ECONOMIC GROWTH AND DEVELOPMENT

Transcription

1 : t \.i ' 0! 15!S JVf.- \ '4 ECONOMIC GROWTH AND DEVELOPMENT Second Edition Hendrik Van den Berg University of Nebraska, USA World Scientific NEW JERSEY LONDON SINGAPORE BEIJING SHANGHAI HONG KON"G TAIPEI CHENNAI

2 Preface PART I Thinking About Economic Development CHAPTER 1 The Complexity of Economic Development The Economic, Social, and Natural Environments Economic activity and the three spheres Economic change and human society The Conventional View: The Great Acceleration Rapid GDP growth only began after A new acceleration in the twentieth century There have been many growth collapses Small Differences in Growth Have Large Consequences The power of compounding Examples of compounding Structural Change and Economic Growth Patterns of structural change The cost of structural change Definitions of terms Holism and the Scientific Method Holism and economics Homeostatic systems, Holism and science Holistic science 35, Kuhn's revolutionary view of science 36

3 xiv 1.6 How Economists Study Complex Systems Economic models The dangers lurking behind models Economic models, holism, and the scientific method A Very Brief History of Thought on Economic Development Economic thought before Fading interest in development in the late 1800s Renewed interest in growth after World War II Development economics and growth theory The biases of growth theory ^ Heterodoxy " '" What Will Future Economic Development Look Like? Is further economic growth necessary? The superfluity of economic growth Environmental limits to growth Sustainable economic growth 51 Appendix 1.1: The Mechanics of Economic Growth 54 References 57 CHAPTER 2 Measuring Economic Development Real GDP Per Capita Gross domestic product (GDP) GDP versus GNP Adjusting for price differences Adjusting for purchasing power The picture that Maddison' s data paint Are standards of living becoming more equal? Finding Better Measures of Economic Development Household production Accounting for informal production The value of leisure 1A Counting the "bads" as well as the goods Adjusting GDP for environmental costs and benefits Welfare and lifetime consumption Adjusting for variety Beyond Adjustment: New Measures of Economic Development Improvements in human health The relationship between output growth and health Life expectancy and life's order Education, technology, and what else? The Human Development Index 89

4 xv 2.4 Summary and Conclusions 91 References 94 CHAPTER 3 Holistic Measurement of Economic Development Thinking About Happiness Changing perceptions of the ideal life Psychology and life satisfaction Happiness Studies, Surveys of life satisfaction " " What surveys of happiness tell us The Human Development Index again Statistical studies of happiness Neuroscientific Evidence on Happiness Linking brain activity to human happiness The discoveries of neuroscience _ Homeostasis, empathy, learning, and other findings Behavioral economics and the neuroscientific findings Economic Development and Human Happiness Is economic growth just a hedonic treadmill? Mandeville's "Fable of the Bees" Growth, inequality, and happiness Individual happiness and economic growth Checking in with Kabamba and Banks How Economists Study Economic Development How did economics become such a narrow field? Models and the human brain's preference for patterns The need for reflexivity The Happy Planet Index Concluding Thoughts 132 References 135 PARTH Models of Economic Development 139 CHAPTER 4 The Evolution of Growth Models: From Smith to 141 Harrod-Domar 4.1 Adam Smith's Model of Economic Change Specialization and exchange Specialization and technological progress 146

5 xvi The importance of institutions Transportation and communications National welfare The Smithian model Adam Smith's legacy The Classical Economists and Diminishing Returns Malthus'theory of population The "Classical" model An example of diminishing returns The Classical equilibrium, An evaluation of the Classical model ' ' Income distribution according to the Classicals John Stuart Mill's recognition of technological progress Assessing the contributions of the Classicals Karl Marx Karl Marx and the Classical School Marx's model of capitalist development An assessment of Marx and Marxism The Growth of Neoclassical Economics Scientific reductionism Some observations on Neoclassical economics The Harrod-Domar Model The "Keynesian" Harrod-Domar model The supply side of the Harrod-Domar model The popularity of the partial Harrod-Domar model The incremental capital-output ratio (ICOR) The demand side of the Harrod-Domar model Summary: What the Models Tell Us about Development 183 References 187 CHAPTER 5 Solow's Neoclassical Growth Model Introduction to the Solow Model The Neoclassicaliproduction function Consumption and saving The capital stock The Solow growth equilibrium The Rate of Saving and the Steady State The rate of saving and output growth Comparative statics Dynamic analysis What the Solow model reveals 199

