ENDOGENOUS FLUCTUATIONS IN TWO‐COUNTRY MODELS*

This paper investigates the interlinkage in the business cycles of large‐country economies in a free‐trade equilibrium. We consider a two‐country, two‐good, two‐factor general equilibrium model with Cobb‐Douglas technologies and linear preferences. We also assume decreasing returns to scale in the consumption good sector. We first identify the determinants of each country's global accumulation pattern in autarky equilibrium, and secondly we show how a country's business cycles may spread throughout the world once trade opens. We thus give capital intensity conditions for local and global stability of competitive equilibrium paths.     

Korean Unification: Economic Adjustments under German Assumptions

This paper explores the impact of unification on North and South Korea under the hypothetical scenario that German‐type reunification occurs in the Korean peninsula. Simulation results using a global dynamic general equilibrium model show that with comprehensive market‐oriented reform and opening, the North Korean economy could capitalize on its growth potentials. Unification can reduce the growth rate in South Korea for a certain period following the unification shock due to the transfer of resources out of the South into the North and an increase in risk on the Korea peninsula. Due to the relative sizes in population and per capita gross domestic product of the two Koreas, unification can be more disruptive on North and South Korea, compared to the experience of Germany. The critical factors determining the economic effects of unification are the nature of wage‐adjustment, the size of resource transfers from the South to North, and exchange rate policy.     

Terms of trade volatility,government spending cyclicality,and economic growth

This paper presents estimates of the effects that terms of trade volatility has on real gross domestic product (GDP) per capita growth. Based on 5‐year nonoverlapping panel data comprising 175 countries during 1980 to 2010, the paper finds that terms of trade volatility has significant negative effects on economic growth in countries with procyclical government spending. In countries where government spending is countercyclical, terms of trade volatility has no significant effect on growth. Conditional on the mediating role of government spending cyclicality, the GDP share of domestic credit to the private sector has no significant effect on the relationship between growth and terms of trade volatility.     

China's regional income disparityAn alternative way to think of the sources and causes1

Using data on China's provincial economies for the period 1978–2005, we decomposed the causes and factors that have contributed to inter‐regional per capita income disparity. Variance in capital per employee and variance in capital elasticity are found to be the two main sources of income disparity while the employment–labour force ratio is shown to be an important factor in containing the rise of income disparity. An analysis on inter‐regional factor reallocation effects reveals their relatively small and insignificant contributions to overall growth performance. It is also discovered that capital has in most years flowed in the right direction to pursue higher marginal productivity across provincial economies. Inter‐provincial labour movement, on the other hand, had not displayed significant equilibrating effects until institutional reforms started to allow freer inter‐regional labour mobility in later years. Generally, we conclude that market‐oriented factor mobility has played a crucial role in equalizing factor returns as well as enhancing growth efficiency across regions.     

Information Technology and the World Growth Resurgence

Abstract. This paper analyzes the impact of investment in information technology (IT) on the recent resurgence of world economic growth. We describe the growth of the world economy, seven regions, and 14 major economies during the period 1989–2004. We allocate the growth of world output between input growth and productivity and find, surprisingly, that input growth greatly predominates! Moreover, differences in per capita output levels are explained by differences in per capita input, rather than variations in productivity. The contributions of IT investment have increased in all regions, but especially in industrialized economies and Developing Asia.     

The impact of the credit crisis on poor developing countries: Growth,worker remittances,accumulation and migration

We show that the credit crisis of OECD countries has a negative impact on the growth of the world economy according to an error-correction model including China and Australia. This causes negative growth effects in poor developing countries. The reduced growth has a direct or indirect impact on the convergence issue, aid, remittances, labour force growth, investment and savings, net foreign debt, migration, tax revenues, public expenditure on education and literacy. We estimate dynamic equations of all these variables using dynamic panel data methods for a panel of countries with per capita income below $1200 (2000). The estimated equations are then integrated to a dynamic system of thirteen equations for thirteen variables that allows for highly non-linear baseline simulations for these open economies. Then we analyze the effects of transitional shocks as predicted by the international organizations for the OECD and world growth for 2008 and 2009. Whereas growth rates return to the baseline scenario until 2013 with overshooting for China and Australia, the level of the GDP per capita shows permanent effects, which are positive only for China. In the poor countries, investment, remittances, savings, tax revenues, public expenditure on education, all as a share of GDP as well as literacy and the GDP per capita, are reduced compared to the baseline until 2087 where our analysis ends. Investment, emigration and labour force growth start returning to baseline values between 2013 and 2017. GDP per capita and tax revenues start returning to baseline around 2040. Education variables do not return to baseline without additional effort.     

