Chapter 5 Conditional Convergence and Long- Run Economic Growth

Conditional Convergence in Practice Conditional convergence in capital per capita: Positive relation between capital per capita and output per capita: y=Af(k). Conditional convergence in output per capita:

Recent Empirical Evidence Factors that influence y* should be controlled for:  Saving rate;  Population growth rate;  Order of law and democracy;  Government consumption purchases;  International openness;  Terms of trade;  Investment in education and health;  Inflation rate.

Recent Empirical Evidence

Empirical evidence support conditional convergence. More evidence:  Post WWII European countries and Japan: Low k(0) but high k*.  East Asian economies: Low k(0) but high k*.  Sub-Saharan countries: Low k(0) and low k*.

AK Model Arguments for constant returns in capital:  Human capital;  Infrastructure capital;  Externality generated by private capital. New production function: y=Ak Transition equation:

AK Model

The long-run growth rate of capital per capita is non-zero.  The long-run growth rate of output per capita is non-zero. No convergence  Poor countries cannot catch up with the rich even if the parameters are the same.

Exogenous Technological Progress Technological progress is not explained by the model. The steady-state growth rate:   K/K is constant at the steady-state, Y/K must be constant at the steady-state;   K/K=  Y/Y at the steady-state.   k/k=  y/y at the steady-state.

Exogenous Technological Progress  It follows that:  y/y=  k/k=g/(1-  ) Long-term growth is possible.

Exogenous Technological Progress The transition path

Exogenous Technological Progress Convergence to the same steady-state paths

Exogenous Technological Progress Conditional convergence

Endogenous Growth Theory Why does technological progress occur? Romer (1990):  R&D generates intellectual property rights and monopolistic power;  R&D investments do not exhibit diminishing returns;  Profit-seeking firms push technological progress at a constant rate.

Endogenous Growth Theory Determinants of private rewards (and the rate of technological progress):  R&D costs;  Revenue/cost effects;  Intellectual property rights protection. Explaining the real world.

The Diffusion of Technology The imitation and adaptation of technology by other countries. It helps poor countries to acquire technology. Explaining the real world:  East Asian economies: international trade, education, legal system.