6 xvii 5.3 Population Growth and the Solow Model Population growth and the steady state Population growth increases total output Technological Change Technical change and the steady state Technological change generates permanent growth The steady state with technology-driven growth Correlation does not imply causation Technological change and the growth path Summarizing the Solow model, Applying the Solow Model " """ The Asian "economic miracle" The reaction to Krugman's analysis The Soviet Union and the Solow model Recent Russian economic growth Economic Growth Paths with Technological Change Long-run growth vs. transitional growth How countries "catch up" Rebelo's AK Model: A Special Case of the Solow Model The production function and the capital share a The special case of no fixed factors What does the AK model tell us about growth? Smith to Solow: Some Conclusions Comparing the Solow model with earlier models Evidence supporting the Solow model Weaknesses of the Solow model The importance of diminishing returns 224 Appendix 5.1: The Cobb-Douglas Production Function 227 References 231 CHAPTER 6 Economic Development and the Natural 233 Environment, 6.1 Limits to Growth Optimists, skeptics, and scientists This time we should be concerned Must we stop economic growth to survive? Stopping growth is also problematic Technological Change and Nature's Resources ' Technology and natural resources Effective supply of exhaustible resources A model of effective exhaustible resource supply 244

7 xviii Effective resource supply with technological change Further examples: Effective supply with growth Which example is most realistic? Technological change and exhaustible resources Resource Prices and Technological Change Hotelling's rising prices, history's falling prices Do prices provide accurate signals? Global Warming The issue of global warming Evidence of global warming ; Projections of global warming " "" More uncertainty: Feedback Stabilizing temperatures The Loss of Biodiversity The issue of biodiversity The services of nature The value of biodiversity _ The Solow Model and Renewable Resources An enhanced Solow model There must be technological change in both spheres Summarizing the conclusions of the enhanced Solow model A Strategy for the Future Net domestic product The graphic cost of resource depletion Refining the definition of sustainable development 272 References * 276 CHAPTER 7 Technological Change: What Is It and How Do 279 We Model It? 7.1 Introduction to Technology and Technological Change Technological change and the production function A more holistic definition of human technology The diversity of technological change A historical view of technology Ranking technological breakthroughs Measuring Technological Change The sources of growth equation Estimates of the Solow residual Inaccuracies in measuring inputs and output Sustainable technological progress 295

8 xix 7.3 Common Characteristics of Technological Change The S-curve of technology diffusion The slow application of electricity in manufacturing Technological change is not always technological progress The geographic diffusion of technology is also slow Technological change as a combinatoric process Technological change can be path dependent Technology is a nonrival good Paradigm shifts Summarizing the characteristics of technology Technological Change as an Externality: Learning by Doing Learning by doing and technological change The Liberty Ship program How is learning related to doing? Summary and Observations 315 References 318 CHAPTER 8 Dynamic Models of Technological Change Schumpeter's Ideas on Technological Change Endogenous growth models and perfect competition Joseph Schumpeter, a radical economist Creative destruction and the entrepreneur Case study: Entrepreneurs in China The routinization of entrepreneurship The role of the financial sector Progress versus change Final thoughts on creative destruction The Schumpeterian R&D Model Imperfect competition and profits Costly innovation must be paid for The resource cost of innovation The present value of innovation The equilibrium level of R&D activity The changes in fx, r, R, and P and innovation Some further observations Land-grant universities and extension agents The Long-Run Trend in the Costs of Innovation How to avoid a technology slowdown ' Measuring R&D The knowledge burden Finding the right combinations 348

9 xx Case study: Finding the right combinations in Peru Protectionism and creative destruction The Holmes and Schmitz model Protectionism and paradigm shifts When is technological change progress? Technology and Developing Economies Endogenous technological change and convergence Can technology transfers close the gap? Technology and the Natural Environment Making environmentally friendly technology "profitable" Making inter-generational decisions ~ ~ Environmental costs and true economic development The Jevons effect complicates adjustment Conclusions and a Critique 362 Appendix 8.1: Mathematical Proof of the Positive Effect of p 366 Appendix 8.2: A Mathematical Version of the Schumpeterian Model 367 References _ 371 PART III Key Elements of Economic Development 375 CHAPTER 9 Population Growth The Many Views of Population Growth Population growth's congestive effects People as the source of technological progress Population growth, economies of scale, and congestion The changing effect of growth on population A Brief Demographic History The Components of Population Growth Historical examples Demographic transition Patterns of population growth: Summary Explaining the Patterns of Population Growth Kremer' s model of long-run economic growth Galor and Weil's model of human capital accumulation Jones' model of the production function of ideas Leibenstein's model of the marginal child Why birth rates have declined Concluding thoughts on the population transition China's policy of birth planning 400

