h Edition Economic Growth in a Cross Section of Countries

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1 In the Name God Sharif University Technology Graduate School Management Economics Economic Growth in a Cross Section Countries Barro (1991) Navid Raeesi Fall 2014 Page 1

2 A Cursory Look I Are there any variables correlated with growth in cross-country data? Initial human capital (+) Initial level per capita GDP (-) Share government consumption in GDP (-) Measures political stability (+) Proxy for market distortions (-) Page 2

3 Key Policy Question: Convergence Hypothesis Neoclassical Growth Models I Important policy question (development economics) Will poor countries catch up with rich countries? In other words: Can we expect international convergence per capita income (PCI) in the long run? There are indeed important theories which provide an affirmative answer. In neoclassical growth models, such as Solow (1956), Cass (1965), Koopmans (1965), a country's per capita growth rate tends to be inversely related to its starting level income per person. In particular, if countries are similar with respect to structural parameters for preferences technology, then poor countries tend to grow faster than rich countries. Thus, there is a force that promotes convergence in levels per capita income across countries. Page 3

4 Reminder: Convergence in the Solow model I Page 4

5 Two Concepts Economic Convergence: β-convergence vs. σ-convergence I β-convergence: Tendency for poor countries to grow faster than rich countries σ-convergence: Reduction in the dispersion the international income distribution Dispersion the international income distribution in a sample N countries is typically measured by the stard deviation σ y t = 1 N 1 N i=1 y i t y t 2 Does β-convergence imply σ-convergence? Barro & Sala-i-Martin (1990) show that β-convergence need not imply σ-convergence, if each country s level income is continually subject to rom disturbances. Page 5

6 Unconditional β-convergence: Empirics Unconditional β convergence: Poor economies grow faster than rich countries. Assuming that all countries exhibit the same fundamentals (A, s, n, δ, ) differ only in their initial stock capital, this is the prediction the neoclassical model. I Page 6

7 Unconditional β-convergence: Empirics I Unconditional β convergence: The empirical test for unconditional β-convergence is based on the following cross-sectional regression y i = α + βy i + u i, i = 1,, N Unconditional β-convergence requires that β < 0 (statistically significant). The finding β < 0 means that poor countries grew, on average, faster than rich countries. Page 7

8 Per Capita vs GDP per Capita Correlation = 0.09 I Page 8

9 Conditional β-convergence: Empirics Conditional β convergence: The growth rate PCI is higher, the farer the economy under consideration is away from its (individual) steady-state. This form is suitable for a sample countries which differ not only with regard to their initial capital endowments but also with regard to other fundamentals. I Page 9

10 Conditional β-convergence: Empirics I Conditional β convergence: The empirical test for conditional β-convergence is based on the following cross sectional regression: y i = α + βy i + γ 1 x i,1 + + γ m x i,m + u i, i = 1,, N Conditional β-convergence requires that β < 0 (statistically significant). The variables x i,m,, x i,m are control variables, which capture the long run growth rate. The interpretation β < 0 reads that economies with a low PCI level, ceteris paribus, grow faster than economies with a comparatively high PC The ceteris-paribus condition guarantees that other factors are held constant; in this case β measures a partial correlation. Page 10

11 Basic Results: Partial Association Between per Capita Growth 1960 GDP per Capita Correlation = 0.74 I Page 11

12 The Role Human Capital in Endogenous Growth Models: Theory I In Romer (1990) human capital is the key input to the research sector, which generates the new products or ideas that underlie technological progress. Thus, countries with greater initial stocks human capital experience a more rapid rate introduction new goods thereby tend to grow faster. As Nelson Phelps (1966) suggested, a larger stock human capital makes it easier for a country to absorb the new products or ideas that have been discovered elsewhere. Becker, Murphy, Tamura (1990) assume that the rate return on human capital increases over some range, an effect that could arise because the spillover benefits from human capital. A supporting force is that more human capital per person reduces fertility rates, because human capital is more productive in producing goods additional human capital rather than more children. Page 12

