Trade and Development

Transcription

1 Trade and Development Table of Contents 2.2 Growth theory revisited a) Post Keynesian Growth Theory the Harrod Domar Growth Model b) Structural Change Models the Lewis Model c) Neoclassical Growth Theory the Solow Model d) the New Growth theory 82

2 Development Models a)post Keynesian Growth Theory The Harrod Domar Growth Model (1940s) b)structural Change Models The Lewis Model (1954) c) Neoclassical Growth Theory The Solow Model (1956) d)the New Growth Theory (1990s) 83

3 a) Post Keynesian Growth Theory The Harrod Domar Growth Model based on Harrod (1939) and Domar (1946) models economic growth as the result of abstention from current consumption (Ray, 2009) the volume of savings and investment as important determinant of economic growth Assumptions (I) the model is based on a Leontief production function (limitational) min, (2.1) with θ as the constant capital coefficient (capital output ratio) and α as the constant labour coefficient 84

4 a) Post Keynesian Growth Theory The Harrod Domar Growth Model Assumptions (II) closed economy, national income is divided between consumption and savings (2.2) the value of produced output is matched by goods produced for consumption and investments goods (2.3) macroeconomic balance: savings equal investment (2.4) 85

5 a) Post Keynesian Growth Theory The Harrod Domar Growth Model Assumptions (III) investments augment the national capital stock K and replace that part of it which depreciates. Thus, the capital stock changes over time according to 1 with δ as the depreciation rate (2.5) when considering the macroeconomic balance: 1 (2.6) 86

6 a) Post Keynesian Growth Theory The Harrod Domar Growth Model Two important concepts to determine the growth rate: the savings rate : (2.7) the ability of the economy to save a certain proportion of national income the capital output ratio θ : (2.8) determines the required capital to produce a single unit of output θ 87

7 a) Post Keynesian Growth Theory The Harrod Domar Growth Model substituting (2.7) and (2.8) into (2.6) leads to θ 1 θ (2.9) dividing (2.9) by the θ leads to 1 (2.10) 88

8 a) Post Keynesian Growth Theory The Harrod Domar Growth Model and the following growth equation δ (2.11) with as the warrant rate of growth linked to two fundamental variables: the ability of the economy to save and the capital output ratio an increase in the savings rate and an increase in the rate at which capital produces output (decreasing θ) increase the growth rate 89

9 a) Post Keynesian Growth Theory The Harrod Domar Growth Model Implications (I): warrant growth rate : production occurs at full capacity; determined by the savings rate and the capital output ratio (implicit assumption: factor labour is sufficiently available) actual growth rate : is influenced by fundamental factors e.g. growth of population, technical progress, cultural aspects, geographical conditions (e.g. resource endowment) etc. resulting (medium term) maximum growth rate of the economy is referred to as "natural" growth rate 90

10 a) Post Keynesian Growth Theory The Harrod Domar Growth Model Implications (II): in case actual growth rate ( ) equals warrant growth rate ( then the economy is on a steady state growth path (constant growth) this growth path is if this will ever be achieved unstable e.g. due to exogenous shocks. This is known as "knife edge growth" if, capacities are not fully utilized, firms perform lower net investments, what follows is structural unemployment. The effective demand is decreasing; net investment in the next period as well. Growth problems can harm the economy even further. Depression as a result of low investment if (when investments are rising too sharply ) it leads to inflationary trends and overcapacity. 91

11 a) Post Keynesian Growth Theory The Harrod Domar Growth Model Conclusion: self perpetuating up or downward trends occur that lead to severe business cycle crises, because it is highly unlikely that the actual growth rate equals the equilibrium growth rate the model provides more an explanation for business fluctuations Policy implications: business cycle fluctuation is central in the Post KeynesianGrowthmodel state intervention to stabilize demand, a decrease in private demand need to be compensated by public demand (anti cyclical fiscal policy) but is policy able to evaluate sources of growth shocks and the correct policy intervention? 92

12 b) Structural Change Models The Lewis Model based on Lewis (1954) two sector surplus labor model focus on mechanism by which economies transform their domestic economic structures (from traditional agriculture to a modern urbanized and industrially diverse manufacturing economy) 93

13 Figure 5: Structural Change Models The Lewis Model : Total Product (Output) in the agricultural sector : Total Product (Output) in the modern industrial sector with a capital stock of : Quantity of agricultural labor / labor input in the agricultural sector : Average product of labor (in the agricultural sector) : Marginal product of labor (in the agricultural sector) : : : : Real wage in the agricultural sector Labor supply in the modern sector Labor demand in the modern sector with a capital stock of (Rigid/fixed) real wage in the modern sector, : Constant technology in the agricultural and in the modern sector 94