10 xxi 9.5 The Short-Run Effects of Shifts in Population Growth Population profile The dependency ratio The importance of the population profile Population Growth and the Natural Sphere Population growth in the natural sphere Technological change and population growth in the 408 natural sphere 9.7 Summary and Some Conjectures Projected future population growth Consequences of future population growth Further issues 412 References 414 CHAPTER 10 Human Capital: Humans' Aquired Abilities Definition of Human Capital Education Trends in education Gender and education Convergence in educational opportunities Summary of the state of education in the world The Costs and Benefits of Education Net returns to education Private versus social returns to education Estimates of the returns to education Developing country expenditures on education The statistical evidence on education is not entirely clear Diminishing returns and human capital Human capital and R&D activity The Optimal Supply of Education with Externalities Human capital and externalities A case of multiple equilibria Why private education falls short of social needs Further difficulties in setting education policy The roles of education in the economic and social spheres Child Labor and Human Capital Child labor throughout history The economics of child labor Policies to deal with child labor Summary and Conclusions 450 References 453

11 xxii CHAPTER 11 The Financial Sector of the Economy Saving The population profile and saving Changing profiles and savings rates: The evidence Research using the World Bank saving data base Saving for the environment: What the evidence implies The Fundamental Role of the Financial Sector Financial failure is a constant A simple model of the financial sector Extending the analysis to the whole economy Market Failures in the Financial Sector The possibility of default Contract enforcement in Taiwan Enforceable contracts do not eliminate all risk The adverse selection problem The moral hazard problem Government regulation and the information problem Property rights and collateral: A role for government Financial intermediaries also face perverse incentives Financial intermediaries versus financial markets Microfinance The Grameen Bank of Bangladesh The Grameen model is not new Nacional Monte de Piedad The future of microfinance Systemic Failures in the Financial Sector Interest rate ceilings Human psychology and self-imposed repression Culture and the financial sector: Islamic finance Crony capitalism: Private financial repression Crony Capitalism and the Natural Environment The financial system's bias towards the economic sphere The conflicting consequences of financial deregulation Summary and Conclusions 493 References, 496 CHAPTER 12 Institutions and Sustainable Development The Role of Institutions in Human Society Dependence on strangers is problematic Getting the institutions right 504

12 xxiii Not all institutions are equally flexible The relationship between formal and informal institutions The complexity and inconsistencies of change Human Behavior and Institutions Individual rationality does not guarantee social success The tragedy of the commons Game theory and the tit for tat strategy Results of the 2004 tournament Sometimes people are irrational Institutions and Exchange Transactions costs and economic efficiency The evolution of markets Most human exchanges and negotiations do not involve 521 markets Social capital Culture * Case study: A culture clash and exploitation Cultures and subcultures Symbolic violence The iron hand of culture The blinding influence of culture The Importance of Institutions for Economic Development Institutions and innovation Institutions and sustainability Nation Building: Defying the Strength of Institutions The Paris Conference and the failure of nation building The failure of Paris did not deter further nation building Is gradual change more successful? Summary and Conclusions 539 Appendix 12.1: Empirical Studies of Institutions and Economic Growth 542 References 545 CHAPTER 13 Formal Government Institutions The Economic Roles of Government Adam Smith's basic functions of government Externalities and government policy Externalities and the holistic nature of human welfare Imperfect competition and government policy Intertemporal decisions Macroeconomic stability Achieving a just distribution of society's production 557

13 xxiv Government leadership in changing the institutional 558 structure There are no human rights without economic rights Summarizing the motivations for collective government 561 action 13.2 Government Failures Why government may fail to accomplish its goals Rent seeking An example of rent seeking A final comment on rent seeking The comparative advantage of government Corruption Casual evidence of corruption Measures of worldwide corruption The conditions for corruption How can corruption be reduced? Measuring the effect of corruption on growth Informal Activity: Making the Best of Bad Institutions Informality is a widespread phenomenon Informal economic activity is a form of rent evasion Estimates of informal activity Informality is more prevalent in developing countries Informality and development Summarizing the consequences of informality The Institution of Intellectual Property Rights The history of patents and copyrights The patent as a property right to an idea The cost of protecting intellectual property rights International protection of intellectual property rights Patents as an example of the clash of formal and 586 informal incentives 13.6 Summary and Conclusions 588 References 590 PART IV International Economic Integration 593 CHAPTER 14 International Trade and Development The Growth of International Trade New transport technologies Is trade an engine or handmaiden of growth? 602

