Optimal balanced growth in a general multi-sector endogenous growth model with constant returns

I will study a multi-sector endogenous growth model with general constant returns to scale technologies and demonstrate the existence, uniqueness and the saddle-path stability of the balanced growth equilibrium. I will first demonstrate the existence of a balanced growth equilibrium, by showing that the balanced growth rate associated with the balanced growth equilibrium is solely determined by solving a Frobenius root problem of the price equations derived from the Euler equations and the property of the nonsubstitution theorem. Then I will show the saddle-path stability of the balanced growth equilibrium without any capital intensity conditions, which is a generalized property proved in the two-sector endogenous growth models by de Guevara et al. (J Econ Dyn Control 21, 115–143, 1997), Bond et al. (J Econ Theory 68, 149–173 1996) and Mino (Int Eco Rev 37, 227–251 1996). The theorem clearly implies that the balanced growth equilibrium has a transition path in the neighborhood of the balanced growth equilibrium. The paper was presented at the conferences “Irregular Growth: Beyond Balanced Growth” held on June 19–21, 2003 in Paris and “Economic Growth and Distribution: On the Nature and Causes of the Wealth of Nations” held on June 16–18, 2004 in Lucca, Italy. From the discussion with Alain Venditti at CNRS-GREQAM, Gerhard Sorger at University of Vienna and the conference participants, I have been benefited much by writing this paper. Especially Alain Venditte had given me a chance to take a look at his unpublished paper titled ” Indeterminacy and the Role of Factor Substitutability” jointly written with Kazuo Nishimura at Kyoto University and published in Macroeconomic Dynamics, Vol. 8. The author also would like to thank an anonymous referee for useful suggestions.     

The approach to transforming the traditional agricultural economy: a research on the multiple paths of poverty alleviation and transformation in rural China

Transforming a traditional agricultural economy into a modern economy is one of the main themes in economic development. Through theoretical and empirical analysis, this paper finds out that the key to transformation is to raise the economic value of people, to improve human capital investment and to match the stocks of physical and human capital. China’s rural economy is on the edge of economic take-off, and different zones may pursue different paths for transformation. The source of rural poverty is not the scarcity of income or consumption, but the deficiency of education, social security, medical care and economic opportunity, which we define as “capability poverty”. __________ Translated from The Journal of World Economy (世界经济), 2005,(2) (in Chinese)     

Social capital and social economics

The “discovery” of social capital in the early 1990s led to an upsurge of research into the economic impact of social cohesion and governmental effectiveness. This paper outlines key developments in the social capital literature over the past 13 years. It then examines theory and evidence of the links between social cohesion, quality of governance, economic performance and human welfare. The literature indicates that social capital makes a measurable contribution to economic development and overall wellbeing, particularly in developing countries. Partly in response to this emerging body of evidence, there has been increased interest in the application of community development principles to economic development initiatives. This paper argues that the advent of social capital theory represents a partial convergence between social economics and mainstream economics, and signifies an increased acceptance that economic activity cannot be meaningfully “disembedded” from social and political context.     

Economic growth,Koestler cycles and the lock chamber effect

This paper develops a suggestion contained in a 1940 novel by A. Koestler. A dynamic model is built to analyze the relationship among economic growth, complexity, “maturity” of the population, and propensity to contribute to the stock of a public good. Economic growth is represented as a process that exogenously generates technical innovations: these increase the division of labor and make the social structure increasingly complex. Information about the new structure can only be gathered at a cost, so that in general, knowledge of the “true” structure lags behind the changes of the structure itself. Economic growth then causes cycles in the individuals’ perception of their best interests. Accessibility to information influences the length and the amplitude of such cycles.     

