Implications: Key event that separates the Malthusian and Post-Malthusian Regimes is the acceleration in the pace of technological progress. Event that separates the Post-Malthusian and the Modern Growth Regime is the demographic transition that followed the industrial revolution. Andreas Schäfer (CER-ETH and UL) Unified Growth Theory WS 14/15 31 / 59

32 2.1.4 The Model - Production of Final Output Production is subject to constant returns to scale and endogenous technological progress, such that where α (0, 1) Y t = H α t (A t X) 1 α, (1) X: fixed quantity of land - without property rights over land(!) the return to land is zero H t = h t L t : efficiency units of labor A t : technological level in period t A t X : effective resources employed in production Andreas Schäfer (CER-ETH and UL) Unified Growth Theory WS 14/15 32 / 59

33 2.1.4 The Model - Production of Final Output Output per worker produced at time t reads where y t = h α t x 1 α t, (2) h t = Ht L t : level of efficiency units of labor per worker, x t = AtX L t : level of effective resources per worker at time t. Without property rights over land, the wage rate per efficiency unit of labor equals its average product. Hence, w t = (x t /h t ) 1 α. (3) Andreas Schäfer (CER-ETH and UL) Unified Growth Theory WS 14/15 33 / 59

34 2.1.5 The Model - Preferences and Budget Constraints Each generation (born in t 1) consists of L t identical individuals and joins the labor force. Each individual has a single parent. Agents live for two periods: childhood and parenthood. Parents are endowed with one unit of time which they allocate between labor and child rearing. Moreover, parents choose quantity and quality of children, optimally. Preferences of parents are defined over consumption, c t, above a subsistence level c > 0, as well as over the quality and quantity of their offspring, such that u t = (c t ) 1 γ (w t+1 n t h t+1 ) γ γ (0, 1). (4) w t+1 n t h t+1 : intergenerational altruism. Andreas Schäfer (CER-ETH and UL) Unified Growth Theory WS 14/15 34 / 59

35 2.1.5 The Model - Preferences and Budget Constraints Population economics: 1 Ben-Porath (1976), Eswaran (1998) - interaction between fertility n and mortality d d n economic reasoning: Old-age security motive (Srinivasan (1988), Sah (1991)... 2 Becker (1960), Barro und Becker (1989) - optimal fertility choice - q-q trade off 1 Interaction between technological progress, human capital, and n (Galor und Weil, 2000). 2 Opportunity costs of childrearing time (Galor und Weil, 1996) interaction with inequality (de la Croix und Doepke, 2003, Schfer, 2005). 3 Reversed direction of intergenerational transfers - Caldwell - Hypothese (Blackburn und Cipriani, 2005) 4 Habits and population dynamics (Schäfer and Valente, 2009) Andreas Schäfer (CER-ETH and UL) Unified Growth Theory WS 14/15 35 / 59

36 2.1.5 The Model - Preferences and Budget Constraints Fertility choices follow the standard model introduced by Becker (1960): Household chooses the number of children and their quality dividing resources between child-raising and labor market activities. Here, the only input for child rearing is time, such that the time cost for raising one child to adulthood with educational level e t+1 amount to τ q + τ e e t+1, (5) where τ q : pure child rearing costs as a fraction of the household s unit of time endowment. τ e : fraction of individual s unit time endowment necessary for each unit of education per child. Andreas Schäfer (CER-ETH and UL) Unified Growth Theory WS 14/15 36 / 59

37 2.1.5 The Model - Preferences and Budget Constraints In the second period of life, the budget constraint reads w t h t n t (τ q + τ e e t+1 ) + c t w t h t. (6) Andreas Schäfer (CER-ETH and UL) Unified Growth Theory WS 14/15 37 / 59

38 2.1.6 The Model - Production of Human Capital Technological progress raises the value of education in producing human capital. The level of human capital is determined by their education and the technological environment. Technological progress g t+1 = (A t+1 A t )/A t reduces the adaptability of existing human capital for the technological environment erosion effect. Education lessens the adverse effects of technological progress technology complements skills in the production of human capital Andreas Schäfer (CER-ETH and UL) Unified Growth Theory WS 14/15 38 / 59