14 xxv 14.2 Orthodox Economic Analysis of International Trade The production possibilities frontier Consumer demand and indifference curves Combining the supply and demand sides of the economy The gain from international exchange The gain from international specialization Welfare gains from trade according to the HO model An evaluation of the HO model and the gains from trade International Trade and Economic Growth International trade and Schumpeter's model of innovation Trade and technology transfers Statistical evidence on trade and development What does the statistical evidence suggest? Conclusions suggested by the statistical evidence Why Free Trade May Not Benefit a Country Adjustments to trade are costly The example of NAFTA ' Shifts in the terms of trade Infant industries Increasing returns to scale Manufacturing, agriculture, and technological change Enclaves, maquiladores, and spillovers The Environmental Impact of International Trade Shifting GHG emissions to less developed countries Institutional failures in the global food distribution system The GHGs embedded in trade Another example of GHGs embedded in trade Summary and Concluding Remarks 640 References 643 CHAPTER 15 International Investment, International Finance 647 and Economic Development 15.1 The Economics of International Investment and Finance A traditional model of international investment Risk and diversification The long-run dynamic gains from international investment Schumpeterian innovation and international investment International Financial Flows and Economic Crises International finance in the nineteenth century The case of Mexico Global finance up to

15 xxvi The resumption of private international lending 659 (and borrowing) The macroeconomics of international investment The Aftermath of the 1982 Debt Crisis The high levels of debt in Reaching an agreement Another crisis in Mexico The Asian crisis of Some common threads Foreign debt and currency mismatches Can financial crises be avoided? " A note on exchange rate uncertainty Foreign Direct Investment The growth of FDI and TNCs The history of TNCs TNCs and international trade TNCs and the spread of technology Is FDI less volatile than other financial flows? Why Have Transnational Corporations Grown? Why TNCs dominate the economic sphere TNCs are altering the economic and social spheres A Final Note 684 References 687 CHAPTER 16 International Economic Policy: Heterodox 691 Approaches 16.1 Mercantilism and the Colonial System The example of Brazil Mercantilism after Brazil's political independence Brazil in the 1930s From accidental to planned industrialization Interpreting Brazil's Colonial and Post-Colonial Experiences Dependency theory The Structuralist school The Agglomeration of Economic Activity The causes of agglomeration The agglomeration of innovative activity The changing patterns of economic activity Immigration and agglomeration Immigrants and the brain drain Immigrants and agglomeration again 712

16 xxvii 16.4 Import Substitution Industrialization (ISI) Import substitution policies An assessment of import substitution policies An extreme example of ISI Lessons from ISI Trade, FDI, and Agglomeration: Modern Mercantilism? The recent evolution of mercantilism TNCs and international economic policy Further concerns about TNCs Neocolonialism? ^ Foreign Aid " " Foreign aid and GDP growth Domestic capabilities and foreign aid Developed countries' commitment to aid Concluding Remarks 730 References 735 PARTV Development Issues 739 CHAPTER 17 The Distribution of Income and Wealth Economic Development and Structural Change An orthodox explanation of structural change Unbalanced growth Unequal income elasticities of demand The costs of structural change Measuring the Distribution of Income First look at inequality The Lorenz curve _ Longitudinal data Long-Term Trends in the Distribution of Income ' The distribution of income in the distant past Estimating historical Gini coefficients The distribution of wealth The Relationship between Growth and Income Distribution The Kuznets curve Trends in world income inequality: The global Gini Does inequality reduce growth? Technological progress and income inequality How to reduce inequality in a growing economy 767

17 xxviii 17.5 What Is the Most Desirable Distribution of Income? Elements of a "just society" Rawls'"veil of ignorance" Can humanity achieve a just society? Inequality as a report card grade for a market economy The relationship between economic equality and social 773 justice 17.6 Poverty Defining poverty Poverty throughout the world Growth may not reduce poverty " "" " Further Thoughts on Poverty and Income Equality 779 Appendix 17.1: Inequality of Lifetime Per Capita Income 781 References 783 CHAPTER 18 Policies for Sustainable Economic Development The Urgent But Difficult Case for Environmental Policies Dealing with uncertainty: The example of global warming The costs of controlling global warming The other example: Biodiversity The momentum of our current path Environmental Policy Environmental costs and economic growth The available policy tools Taxes versus quantitative restrictions The political economy of environmental policy Cases of Environmental Policy Failures Hoy No Circula: A case of policy failure Clean coal technology Carbon offsets Species losses and international policy The Jevons effect Subsidies for research versus energy taxes What Technologies Do We Need for Sustainability? Sustainability in all three spheres and economic interests The rights of nature Changing the culture of consumption How to change the culture of growth 824 References 827

18 xxix Name Index 841 Subject Index 853 Geographic Index 857