Economic policy making in evolutionary perspective

Economic policy making is discussed from three different angles: the political economy of actual policy making (“what policy does do”), the analysis of policy instruments for given ends (“what policy could do”), and the debate on policy goals and their legitimization (“what policy ought to do”). Center stage in the evolutionary perspective is new, positive and normative knowledge which is unfolding during the policy making process and in its aftermath. It is argued that this implies regularities and constraints which extend and modify the comparative-static interpretations of public choice theory, economic policy making theory, and social philosophy. RID="*" ID="*" The author should like to thank three anonymous referees of this journal and the editor for helpful comments on an earlier version of the paper.     

What is the Best Distribution for Pollution Abatement Efforts? Information for Optimizing the WFD Programs of Measures

The Water Framework Directive (WFD) has mobilized economic theory in order to encourage E.U. Member States to reach desirable environmental water pollution levels by conciliating economic and ecological interests. For this purpose, a stringent standard (“good status”) has been set. Nevertheless, it will be possible to relax this standard if it appears that total abatement costs required for reaching this “good status” exceed expected environmental benefits. This ambitious policy updates the issue of the abatement costs and environmental benefits assessment. Concerning the costs, a full discrimination of the abatement effort minimizes the total cost when the impact of polluters changes spatially, while a uniform effort can reach a pollution target in flexible ways. In this case, the increase of the degree of discrimination of the abatement effort is required only if it generates significant positive economies. Our theoretical and empirical results have shown that the discrimination advantage becomes insignificant for either very demanding or very little demanding ecological standards and varies according to the polluters’ profile. In the case of “intermediate” standards, efficiency gains become negligible with a restricted number of effort “levels”.     

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.”     

FDI, domestic capital and economic growth: Evidence from panel data at China’s provincial level

Based on panel data at the provincial level in China, this paper found that direct effects foreign direct investment (FDI) had on economic growth were of insignificance. However, through improving technical efficiency and “crowding” in domestic investment, FDI produced positive effects on China’s economy. The state sector still played a major part in the total fixed investment, therefore, direct effects on growth were significant. Although private sector was increasingly important for the whole economy, it had no direct influences on economic growth. Meanwhile, neither the state sector nor private sector made contribution to the improvement on technical efficiency. __________ Translated from Shijie Jingji Wenhui 世界经济文汇 (World Economic Papers), 2006, (4): 27–43     

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.     

Economics,Democracy, and the Distribution of Capital Ownership

This article holds that widespread, practical access to capital acquisition is essential for sustainable widespread economic prosperity and democracy. The founders of the U.S.A. agreed that sustainable democracy required widespread ownership of land to provide a viable earning capacity sufficient to support robust participation in democratic government. The importance of widespread land ownership to individual prosperity and sustainable democracy was supported not only by the prevailing philosophical views of property, it was also apparent to the common man and woman. Compared to Europe, America offered widespread access to land ownership, higher wages, better work conditions, cheaper staples and greater individual freedom, equal opportunity, prosperity, and political participation. This conviction that widespread access to ownership is a necessary condition for widespread prosperity and sustainable democracy continued throughout most of the nineteenth century, but today public discourse reveals virtually no trace of this once universally held opinion. This article suggests that the disappearance of this conviction can be traced to an erroneous view shaped by neoclassical economics and Keynesian economics. According to this view, (1) the disappearance of the American frontier and industrialization made the goal of widespread capital ownership either impractical or of little or no economic significance and (2) by way of technological advance, sufficient earning capacity and consumer demand to promote growth and sustain democracy can be achieved, without widespread ownership, primarily through jobs and welfare. Although differing in many respects, both mainstream schools, along with Adam Smith’s classical economics, share one common but unstated economic assumption: the broader distribution of capital acquisition (in itself) has no fundamental relationship to the fuller employment of people and capital, the broader distribution of greater individual earning capacity, and growth. Contemporary thinking, shaped by these economic schools, also tacitly assumes that widespread capital ownership is not essential for the sustainable individual earning capacity needed to support robust democracy. This erroneous “ownership-neutrality assumption” (1) contradicts both the views of America’s founders and the colonial experience, and (2) provides theoretical justification for structuring capital markets and capital acquisition transactions to unfairly and dysfunctionally favor existing owners at the expense of broader ownership distribution, more widely shared prosperity, greater efficiency, ecologically friendly growth, and a vital democracy. America’s conscientious founders would be shocked by the diminished importance of the distribution of ownership in the mainstream analysis of prices, efficiency, production, growth, and democracy. Rather than enhancing democracy, they would view the “ownership-neutrality assumption” of mainstream economics as contributing to its deterioration and corruption. They would openly search for economic analysis built on an alternate assumption more consistent with their understanding of the requisite conditions for sustainable democracy. This article advances an economic analysis that suspends the ownership-neutrality assumption, replaces it with a “broader-ownership-growth assumption,” and suggests a voluntary market strategy for substantially broadening capital ownership, enhancing individual earning capacity, and providing the widespread economic prosperity needed for robust democracy.     