14 b) Structural Change Models The Lewis Model The Model (I): The (underdeveloped) economy consists of 2 sectors: a traditional agricultural (overpopulated rural subsistence) sector with a zero marginal labor productivity ( surplus labor ) a modern, industrial (urban) sector with high productivity Focus on process of labor transfer from agriculture to industry growth of output and employment industrial investment and capital accumulation in the modern sector determines the rate of expansion (reinvestments of all profits) 95

15 b) Structural Change Models The Lewis Model The Model (II): due to the zero marginal productivity in the agricultural sector, labor can be removed without loss of output in the sector ( surplus labor ) wages in the industrial sector are constant and higher than in the traditional agricultural sector induce workers to migrate from rural to urban wages in the agricultural sector equal the average product, which is higher than the marginal product of zero (all workers share of the total product) 96

16 b) Structural Change Models The Lewis Model The Model (III): due to constant wages in the modern sector and the labor surplus in the agricultural sector, the supply curve of rural labor (agricultural population) to the industrial sector is perfectly elastic in the modern sector profits are reinvested, increase in productivity increase in labor demand, employees move from agricultural into the industrial sector (unless the labor demand can be met entirely by the growth of population) aggregate demand increases, profits in the industrial sector are re invested, 97

17 b) Structural Change Models The Lewis Model The Model (IV): process of industrial sector self sustaining growth and employment creation continues until rural surplus labor is absorbed then, additional workers withdrawn from agriculture at higher cost (of lost agricultural production, labor to land ratio decrease, no zero marginal product of labor, labor supply curve positive slope ) 98

18 b) Structural Change Models The Lewis Model Criticism (I): Assumption: rate of labor transfer equals rate of capital accumulation duplicating existing capital by reinvestments Re investments in labor saving technologies can lead to significantly less absorption of labor than the model predicts, antidevelopmental economic growth (no job creation), GNP increases due to increase in profits to capital owners while income of workers do not change (income distribution). Assumption: surplus labor in rural areas, full employment in urban areas In developing countries rather the opposite is true: In many LDCs massive urban unemployment, while a surplus of workers in the agricultural sector cannot be shown. Urban surplus labor more valid. 99

19 b) Structural Change Models The Lewis Model Criticism (II): Assumption: competitive modern sector labor markets guarantees constant (rigid) real urban wage the assumption of completely rigid wages in the modern sector at least until reduction of labor surplus in agricultural can hardly be supported. Instead, heterogeneous development of wages (depending on qualifications, rising real wages) and institutional factors (trade unions bargaining power, civil services wage scale, hiring practice of MNEs) play a role 100

20 b) Structural Change Models The Lewis Model Criticism (III): Further shortcomings of the model if rising demand for labor in modern sector is entirely covered by population growth (which seems quite realistic for LDCs), in the Lewis model no substantial reduction of the labor surplus in the agricultural sector can be achieved How does surplus labor of agricultural sector achieve necessary skills for the modern sector? Inadequate education and skill level is one of the main problems of LDCs. 101

21 c) Neoclassical Growth Theory The Solow Model growth of the economy driven by population growth and exogenous technical progress; due to decreasing returns to capital the model predicts convergence an increase in savings and investment has only level effects but not growth effects (per capita). due to technical progress, the growth path is stable (in contrast to Harrod Domar) The Basic Model Neoclassical production function (Cobb Douglas): (2.12) 102

22 c) Neoclassical Growth Theory The Solow Model Characteristics: allows for substitution between the factors, constant returns to scale, decreasing marginal rate of substitution, linear homogenous (elasticities add up to 1) decreasing marginal product of capital with increasing quantity (diminishing returns) input factors will be paid their marginal product, factor markets in equilibrium (this means full employment) factor input ratio is determined by market forces (relative prices), under the condition of sufficiently flexible factor markets instability of the Harrod Domar Model vanishes, since business cycle fluctuations affect the factor input ratio and thus in turn the factor prices the economy can return to the balanced growth path (steady state) 103

23 c) Neoclassical Growth Theory The Solow Model Other consequences of factor substitutability: economic growth cannot be explained by net investments, decreasing marginal returns of the factor here: capital. The higher the existing capital stock the lower the return of an additional investment capital accumulation is not a source of sustainable growth population growth which is not accompanied by an equivalent increase in the capital stock, leads to a reduction in the per capita income however, the model is based on the assumption that it is possible to increase the capital stock according to the population growth the economy grows at the population growth rate 104

24 c) Neoclassical Growth Theory The Solow Model Derivation of the basic equation: Notations: variables in capital letters Y, A, N, K, C, S represent the absolute amount variables in lower case letters y, k, c, s represent per capita variables. Most important: per capita output / and per capita capital stock (the capital intensity) /. variables with dots represent the derivative of variables with respect to time ( /. 105

