Rethinking Economic Development, Growth, and Institutions
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Why are some countries richer than others? Why do some economies grow so much faster than others do? Do economies tend to converge to similar levels of per capita income? Or is catching up simply impossible? If modern technology has shown the potential to raise living standards to first-world levels, why is it that the vast majority of the world's population lives in poverty in underdeveloped countries? These questions have been at the heart of development economics since its inception several decades ago and are now at the center of the research agenda of the modern economics of growth.
This book reviews the answers to these questions in the contemporary fields of growth theory and comparative development. It is a sequel to Development Theory and the Economics of Growth published in 2000 with the aim to vindicate the theoretical insights and accumulated empirical knowledge of classical development economics and to integrate them into the mainstream of modern growth economics. The growth and development fields have expanded in the last twelve years in welcome directions that aim to deepen our understanding of the fundamental determinants of comparative development. This new book evaluates these new directions, including developments in endogenous growth theory and economic geography as well as the rise and challenge of the new institutional economics, in the light of the earlier, classical contributions to development theory.
concentration coefﬁcient: World Development Indicators and United Nations University World Institute for Development Economics Research (UNU-WIDER) Industrial employment share: Percent of labor force in industry. Source: International Labor Organization (ILO) and World Development Indicators. Industrial employment share growth rate: Trend growth rate of industrial employment share from 1970 to 2008. Market size: PPP Converted GDP (Chain Series) at 2005 constant prices. Source: Penn World Table
output per worker). Yet, the picture that emerges from the analysis is that the income gaps implied by the Solow model are largely the result of international differences in the position relative to the steady state, rather than of differences in steady state values of output per worker. Poor countries would appear to be poorer than others largely because they are much further away from the steady state than 6 It is worth noting that the assumed value of the proﬁt share (“a”) of one third is far
model, that in each period the end value of capital stock is equal to its initial value plus the ﬂow of savings and investment net of the depreciation of the capital stock. Consider the maximization problem of the representative consumer and let’s derive intuitively the Euler equation governing the behavior of consumption. Suppose that the consumer reduces consumption per worker (c) at time t in a small (formally inﬁnitesimal) amount ˜c, and invests this amount for a short (inﬁnitesimally) period
which growth of income per capita is endogenous due to the presence of constant returns to human capital accumulation. The following example illustrates the mechanics of economic growth under these conditions. Consider an economy with two sectors (Y and H). In sector Y, goods and services are produced with physical and human capital under constant returns to scale: Y ¼ Ka ðçHÞ1Àa ð8Þ where H is the total stock of human capital, ç is the fraction of it devoted to the production of goods, and (ç
(the Abramovitz, 1986, component). Indeed, as Abramovitz argued: “Countries that are technologically backward have a potentiality for generating growth more rapid than that of more advanced countries, provided their social capabilities are sufﬁciently developed to permit successful exploitation of technologies already employed by the technological leaders” (Abramovitz, 1986, p. 225). The second variant of Benhabib and Spiegel takes human capital as the central social capability to which