Economic Growth and Development: Towards a Catchup Model

We develop a model for economic growth applicable to a group of countries, constituting around half of the gross global production, that have been consistently “catching up” to the US since 1960 or so. This group can be termed “the convergence club.” The model has a theoretical basis developed in other publications (cited), but the present work is essentially empirical. It demonstrates that there is a very strong correlation between “catchup” growth, with respect to the US, and an energy proxy (EP). The energy proxy that works best is a linear combination of domestic electric power consumption petroleum (oil) consumption, per capita, compared to the US levels. The results presented here do not constitute a theory of growth, but they are consistent with theory presented elsewhere. On a practical level, we argue that consistent “catchup” trends over the past 40 years can safely be extrapolated for a few more decades for scenario construction purposes. We also believe that the observed catchup trends can be regarded as “potential” mid-term or long-term growth trajectories for transition economies and others that have recently been adversely affected by conflict or mismanagement.     

Commitment,first-mover-, and second-mover advantage

We identify circumstances under which a firm with a first-mover advantage may get leapfrogged by a follower. At the market stage we assume a Stackelberg structure, i.e. the leader commits to a quantity and the follower reacts to it. We allow the owners of both firms to select the internal organization and the production technology before quantities are set. That is, leader and follower can additionally use two commitment strategies alternatively or in combination: investing in R&D and delegating quantity decisions to managers. Despite the symmetry of options for the two firms, we find that there is a unique equilibrium in which both firms invest in process R&D, only the follower delegates, and the follower can overcome the first-mover advantage of the quantity leader and obtain a higher profit than the leader. Our analysis reveals that there are some important differences between the two commitment devices “cost-reducing R&Dt” and “delegation to managers”.      

The Influence of Socioeconomic Factors on Economic Growth

The main goal of this paper is to analyse the relationship between social capital and economic growth taking into account the role of fiscal policy from theoretical and empirical points of view. To achieve this goal, “Human Capital and Public Capital Effects on Economic Growth” is focused on the effects of two traditional factors: human capital and public capital effects on economic growth. “Social Capital Effects on Economic Growth” considers qualitative variables introducing some socioeconomic effects on economic growth process analysis. In this case, social capital the main variable will be considered. “Empirical Analysis,” an empirical analysis is developed considering the case of European countries prior to the EU enlargement. Finally, in Conclusions,” the main conclusions will be resumed.      

On the growth and welfare effects of monopolistic distortions

The most fundamental proposition about growth and competition is that there is a tradeoff between static welfare and long-term growth. This paper reconsiders this basic proposition in an expanding variety endogenous growth model with competitive markets for “old” innovative products and for a traditional good. We shed light on some implications of monopolistic distortions which tend to be ignored by standard models. First, no growth may be better than some growth, since modest positive growth potentially requires sizeable static welfare losses. Second, the economy may converge to a steady state with zero growth, even though a locally saddle-point stable steady state with positive growth exists if the initial share of “cheap” competitive markets is sufficiently high, as this implies a relatively low demand for “expensive” innovative goods. Third, such a “no-growth trap” may happen in a world economy made up of several countries engaged in free trade with each other. The policy implications are that growth-enhancing policies may be misguided and that quick deregulation as well as quick trade liberalization can lead to stagnation in the long term.      

A resource-based view of Schumpeterian economic dynamics

This paper seeks to offer a theoretical platform where the modern “resource-based view” of the firm might meet with evolutionary economics and the study of entrepreneurship, and with the economics of industrial organization. It does so by proposing the concept of the “resource economy” within which productive resources are produced and exchanged between firms. This is presented as the dual of the mainstream goods and services economy – where the “resource economy” captures the dynamic capital structure of the economy. The paper is concerned to bring out the distinctive principles governing resource dynamics in the resource economy, capturing competitive dynamics in such categories as resource creation, replication, propagation, exchange and leverage; evolutionary dynamics in terms of resource variation, selection and retention; entrepreneurial dynamics in terms of resource recombination and resource imitation, transfer and substitution; and industrial organizational dynamics in terms of resource configuration, resource complementarities and resource trajectories.     

The Impact of the Welfare State and Social Policy on the Working Population: The Recent British Experience

This paper focuses on financing the welfare state expenditures in the UK. It offers a comprehensive analysis of social expenditures and taxes paid by the working population families, and an estimation of the net benefits received by them. While the subsequent analysis of the welfare state and its development primarily concentrates on the British experience, it has a broader application to other OECD countries. The UK as the most egalitarian “liberal market economy,” offers an interesting case for the study of the interaction between the welfare state expansion and economic growth. In terms of her capitalist economic structure, (interaction between market and economy) she is relatively closer to the USA and other Angelo-Saxon (liberal market) economies. In terms of her level of social expenditures, she is much closer to the European “social market economies” than the USA and other more egalitarian “liberal market economies.”     