25 c) Neoclassical Growth Theory The Solow Model Due to the steady growth of population the labor supply L increases and thus the demand for labor N (neoclassical world: full employment) with the exogenous rate n. Formally, this leads to. 106

26 c) Neoclassical Growth Theory The Solow Model Growth equilibrium (steady state) growth equilibrium defined as a situation in which all per capita terms are constant over time is constant in equilibrium it follows that δ with as equilibrium capital intensity is constant over time. That is the growth rate of the capital intensity = 0, but in the model K and N are not constant. The labor supply (L) and labor demand (N) continuously increase with the population growth rate (n). thus, if the ratio of / remains constant, the capital stock K must grow at the same rate n per capita production is constant as well. If N increases with the rate n, then ceteris paribus also has to increase by the rate n. The same holds for consumption and savings. 107

27 c) Neoclassical Growth Theory The Solow Model Figure 6: Steady state of the Solow model 108

28 c) Neoclassical Growth Theory The Solow Model In growth equilibrium (steady state) all absolute variables labor (L) andcapital(k) and therefore national income (Y) grow (or have to grow) with the same growth rate which is the population growth rate, n. A higher growth rate is not achievable. Variables in per capita terms do not grow. Or: The individual is not doing better. What happens if i), ii) δ and iii) increases? 109

29 c) Neoclassical Growth Theory The Solow Model How can sustainable economic growth (growth exceeding population growth) be achieved in the Solow model? Growth through technological progress: In the Solow Model, the production function is now enhanced by A:, (2.13) In per capita notation:, / = (2.14) exogenous technological progress increase in A 110

30 c) Neoclassical Growth Theory The Solow Model Here again, in the growth equilibrium (all per capita terms are constant over time), the equilibrium condition 0 holds: δ (2.15) with as equilibrium capital intensity. 111

31 c) Neoclassical Growth Theory The Solow Model Figure 7: Technical progress in the Solow model The long term growth rate of economy follows the rate of technical progress: In growth equilibrium, all relevant factors (labor productivity, real wage, capital intensity) grow with the same rate (of technical progress). Deviations lead to adjustment processes. 112

32 c) Neoclassical Growth Theory The Solow Model Criticism technological progress not explained, rather assumed and considered as exogenous, it appears from nowhere ( new growth theory) Some assumptions are very critical and they do not hold for developing countries, i.e. complete substitution of labor and capital, permanent factor market equilibrium (which means no unemployment). applicable especially for industrialized countries functioning capital market as a precondition (property rights..) 113

33 d) The New Growth Theory Since mid 1980s based on shortcomings of neoclassical growth theory: 1. assumption of decreasing marginal productivity of capital 2. assumption of exogenous technical progress New Growth Theory: 1. mechanism, explaining growth without decreasing productivity of capital 2. explain technical progress with preferences and market structure from inside the model endogenously 114

34 d) The New Growth Theory Selected determinants in the endogenous growth literature: i) Externalities resulting from research and development (R&D) ii) Human capital (HC) iii) Specialization 115

35 d) The New Growth Theory i) Externalities resulting from Research and Development (R&D) Romer (1990a): main source of growth technological progress emanating from maximization decision by economic agents (endogenous) increasing returns in the human capital producing sector produce endogenous technological growth, translating into endogenous economic growth benefits of technology not fully appropriable, less produced than socially optimal amount policies (e.g. research subsidies) that reduce the difference between private and social return to technology production raise economy s growth rate Grossman and Helpman (1989a and 1989b) (models emphasizing growth effects of international trade) also include a positive externality in R&D 116

36 d) The New Growth Theory ii) Human capital (HC) Lucas (1988) stresses the accumulation of HC as a fundamental determinant of long run growth the HC production function is not decreasing in the stock of HC the marginal productivity of HC does not fall as its stock increases incentive to continue accumulating Becker, Murphy and Tamura (1990) relate HC to fertility and growth the higher HC the higher the investment in HC and the lower the investment in children Stokey (1991): investing in HC has a positive externality in the productivity of future generations HC and this boosts growth 117

37 d) The New Growth Theory iii) Specialization Ethier (1982): production specialization leads to increasing returns to scale production function is an increasing function of the number of intermediate inputs used in production Romer (1987): increasing specialization produces permanent growth crucial: access to world markets Grossman and Helpman (1989a and 1989b) emphasize the role of free trade in order to have access to intermediate goods and technology which in turn promotes growth of importance for the increasing fragmentation of production processes and the development of Global Value Chains and their implications for economic growth 118