13 Basic Results: Regressions for per Capita Growth I Page 13

14 Basic Results: Per Capita Growth vs. School-Enrollment Variables Correlation = 0.43 I Page 14

15 Basic Results: Partial Association Between per Capita Growth School- Enrollment Variables Correlation = 0.73 I Page 15

16 Measurement Errors Related Issues: Regressions for per Capita Growth I Page 16

17 Other Measures Human Capital: Regressions for per Capita Growth I Page 17

18 Other Measures Human Capital: Regressions for per Capita Growth (cont d) I Page 18

19 : Theory I Some theories in which the initial values human capital per capita GDP matter for subsequent growth rates also suggest relations with physical investment fertility. In endogenous growth models, such as Rebelo (1990) Barro (1990), per capita growth the investment ratio tend to move together. In models that include human capital, such as Romer (1990) Becker, Murphy, Tamura (1990), an increase in the initial stock human capital tends to raise the ratio physical investment to GDP. In growth models with endogenous fertility, such as Barro Becker (1989) Becker, Murphy, Tamura (1990), per capita growth net fertility tend to move inversely. Page 19

20 : Net vs GDP per Capita Correlation = 0.87 I Page 20

21 : Net vs. School-Enrollment Variables Correlation = 0.74 I Page 21

22 : Regressions for I Page 22

23 : Ratio Private to GDP vs GDP per Capita Correlation = 0.42 I Page 23

24 : Ratio Private to GDP vs. School-Enrollment Variables Correlation = 0.64 I Page 24

25 : Regressions for Ratios I Page 25

26 : Interaction Between Growth I Page 26

27 Government Expenditures: Regressions for per Capita Growth I Page 27

28 Government Expenditures: Regressions for Ratios I Page 28

29 Government Expenditures: Interaction Between Growth I Page 29

30 Political Stability: Regressions for per Capita Growth I Page 30

31 Political Stability: Regressions for Ratios I Page 31

32 Political Stability: Interaction Between Growth I Page 32

33 Economic System: Regressions for per Capita Growth I Page 33

34 Market Distortions: 1960 PPP Ratio for GDP Deflator (U.S.=1.0) vs GDP per Capita I Page 34

35 Market Distortions: 1960 PPP Ratio for Deflator (U.S.=1.0) vs GDP per Capita I Page 35

36 Market Distortions: Regressions for per Capita Growth I Page 36

37 Market Distortions: Regressions for Ratios I Page 37

38 Africa Latin America: Regressions for per Capita Growth I Page 38

39 Africa Latin America: Regressions for I Page 39

40 Africa Latin America: Regressions for Ratios I Page 40

41 Africa Latin America: Interaction Between Growth I Page 41

42 Africa Latin America: Regressions for per Capita Growth (cont d) I Page 42

43 Concluding Remarks I Using recent theories economic growth as a guide, this study brings out some empirical regularities about growth, fertility, investment for 98 countries in the period Although the simple correlation between per capita growth ( ) the initial (1960) level per capita GDP is close to zero, the correlation becomes substantially negative if measures initial human capital (proxied by school-enrollment rates) are held constant. Moreover, given the level initial per capita GDP, the growth rate is substantially positively related to the starting amount human capital. As a related matter, countries with high human capital have low fertility rates high ratios physical investment to GDP. Page 43

44 Concluding Remarks (cont d) I Per capita growth the ratio private investment to GDP are negatively related to the ratio government consumption expenditure to GDP. Measures political instability (proxied by figures on revolutions, coups, political assassinations) are inversely related to growth investment. A proxy for price distortions (based on purchasing-power parity numbers for investment deflators) is negatively related to growth. Finally, the results leave unexplained a good deal the relatively weak growth performances countries in sub-saharan Africa Latin America. Page 44

45 Thanks for Your Attention! Principles Macroeconomic Econometrics, Research 4tGroup Page 45

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