Sunspot Fluctuations in Two-sector Economies with Heterogeneous Agents

We study a two-sector model with heterogeneous agents and borrowing constraint on labor income. We show that the relative capital intensity difference across sectors is crucial for the conditions required to get indeterminacy and endogenous fluctuations. The main result shows that when the consumption good is sufficiently capital intensive, local indeterminacy arises while the elasticities of capital–labor substitution in both sectors are slightly greater than unity and the elasticity of the offer curve is low enough. Locally indeterminate equilibria are thus compatible with a low elasticity of intertemporal substitution in consumption and a low elasticity of the labor supply. As recently shown in empirical analysis, these conditions appear to be in accordance with macroeconomic evidences. We would like to thank R. Becker, J.P. Drugeon and an anonymous referee for useful comments and suggestions. The current version also benefited from a presentation at the conference “Public Economic Theory 04”, Beijing, August 2004.     

Environmental tax policy in a model of growth cycles

Summary. The purpose of this paper is to consider environmental taxation which would control emissions of firms in a model of growth cycles. In the model presented below, the economy may experience two phases of growth and environmental quality: “the no-innovation growth regime” and “the innovation-led growth regime”. Aggregate capital and environmental quality remain constant in the no-innovation growth regime, while they perpetually increase in the innovation-led growth regime. The paper shows that the tax plays a key role in determining whether the economy stably converges to one of the two regimes or fluctuates permanently between them. It also shows that there is a critical level of the tax and that the economy obtains higher growth rates of capital and environmental quality by raising (or reducing) the tax if the initial tax is below (or above) the critical level. Received: April 2, 2001; revised version: March 21, 2002 RID="*" ID="*" This research reported here was conducted within the research project “Project on Intergenerational Equity” at Institute of Economic Research, Hitotsubashi University. I am deeply grateful to an anonymous referee for his or her insightful comments, which greatly improved the paper. I also thank Hiroshi Honda, Yasuo Maeda, Yuji Nakayama, and participants in workshops at Hitotsubashi University, Kyoto University, Nagoya University, Osaka University, University of Tsukuba, Yokohama National University, and University of Tokyo for their valuable comments and suggestions. Any remaining errors are mine.     

增长失衡与政府责任:基于社会性支出角度的分析

There exists a kind of growth imbalance in China’s current development process, which is essentially characterized by the imbalance between the nation’s wealth and the people’s welfare. This paper points out that growth imbalance results mostly from insufficient government social spending on people’s welfare. Consequently, the government should shoulder the basic responsibility for the provision of education, health and social security, quicken the transformation of government expenditure structure and increase the share of social spending, in order to improve the people’s welfare and achieve the rebalancing of growth. The increase in social spending can also promote the accumulation of human capital, which will help the conversion of economic growth pattern and the realization of sustainable and healthy economic development. Translated from Jingji Yanjiu 经济研究 (Economic Research Journal), 2006, (10): 4–17     

Constitutional Foundations of Economic Freedom: A Time-Series Cross-Section Analysis