39 2.1.6 The Model - Production of Human Capital formally, with h t+1 = h(e t+1, g t+1 ), (7) h e (e t+1, g t+1 ) > 0, h ee (e t+1, g t+1 ) < 0, h g (e t+1, g t+1 ) < 0, h gg (e t+1, g t+1 ) > 0, h eg (e t+1, g t+1 ) > 0, (e t+1, g t+1 ) 0 Andreas Schäfer (CER-ETH and UL) Unified Growth Theory WS 14/15 39 / 59

40 {n t, e t+1 } = argmax { (w t h t [1 n t (τ q + τ e e t+1 )]) 1 γ (8) Optimization The optimization problem of a household born in t 1 reads as subject to (w t+1 n t h(e t+1, g t+1 )) γ } w t h t [1 n t (τ q + τ e e t+1 )] c, (9) (n t, e t+1 ) 0. (10) Andreas Schäfer (CER-ETH and UL) Unified Growth Theory WS 14/15 40 / 59

41 2.1.7 Optimization If potential income z = w t h t is sufficiently high in order to ensure c t > c, we yield c t = (1 γ)w t h t, (11) n t [τ q + τ e e t+1 ] = γ (12) Since γ represents the share of time devoted to child raising, and the time budget is normalized to one, we know that 1 γ is the fraction of time devoted to labor market participation. Andreas Schäfer (CER-ETH and UL) Unified Growth Theory WS 14/15 41 / 59

42 2.1.7 Optimization If z t z, the subsistence constraint becomes binding. Hence, the fraction of time allocated to labor market participation is larger than 1 γ and the fraction of time devoted to child rearing below γ. Therefore, { n t [τ q + τ e e t+1 ] = γ if z t z 1 [ c/(w t h t )] if z t z (13) Andreas Schäfer (CER-ETH and UL) Unified Growth Theory WS 14/15 42 / 59

43 2.1.7 Optimization TimeSpent RaisingChildren 1 IncomeExpansionPath c ct Andreas Schäfer (CER-ETH and UL) Unified Growth Theory WS 14/15 43 / 59

44 2.1.7 Optimization Using (8), the optimization with respect to e t+1 implies the implicit functional relationship between e t+1 and g t+1 G(e t+1, g t+1 ) (τ q + τ e e t+1 )h e (e t+1, g t+1 ) τ e h(e t+1, g t+1 ) { = 0 if et+1 > 0 0 if e t+1 = 0. Moreover, it is assumed that G(0, 0) < 0. Since, h eg > 0 and h g < 0 lim gt+1 G(0, g t+1 ) > 0. As in addition G(0, 0) < 0, there exists a ĝ, such that G(0, ĝ) = 0 and e t+1 > 0 (e t+1 = 0 for g t+1 < ĝ). Andreas Schäfer (CER-ETH and UL) Unified Growth Theory WS 14/15 44 / 59

45 2.1.7 Optimization It follows that e t+1 = e(g t+1 ), where { = 0 if gt+1 ĝ, e(g t+1 ) > 0 if g t+1 > ĝ, (14) with e (g t+1 ) > 0 and ĝ > 0. children s quality depends only on the rate of technological progress and not on the level of potential income z t Andreas Schäfer (CER-ETH and UL) Unified Growth Theory WS 14/15 45 / 59

46 2.1.7 Optimization It follows that n t is n t = { γ τ q +τ e e(g t+1 ) nb (g t+1 ) 1 [ c/(w th t)] τ q +τ e e(g t+1 ) na (g t+1 ) if z t z if z t z (15) Andreas Schäfer (CER-ETH and UL) Unified Growth Theory WS 14/15 46 / 59

47 2.1.8 Some Results 1 Technological progress results in a decline of in the number of children and an increase in their quality, i.e., n t / g t+1 0 and e t+1 / g t If z t < z, an increase in parental potential income raises n t, but has no effect on children s quality, i.e, n t / z t > 0 and e t+1 / z t = 0. 3 If z t > z, an increase in parental potential does not change n t or children s quality, i.e, n t / z t = e t+1 / z t = 0. Andreas Schäfer (CER-ETH and UL) Unified Growth Theory WS 14/15 47 / 59