Economic Growth and (Re-)Distributive Policies in a Non-cooperative World

Many models show that redistribution is bad for growth. This paper argues that in a non-cooperative world optimizing, redistributing (“left-wing”) governments mimic non-redistributing (“right-wing”) policies for fear of capital loss if capital markets become highly integrated and the countries are technologically similar. “Left-right” competition leads to more redistribution and lower GDP growth than “left-left” competition. Efficiency differences allow for higher GDP growth and more redistribution than one's opponent. Irrespective of efficiency differences, however, “left-wing” governments have higher GDP growth when competing with other “left-wing” governments. The results may explain why one observes a positive correlation between redistribution and growth across countries, and why capital inflows and current account deficits may be good for relatively high growth.     

Identifying the dynamic home market effect in a three-country model

The home market effect (HME) is a distinguishing feature of the “new” trade theory. It is customarily defined as disproportionate positive causation from expenditure to production. Recently it has been argued that this dynamic definition of the HME is problematic in a multi-country framework, because it neglects third country effects. In this paper, we show that more than one exogenous parameter change is needed to overturn the dynamic HME. An isolated increase in the size of the home country will unambiguously lead to an over-proportional domestic industry expansion. We then illustrate with some specific scenario what type of third country effects can “swamp” the HME.      

Sensitivity analysis of job-training effects on reemployment for Korean women

The main difficulty in treatment effect analysis with matching is accounting for unobserved differences (i.e., selection problem) between the treatment and control groups, because matching assumes no such differences. The traditional way to tackle the difficulty has been “control function” approaches with selection correction terms. This paper examines relatively new approaches: sensitivity analyses—sensitivity to unobservables—in Rosenbaum (Biometrika 74:13–26, 1987), Gastwirth et al. (Biometrika 85:907–920, 1998) and Lee (J Appl Econ 19:323–337, 2004). These sensitivity analyses are applied to the data used in Lee and Lee (J Appl Econ 20:549–562, 2005) to see how the assumption of no unobserved difference in matching affects the findings in Lee and Lee, to compare how the different sensitivity analyses perform, and to relate the “sensitivity parameters” in the different sensitivity analyses to one another. We find (i) the conclusions in Lee and Lee are weakened in the sense that only the “strong” ones survive, (ii) the sensitivity analysis in Rosenbaum (Biometrika 74:13–26, 1987) is too conservative (and inferior to Gastwirth et al.’s), and (iii) Gastwirth et al.’s and Lee’s approaches agree on some findings to be insensitive, but the two approaches also disagree on some other findings. The authors are grateful to the Editor and anonymous reviewers for their constructive and helpful comments.     

"生育效应"或"支持效应"?——子女数量与父母健康

Using the Chinese Longitudinal Healthy Longevity Survey, we try to identify the effect that quantity of children has on the health statuses of elderly parents. After dealing with a potential endogeneity problem using instrumental variable estimation, we find no significant long-arm “fertility effect,” but do find a positive “supporting effect” of the quantity of children on parental health. That is, giving birth to more children has no significant effect, but the availability of additional children in old age has a beneficial effect on health during that time. Further investigation yields a more significant effect on mothers than on fathers, and a more pronounced effect on cognitive health than on physical health, as measured by occurrences of hypertension.     

Schumpeter and the revival of evolutionary economics: an appraisal of the literature

During the last two decades we have seen a revival of interest in the works of Joseph Schumpeter and “evolutionary” ideas in economics more generally. A professional society honouring Schumpeter's name has been founded, and linked to it we have had for more than fifteen years now a professional journal devoted to this stream of thought. However, it has been argued that, despite these developments, the link between Schumpeter's own work and the more recent contributions to evolutionary economics is in fact rather weak. This paper considers this claim. Based on an analysis of Schumpeter's contribution to economics the paper presents an overview and assessment of the more recent literature in this area. It is argued that although there are important differences between Schumpeter's work and some of the more recent contributions, there nevertheless remains a strong common core that clearly distinguishes the evolutionary stream from other approaches (such as, for instance, so-called “new growth theory”). RID="*" ID="*" Many people have contributed to this paper in various ways. Jon Hekland at the Norwegian Research Council started it all by asking me to make an overview of the contribution from “evolutionary economics” to our understanding of contemporary economies. Several people helped me on the way by supplying written material, comments and suggestions, and I am indebted to all of them. Brian Arthur, Stan Metcalfe, Keith Pavitt, Erik Reinert, Paolo Saviotti and Bart Verspagen may be particularly mentioned. A preliminary version was presented at the conference “Industrial R&D and Innovation Policy Learning – Evolutionary Perspectives and New Methods for Impact Assessment” organised by the Norwegian Research Council (“SAKI”) at Leangkollen, Asker, April 18–19.2002. I wish to thank the discussant, Tor Jakob Klette, and the participants at the conference for useful feedback. Moreover I have benefited from comments and suggestions from the editors and referees of this journal. The final responsibility is mine, however. Economic support from the Norwegian Research Council (“SAKI”) is gratefully acknowledged.     