HUMAN CAPITAL DISTRIBUTION,GROWTH AND TRADE

Distribution differences in human capital matter for a country's growth and trade. While the existing literature considers only the diversity difference in talent distribution, we argue that the kurtosis difference is also an important factor. In a two‐sector equilibrium growth model, where the production function is supermodular for the consumption‐good sector and submodular for the R&D sector, we prove that the diversity effect and kurtosis effect are opposite to each other. A country endowed with more diverse but leptokurtic talent distribution may have lower growth rate and import submodular goods, opposite to the conventional result from considering only the diversity difference.     

Information Technology and the World Economy*

This paper addresses the impact of investment in information technology (IT) on the recent resurgence of world economic growth. We describe the growth of the world economy, seven regions and 14 major economies during the period 1989–2003. We allocate the growth of world output between input growth and productivity and find, surprisingly, that input growth greatly predominates! The contributions of IT investment have increased in all regions, but especially in industrialized economies and Developing Asia. Differences in per capita output are explained by differences in per capita input, rather than by variations in productivity.     

The brain drain and the world distribution of income

Skilled emigration (or brain drain) from developing to developed countries is becoming the dominant pattern of international migration today. Such migration is likely to affect the world distribution of income both directly, through the mobility of people, and indirectly, as the prospect of migration affects the rate of return to education in both the sending and receiving economies. This migration pattern will therefore affect human capital accumulation and fertility decisions in both the sending and receiving economies. This paper analyzes these effects in a dynamic two country model of the world economy where agents in both countries make optimal fertility and human capital decisions. The implications of the analysis for the world distribution of income are derived in the light of recent empirical findings of the brain drain literature. The analysis shows that the current trend towards predominantly skilled emigration from poor to rich countries may in the long run increase inequality in the world distribution of income as relatively poor countries grow large in terms of population. In the short run however, it is possible for world inequality to fall due to rises in GDP per capita in large developing economies with sufficiently low skilled emigration rates.     

PRODUCTIVE GOVERNMENT SPENDING,PATTERNS OF SPECIALIZATION AND ECONOMIC GROWTH IN A SMALL OPEN ECONOMY*

Constructing a two‐sector small open endogenous growth model with productive government spending, this paper examines patterns of specialization and the growth effects of fiscal policy. It is shown in this model that a change in income tax rate can cause a change in an equilibrium pattern of specialization. Because of this property, the relationship between the tax rate and the growth rate yields either a humped shape or a two‐humped shape, depending on world commodity prices. We also show that the growth maximizing tax rate is not necessarily equal to the tax rate that maximizes the level of social welfare.     

Specialization,product development,evolution of the institution of the firm,and economic growth

This paper considers the effects of the division of labor on economic growth and welfare in a general equilibrium environment where changes in individual specialization and product development can proceed simultaneously. The nature of the dynamic equilibrium is shown to depend on the interaction of transaction efficiency, economies of specialization, and economies of complementarity. Where the dynamic equilibrium involves evolution in the division of labor, this will be associated with increased per capita real income and hence economic growth. It is also shown that the emergence of firms is an aspect of the evolution of division of labor if transaction efficiency for a producer good is lower than that for labor used to produce this good.     

Start up costs, limited enforcement, and the hidden economy

This paper examines how much of the difference in the size of the informal sector and in per capita income across countries can be accounted by regulation costs and enforcement of financial contracts. It constructs and solves numerically a general equilibrium model with credit constrained heterogenous agents, occupational choices over formal and informal businesses, financial frictions and a government sector which imposes taxes and regulations on formal firms. The benefit from formalization is better access to outside finance. The quantitative exercises suggest that: (i) regulation costs and not the level of enforcement account for differences in the size of the informal sector between United States and Mediterranean Europe; (ii) for a developing country like Peru, however, contract enforcement and regulation costs are equally important in accounting for the size of the informal sector; and (iii) regulation costs and contract enforcement do not account for most of the income differences observed among countries.     

The Financial Sector and Economic Growth*

The Mankiw–Romer–Weil (1992) augmented Solow–Swan ( Solow 1956 ; Swan 1956 ) model is extended to incorporate the financial sector in this study. Distinguishing between financial capital, physical capital and human capital, the research attempts to identify, in particular, the effects of financial capital on economic growth. The effects of financial sector efficiency on economic growth are also examined. The financial sector augmented model is tested on a cross‐section of 35 economies. Strong support is found for the model.     

Inflationary Financing of Government Expenditure in an Endogenous Growth Model

This paper analyses the role of inflation in economies with endogenous growth and congestion in public services. Optimal policy rules are derived for public services and investment. The other findings are as follows. Monetary policy should maximize economic growth. The more inefficient the public sector is, the higher the growth‐maximizing inflation rate is. If a currency union accepts a new member with an inefficient public sector, this will boost inflation in the union and decrease growth and welfare in all member economies of the union.     