48 2.1.9 Technological Progress Technological progress g t+1 depends on education of the working cohort, e t, and the size of the population, L t (scale effect a la Jones, 1995). Hence, where g(0, L t ) > 0, g t+1 A t+1 A t A t = g(e t, L t ), (16) g i (e t, L t ) > 0 and g ii (e t, L t ) < 0, i = e t, L t. Andreas Schäfer (CER-ETH and UL) Unified Growth Theory WS 14/15 48 / 59

49 Effective Resources Effective resources are defined as x t = AtX L t, hence x evolves over time according to where x 0 is historically given. x t+1 = A t+1/a t L t+1 /L t x t = 1 + g t+1 n t x t, (17) Andreas Schäfer (CER-ETH and UL) Unified Growth Theory WS 14/15 49 / 59

50 Technology and Education The evolution of technology and education follows g t+1 = g(e t ; L) e t+1 = e(g t+1 ). This system is depicted by three different configurations. The economy shifts endogenously from one configuration to another as population increases and g(e t ; L) shifts upwards. Andreas Schäfer (CER-ETH and UL) Unified Growth Theory WS 14/15 50 / 59

51 Technology and Education Panel 1: For a range of small population sizes, the system is globally stable. The steady state is (ē, ḡ) = (0, g l ). (18) As g(0, L) > 0, the rate of technological change increases with the size of population, whereas the level of education remains unchanged. Panel 2: For a range of moderate population sizes there are three steady states. Two of them are locally stable (ē, ḡ) = (0, g l ) (19) (ē, ḡ) = (e h, g h ). (20) the interior steady state (ē, ḡ) = (e u, g u )is unstable. Andreas Schäfer (CER-ETH and UL) Unified Growth Theory WS 14/15 51 / 59

52 Technology and Education Panel 3: For a range of large population sizes there is globally stable steady state, that is (ē, ḡ) = (e h, g h ). (21) Andreas Schäfer (CER-ETH and UL) Unified Growth Theory WS 14/15 52 / 59

53 Dynamics - Panel 1 g t e t e( g ) 1 t1 g g( e l L 1 ; ) t t l g () L l x xt () L x t x 1 t el ˆ( ) et et Andreas Schäfer (CER-ETH and UL) Unified Growth Theory WS 14/15 53 / 59

54 Dynamics - Panel 1 Population is low and the implied rate of technological change is small. Parents have no incentive to provide education. Malthusian steady state: effective resources and output per capita are constant. Andreas Schäfer (CER-ETH and UL) Unified Growth Theory WS 14/15 54 / 59

55 Dynamics - Panel 2 g t h g e t e( g ) 1 t1 g g( e m L 1 ; ) t t u g l g xt u e h e xt 1 xt et 1 et et 1 et et u e ê h e et Andreas Schäfer (CER-ETH and UL) Unified Growth Theory WS 14/15 55 / 59

56 Dynamics - Panel 2 Multiple history dependent equilibria. Given the initial conditions, the economy remains in the vicinity of the Malthusian steady state. As the rate of technological progress continues to rise, the Malthusian steady state vanishes. There is only one stable steady state Panel 3 Andreas Schäfer (CER-ETH and UL) Unified Growth Theory WS 14/15 56 / 59

57 Dynamics - Panel 3 g h e t e( g ) 1 t1 g g( e h L 1 ; ) t t xt xt 1 xt h e et 1 et et ê h e et Andreas Schäfer (CER-ETH and UL) Unified Growth Theory WS 14/15 57 / 59

58 Dynamics - Panel 3 The increase in the rate of technological progress has two opposing effects on the evolution of the population: 1 There are more resources available for child rearing. 2 Reallocation of additional resources towards child quality which lowers fertility. due to a low demand for human capital, the first effect dominated and households increased their family size as well as the quality per child in the Post-Malthusian regime. The interaction between human capital formation and technological progress induced further investments in child quality. Fertility declines, the offsetting effect of population growth on the growth rate of income per capita is eliminated. resources per capita rise, as technological progress outstrips population growth. Andreas Schäfer (CER-ETH and UL) Unified Growth Theory WS 14/15 58 / 59

59 Dynamics - Panel 3 If population growth is zero, the levels of education and technological progress and the growth rates of resources per capita are constant. The model makes no prediction of the long-run growth rate of the population and of the economy. Andreas Schäfer (CER-ETH and UL) Unified Growth Theory WS 14/15 59 / 59