Pollution Abatement and Productivity Growth: Evidence from Germany,Japan, the Netherlands,and the United States

The passage of environmental legislation was accompanied by concerns about its potential detrimental effect on productivity. We assume inputs can be assigned to either abatement activities or good output production. This allows us to specify regulated and unregulated production frontiers to determine the association between pollution abatement and productivity growth. We then employ our “assigned input” model to determine the association between productivity and abatement activities for manufacturing industries in Germany, Japan, the Netherlands and the United States.     

Different employment of capitals in vertically integrated sectors: Smith after the Austrians

The Austrian notion of stages of production and the related principle of the greater productivity of roundabout methods, plus the neo-Austrian notions of vertical integration and vertical division of labour, are utilized in this paper in an attempt to reconstruct Smith’s convoluted arguments on the different employment of capitals in chapter 5, book 2, of the Wealth of Nations. Smith’s arguments are first clarified in the light of the two concepts of capital (money capital and productive capital), of the two aspects of productive labour (living labour and dead labour) and of the two viewpoints (of an individual and of society) on which Smith’s theory is based. The results of this clarification are then used to prove that, independently of Smith’s own words but in consistency with his theory, the notions of “quantity” and “productivity” of productive labour have a “vertical”, as well as a “horizontal”, dimension so that they fit both the input–output scheme and the Austrian framework of time-consuming methods of production.     

Over- and under-investment according to different benchmarks

In a two-stage oligopoly, with investment in the first stage and quantity or price competition in the second stage, there is a “Common Wisdom” Theorem which states that we find over-investment if the goods are substitutes and competition is in strategic substitutes, or if goods are complements and competition is in strategic complements, and that we find under-investment if we have complements and strategic substitutes or substitutes and strategic complements. The existing literature, however, lacks a proof of this theorem and, in particular, it lacks a systematic comparison of the different benchmarks for over- and under-investment. A “naive” benchmark is the cost efficient investment with respect to the subgame perfect (closed loop) equilibrium quantities. Alternative benchmarks (which are more often proposed) are the open loop equilibrium investment or the welfare maximizing investment. The chosen benchmark is critical because the Common Wisdom Theorem applies (under certain conventional conditions) only for the naive benchmark. The other two benchmarks give rise to subcases.     

Environment,Directed Technical Change and Economic Policy

We study the effects of an economic policy in an endogenous growth general equilibrium framework where production of consumption goods requires two resource inputs: a polluting non-renewable resource and a non-polluting labour resource. The use of the former contributes to the accumulation of pollution in the atmosphere, which affects welfare. There is a specific research sector associated with each of those resources. We provide a full welfare analysis, and we describe the equilibrium paths in a decentralized economy. We go on to study the effects of three associated economic policy tools: a tax on the polluting resource, and two research subsidies. We show that the optimal environmental policy has two main effects; it delays the extraction of the resource and with it the level of polluting emissions and it reallocates research efforts, decreasing the amount put into “grey” research to the benefit of “green” research. We also show that the environmental policy is grey-biased in the short-term, and green-biased in the long-term. Finally, we compute the optimal values for these tools.      

The world elasticity of labor substitution across education levels

We estimate the world elasticity of substitution between labor types on a very well-known data set. Using enrollment ratios and government expenditures on education as instruments, the plausible elasticities varying from 2.00 to 3.21 for the “college-completed” definition suggests imperfect substitution between skilled and unskilled labor. Considerably higher values are found for the “secondary” and “primary-completed” definitions. Overall, the higher the threshold for defining skilled labor, the lower the elasticity and less likely is the switch between types of labor. These findings complement micro-evidence and support stronger links between productivity and output for the “college educated” labor definition.     

