The Forces of Economic Growth?
I have pretty much finished my exams now and apart from the obvious resting and enjoying the nice weather in Copenhagen I have also found the section in the library where the economic growth literature is. I know ... completely and utterly nerdy but I just do not have the time to dig into this stuff during my courses. As such, I found one the most recent (I think) contributions to endogenous growth theory in the book The Forces of Economic Growth by Alfred Greiner, Willi Semmler, & Gang Gong; here is the general review ...
In economics, the emergence of New Growth Theory in recent decades has directed attention to an old and important problem: what are the forces of economic growth and how can public policy enhance them? This book examines major forces of growth--including spillover effects and externalities, education and formation of human capital, knowledge creation through deliberate research efforts, and public infrastructure investment. Unique in emphasizing the importance of different forces for particular stages of development, it offers wide-ranging policy implications in the process.
The authors critically examine recently developed endogenous growth models, study the dynamic implications of modified models, and test the models empirically with modern time series methods that avoid the perils of heterogeneity in cross-country studies. Their empirical analyses, undertaken with newly constructed time series data for the United States and some core countries of the Euro zone, show that models containing scale effects, such as the R&D model and the human capital model, are compatible with time series evidence only after considerable modifications and nonlinearities are introduced. They also explore the relationship between growth and inequality, with particular focus on technological change and income disparity. The Forces of Economic Growth represents a comprehensive and up-to-date empirical time series perspective on the New Growth Theory.
Quite exceptionally, for me at least, I have read most of the thing and I like it a lot. Perhaps the most important part of this study is that is exposes long term growth rates to non-linearities on the basis of its time series perspective (see also Charles I. Jones, 1995). A lot of econometric mumbo-jumbo is of course made of this but the main message remains clear. Different stages of growth demand different growth models with different input variables to account for the lion's share of growth. Based on the authors' models which are strictly applied through various 'single variable' frameworks it remains somewhat an open question I think whether in fact there is not a residual ticking outside the model somewhere, but that is not really the point I think. The point is that heterogeneity not only exists between countries which would merit a cross-country perspective but crucially within countries as well and over time. This I think is a very important assumption and one compatible with the path dependancy view taking by the application of the demographic transition to economic growth. Going into specifics the study does not however go that far but notes in stead that in earlier stages of growth learning from other, externalities and increasing returns account best for growth. At later stages, education and investment in human capital are important but it should be noted that the returns to investment in human capital and education tend to level off over time (i.e. decreasing returns to scale and/or non-linearities). In an even later stage of economic growth the authors emphasize that keeping the majority of the working population in high valued added sectors as well as spending on R&D matter most for growth. This is of course highly stylised but the main point remains for the authors and as such we see that the weapons of choice in terms of the Uzawa-Lucas model and the Romer model respectively need to be tweaked to incorporate non-linearities contrary to the traditional endogenous growth perception of constant returns to scale.
Whether or not population development has something to say here is of course far from certain. However, I do think that the general perspective of the authors and the focus on non-linearities in long run economic growth is fruitful when thinking of the potential effects of demographic developments on growth. Especially, there seems to be food for thought for those countries which are experiencing unprecedented processes of ageing and thus structural changes in the economy but also perhaps for countries which are experiencing prolonged structural shocks as a result of immigration. The pass through of the demographic dividend could be perhaps be noted here as well.
In the end whether you buy my hypothesis or not, I think that this is valuable contribution to the general economic growth discourse at least from my seat. The inclusion of non-linearities from the perspective of all input variables to out production functions seems to me to be a sound theoretical assumption.