NEOCLASSICAL GROWTH AND THE DISTRIBUTION OF CONSUMPTION

Abstract.  The neoclassical growth model is used to compare an economy with growing per capita income with an economy with stationary per capita income, in terms of equity in distribution of consumption. The economies have the same initial conditions including the same initial wealth distribution. The outcome of the comparison depends on the nature of structural differences between the economies. Even with convergence in wealth distribution in the growing economy, the consumption distribution there may be less equitable and dynasties with least initial levels of wealth may be worse off than dynasties with same initial wealth levels in the stationary economy.     

Global welfare comparisons

Abstract To provide a normative foundation for transfers between different economies, one needs information on their ‘per capita welfare.’ This paper considers various methods for doing this and reaches the following conclusions: (i) Such global welfare comparisons are more demanding than usually thought. (ii) The ranking of methods differs from that of local (over‐time) comparisons, with real comprehensive per capita NNP being the least impractical method. The lesson is that global welfare comparisons should be performed with great care. The comparisons must be made in local real prices calculated according to ‘purchasing‐power‐parity,’ where non‐traded environmental amenities play an important role.     

On the Dynamics of Basic Growth Models: Ratio Stability vs. Convergence and Divergence in State Space

Abstract. We show for a class of basic growth models that convergence in ratios does not imply the pathwise convergence to the corresponding balanced growth path in the state space. We derive conditions on parameters and on the elasticity of the savings function for convergence or divergence and apply our results to the Solow model, an augmented Solow model as well as to an optimal growth model. An implication for the convergence debate is that two economies that differ only in the initial capital stock and converge in per capita terms might diverge to infinity in absolute terms.     

Finite allocation mechanisms: approximate Walrasian versus approximate Direct Revelation

Summary. This paper obtains finite counterparts of previous results that showed the informational efficiency of the Walrasian mechanism among all mechanisms yielding Pareto-optimal individually rational trades in exchange economies while using a continuum of possible messages. In particular, we develop finite counterparts of the superiority, with respect to message-space dimension, of the Walrasian mechanism over Direct Revelation (DR). We measure a finite mechanism's cost by the number of its (equilibrium) messages. Our two main results are as follows: (1) For exchange economies we find that the overall (maximum) error of a (sufficiently fine) approximate Walrasian mechanism is less than the overall error of a not-more-costly approximate DR mechanism whose equilibrium outcomes are trades that are (approximately) Pareto optimal and individually rational; more generally, approximate Walrasian mechanisms are superior, in the same sense, to approximations of any continuum mechanism whose outcomes are Pareto optimal individ ually rational trades and whose message space has higher dimension than that of the Walrasian mechanism. (2) As we increase without limit the dimension of the set of environments (characteristics) defining our class of exchange economies, the extra cost of DR approximations relative to Walrasian approximations, when both achieve the same overall error, also grows without limit. Thus the informational superiority of the Walrasian mechanism emerges again when we approximate it and take the finite number of messages in the approximation as our cost measure. Received: June 16, 2002; revised version: July 22, 2002 RID="*" ID="*" The second author is grateful for support from National Science Foundation grant #IIS-0118600. Correspondence to: T. Marschak     

Non‐Homothetic Multisector Growth Models

Multisector growth (MSG) models are dynamic versions of computable general equilibrium (CGE) models. Non‐homothetic preference (utility) functions are required for the evolution of factor allocations and industrial structures in accordance with consumption expenditure patterns implied by the non‐unitary income elasticities observed in all budget data since Engel in the 1850s. But comparative static general equilibrium solutions and particularly solving the dynamics of MSG models require explicit specifications of all demand and cost (price) functions. On the demand side, the constant differences of elasticity of substitution (CDES) non‐homothetic indirect utility functions and Roy's identity provide the explicit Marshallian demand functions and budget shares. Sectorial constant elasticity of substitution (CES) cost functions and Shephard's lemma provide the explicit relative commodity price functions and the sectorial cost shares and capital–labor ratios. Walrasian equilibria are given by one equation and the multisector dynamics by three differential equations. Benchmark solutions are given for three cost regimes of a 10‐sector MSG model. History patterns of industrial/allocational evolutions are recognized.     

Non-scale endogenous growth effects of subsidies for exporters

We built a general equilibrium endogenous growth model in which final goods are produced either in the relatively skilled-labour intensive exports sector or in the relatively unskilled-labour intensive domestic sector. We show that, by affecting the technological-knowledge bias, subsidies explain the simultaneous rise in the exports sector, the skill wage premium and the economic growth rate. Then, to shed light upon the causal nexus between production-related subsidies and exports, we use a Portuguese longitudinal database (1996–2003) and implement a propensity score matching approach. Empirical results seem to prove the theoretical predictions: subsidies generate the rise in the wage premium of exporters and the increase in the relative size of export sector, even if no impact of subsidies is found in the capacity of transforming domestic firms into new exporters.