The underdevelopment of service industry in china: An empirical study of cities in Yangtze River Delta

The service industry in China is underdeveloped, in comparison with not only the past experience of developed countries at the similar level of GDP per capita, but also other similar developing countries at present. We define this deviation of China’s service industry from the development trend in other countries as the “development deviation puzzle,” and propose a conceptual framework based on the “manufacturing cost disease” hypothesis to understand the reasons behind this puzzle. We test our hypothesis using the data from the urban cluster in Yangtze River Delta. The results indicate that labor productivity growth in service industry is driven by capital investment and the “development deviation puzzle” is indeed rooted in the “manufacturing cost disease.” Our analysis suggests that, to correct the underdevelopment of service industry, the strategy of investment-driven industrialization and urbanization must be changed. Expansion of producer services is important in increasing the intensities of human capital and foreign investment.     

Is there a Laffer curve between aggregate output and public sector employment?

This paper develops a model of the relationship between public sector employment, total output and aggregate real demand in market prices, where public employment has a positive productivity effect on private output. Public employment crowds out private employment and output because its increase induces higher wages and taxes. The valuation of government output is also taken into account. While public employment affects total output and aggregate real demand in an a priori ambiguous way, numerical simulations suggest that the relationship may be nonlinear; positive, when public sector is “small” and negative, when it is “large”. Using the annual data from 22 OECD countries over the period 1960–1996 and estimating and testing for threshold models and more commonly used specifications with multiplicative interaction terms give support to this nonlinearity hypothesis between public employment and private sector output. First version received: October 1996/Final version received: April 2000     

The Arrow-Debreu model: How math can hide a fatal conceptual error

I argue that math, like love, can cover a multitude of sins, and I use the neoclassical object of adoration, the Arrow-Debreu model, as the case in point. It is commonplace that the Arrow-Debreu (AD) model of general equilibrium does not describe the real world, but it is equally commonplace to accept it as representing the pure logic of the competitive capitalist economy in an idealized world free of transactions costs. I show that the AD model fails even as an idealized model; it actually mistakes the logic of pure capitalism. Unlike McKenzie’s model of idealized general equilibrium under constant returns to scale, Arrow and Debreu claim to have shown the existence of competitive equilibrium under decreasing returns to scale and positive pure profits. The AD model (again unlike the McKinzie model) needs to assign the profits to individuals and this is done using the notion of “ownership of the production set.” But this notion suffers from a fatal ambiguity. If Arrow and Debreu interpret it to mean “ownership of a corporation” then a simple argument in the form “labor can hire capital or capital can hire labor” defeats the alleged necessity of assigning residual claimancy to the corporation. A given corporation may or may not end up exploiting a set of production opportunities (represented by a production set) depending on whether it hires in labor and undertakes production or hires out its capital to others (all by assumption at the parametrically given prices). In the latter case, residual claimancy is elsewhere. There is no such property right as “ownership of a production set” in a private property market economy. The legal party which purchases or already owns all the inputs used up in production has the defensible legal claim on the outputs: there is no need to also “purchase the production set.” At any set of prices that allow positive pure profits, anyone in the idealized AD model could bid up the price of the inputs and thus try to reap a smaller but still positive profit. Therefore,pace Arrow and Debreu, there could be no equilibrium with positive pure profits. In the Appendix, the property rights fallacy that afflicts the AD model is shown to also afflict orthodox capital theory and corporate finance theory. World Bank The findings, interpretations and conclusions expressed in this paper are entirely those of the author and should not be attributed in any manner to the World Bank, to its affiliated organizations or to the members of its Board of Directors or the countries they represent.     

Emerging from the Hobbesian jungle: Might takes and makes rights

The conflict over scarce resources in the Hobbesian jungle may be avoided if rules of obligation delineating property rights develop along with institutions of governance. One possibility is a “duress contract” as the strongest individual threatens others who agree to enslavement. Thus, “might takes rights.” Alternatively, individuals with similar capacities for violence may enter a “consent contract” establishing rules of obligation and then voluntarily participating in governance. They will not agree to a rights assignment that produces less wealth than they expect through violence, however, so “might makes rights.” A might-takes-and-makes-rights analysis is outlined to explain the continuum of legal institutions and property rights allocations that can evolve between these two extremes of duress and consent. Increasingly finely delineated private property rights tend to evolve under institutions produced by consent contracts, while common pool problems tend to arise near the duress contract end of the spectrum. This paper draws from a larger project on “The Evolution of Law” which has been supported by the Earhart Foundation. Discussions with and comments by Randy Holcombe, Kevin Reffit, and two anonymous referees led to significant improvements in the development and presentation of the arguments, as did discussant comments on a related paper made by Douglas Ginsburg and participants in the Friedrich August von Hayek Symposium on “Competition Among Institutions” in Freiburg, Germany, June 1–4, 1994, sponsored by the International Institute at George Mason University and the Walter Eucken Institute, Freiburg.