Explaining modern growth

It’s human capital….

Some figures

Last millennium: World population growth = 22-fold Income per capita growth = 13-fold World GDP growth = 300-fold

1000-1820 Income per capita growth = 50% Life expectancy = 24 years

1820 onwards: Income per capita growth = 8-fold Life expectancy now = 66 years

No consensus

Economic growth models have attempted to explain the change in growth rates but no consensus has emerged.

Regularities – modern times Per capita output grows over time and its

growth rate does not tend to diminish

Physical capital per worker grows over time

The shares of labor and physical capital in national income are nearly constant

The growth rate of output per worker differs substantially across countries.

Divergence

Modern economic growth: Divergence in relative productivity levels and living

standards. In the last century: income in the “less” developed countries

have fallen far behind those in “developed” countries.

Developed countries: Strong convergence in per capita incomes within these

countries No obvious acceleration of overall growth rates over time.

What we see in the data

Variability of growth rates over time

Variability of growth rates between countries

Convergence in richer countries

Growth rates over timeAnnual Growth Rates by decade

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990

US Italy Argentina

Growth between countriesGDP per capita

1990 International Geary-Khamis dollars

0

5000

10000

15000

20000

25000

30000

1 1000 1500 1600 1700 1820 1900 1950 2000

Western EuropeWestern OffshootsAsia AfricaWorldLatin America

Convergence clubConvergence: GDP per capita

- Western Europe & Western Offshoots-

0

5,000

10,000

15,000

20,000

25,000

30,000

1870

1876

1882

1888

1894

1900

1906

1912

1918

1924

1930

1936

1942

1948

1954

1960

1966

1972

1978

1984

1990

1996

Denmark

France

Germany

Italy

Sw itzerand

United Kingdom

Australia

Canada

United States

Making a miracle by Lucas

GDP per capita growth (1960-2000)Philippines: 62%South Korea: 1200%

GDP per capita growth, annual rate (1960-2000)Philippines: 1.2%South Korea: 6.6%

East Asian miracle

Features Large exporters of manufactured goods of

increasing sophistication. Highly urbanized and increasingly well-educated. High savings rates. Pro-business governments.

Human capital

The main engine of growth Main source of differences in living standards

among nations. Physical capital plays an essential but

subsidiary role. Expansion of the definition of HK: not only

formal education but on the job.

Lucas’ contribution

Human capital: additional input in production

Labor force can accumulate human capital

Accumulation of human capital involves a sacrifice of current utility

Why isn’t the whole world developed? By Easterlin Spread of economic growth depended on the

diffusion of knowledge of new production techniques.

Acquisition of knowledge closely associated with formal schooling.

The expansion and establishment of formal schooling has depended in large part on political conditions and ideological influences.

Since WWII, modern education systems have been established almost everywhere

=> spread of modern economic growth accelerated.

Slow spread of economic growth Why has technological change been limited

to so few nations? Transfer of technology as an educational

process: Teachers’ side: readily access to new technology. Students’ side: no native differences among

nations in the native intelligence of their populations.

Problem: different incentives for learning.

Growth and schooling

The more schooling, the easier to master new technological knowledge.

Significant increases in formal schooling

=> improvement in the incentive structure.

Primary enrolment per 10,000

0

500

1000

1500

2000

2500

1830 1850 1882 1900 1910

USAUKArgentinaMexicoJapan

Education and growth

More advanced nations educationally developed first.

Cause-effect: effect of education on economic growth or vice-versa?

The political economy of growth

Political roots to mass education Colonialism Monarchical rule Catholic Church

Conclusions and predictions

Expansion of formal schooling: positive shift in the incentive structure

Commitment to mass education: Symptom of major shift in political power Greater social mobility

Once developing countries complete their demographic transition: long-term per capita growth as high as in developed countries.

Easterlin’s contributions

Three aspects of knowledge facilitate growth

new knowledge is complementary to existing knowledge.

knowledge is non-rival.

knowledge is only partially excludable.

Data

Source: World Development Indicators.

Data