Using time-series cross-section analysis, we provide additional empirical validation for the principal-agent model developed by Adserà et al. (2003). In our innovation, efficient economic policy is proxied by “economic freedom” from the Fraser Institute database and constitutional “political institutions” are proxied by variables from the Database of Political Institutions. Our results suggest that the more credible the threat of removal from office, the more government officials will pursue efficient economic policies. The authors are grateful to Alan Hamlin and an anonymous referee for their highly valuable input to the development of this paper. Tel.: +1-604-291-4167     

What you export matters

When local cost discovery generates knowledge spillovers, specialization patterns become partly indeterminate and the mix of goods that a country produces may have important implications for economic growth. We demonstrate this proposition formally and adduce some empirical support for it. We construct an index of the “income level of a country’s exports,” document its properties, and show that it predicts subsequent economic growth.     

Social Change versus Transition: The Political Economy of Institutions and Transitional Economies

The “transition” process in Eastern Europe and the former Soviet Union (EEFSU) was one of the most dramatic non-marginal adjustments in economic systems ever experienced. During the transition process, elements of centrally administered socialism and embryonic market relations co-existed. This made traditional economic theory irrelevant. The purpose of this paper is to discover policy concerns and outcomes that orthodox “transition” literature ignores. Stanfield’s contribution to the economic literature, a cultural-holistic approach of radical institutionalism, makes it possible to understand the “transition” process from a new and more enlightened perspective. Stanfield provides a better understanding of the complexities involved, since the nature of change in the EEFSU is social and ever-lasting, not an end-state in the form of “transition”. Students of transition and of international development would benefit from this novel approach, which dismisses “transition” and substitutes “social change”, as the proper designation and manifestation of what actually took place in EEFSU.     

Investment behavior and investment aggregates during China’s economic transition

In view of the peculiar patterns of investment ownership structure and special investment phenomena in China, the paper sets up formal dynamic investment behavioral models for state-owned enterprises (SOEs) and non-state-owned enterprises (NSOEs) under the background of full-dimensional and gradual economic transition. The models are based on two key points: entrepreneurs of SOEs have dual and changing operational objectives as the result of property-rights reformation; and dual-track approach of price liberalization process and reformation of financing system alters the actual user costs of capital goods. Analytical solutions are provided and it is shown that there exists a normative and unified explanation of the peculiar phenomena such as “investment deficiency” of NSOEs, “investment thirst”, “investment inefficiency,” and dual shrinkage of SOEs in both investment and output. Our research also sheds lights on evaluation of preceding reforms, understanding of SOEs’ losses and bad bank loans. The paper partially justifies the property-rights-oriented reformation of SOEs. __________ Translated from the China Economic Quarterly (经恎学季刊),2005, (7) (in Chinese)     

FDI and growth in transition economies: Does the mode of transition make a difference?

The countries of Central and Eastern Europe are a unique group of countries. In the process of transformation to market economies, some of them adopted the “shock therapy” while others the “gradualism” mode. Foreign Direct Investment (FDI) plays an important role in economic growth through the addition of physical capital, technological know-how, management skill and marketing network. This paper empirically demonstrates that the mode of transformation definitely affects the effectiveness of FDI in promoting growth. (JEL: P3, P33)     

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.     

Does Social Capital Affect Entrepreneurial Intentions?

Nowadays, the scientific community assigns both social context and entrepreneurs’ behavior as a central role in the growth and development of the world economy. However, the relationships between these two factors have not been sufficiently studied in business and economics. Therefore, in this paper, the specific influence of the new socioeconomic factor of social capital on the formation of entrepreneurial intentions will be analyzed. To test the theoretical hypotheses, an empirical study will be carried out using the Partial Least Squares (PLS) technique with data from a sample of young undergraduate students in the last year of their degree. This population has been selected because these individuals, according to different studies, show a higher propensity towards firm creation. A previous version of this paper was presented to the 61st International Atlantic Economic Conference held in Berlin (15–19, March 2006).