Comparative Economic Development: Insights from Uni–ed ... lecture.pdf · Comparative Economic...

IntroductionHistorical Evidence

Unied Growth TheoryThe Theory

UGT and Comparative Development

Comparative Economic Development:Insights from Unied Growth Theory

Oded Galor

Department of EconomicsBrown University

Klein Lecture, Osaka, June 5th, 2008

Oded Galor Comparative Economic Development: Insights from Unied Growth Theory




Outline

Introduction

Historical Evidence

Unied Growth Theory

Implications for Comparative Development





The Complexity of the Process of DevelopmentMajor PuzzlesInconsistency of Non-Unied Growth Theories with the Growth ProcessLessons from other Scientic DisciplinesVirtues of Unied Growth Theory

The Complexity of the Process of Development

The Malthusian Epoch

Developed Countries 100; 000 BCE - 1750Less Developed Economies 100; 000 BCE - 1900

The Post Malthusian Regime

Developed Countries 1750 - 1870Less Developed Economies 1900 -

The Modern Growth Regime

Developed Countries 1870 - presentLess Developed Economies






Major Puzzles

Context: The Malthusian Epoch

What accounts for the epoch of stagnation that characterizedmost of human history?

Why had episodes of technological progress in the pre-industrializationera failed to generate sustained economic growth?

Why has population growth counterbalanced the expansion ofresources per capita that could have been generated by tech-nological progress?






...Major Puzzles

Context: The Transition from Stagnation to Growth

What is the origin of the sudden spurt in growth rates of outputper capita and population?

What triggered the demographic transition?

Would the transition to a state of sustained economic growthhave been feasible without the demographic transition?

What are the underlying behavioral and technological structuresthat account for the distinct phases of development and whatare their implications for the contemporary growth process ofdeveloped and underdeveloped countries?






...Major Puzzles

Context: Comparative Development

What accounts for the sudden take-o¤ from stagnation to growthin some countries and the persistent stagnation in others?

Why has the positive link between income and population growthreversed its course in some economies but not in others?

Why have the di¤erences in per capita income across countriesincreased so markedly in the last two centuries?

Has the transition to a state of sustained economic growth inadvanced economies adversely a¤ected the process of develop-ment in less-developed economies?






Inconsistency of non-UGT with the Growth Process

Inconsistent with the qualitative aspects of the growth processduring the Malthusian epoch and the Post-Malthusian Regime

Limited to the modern growth regime a small fraction of theentire process of development

Do not capture the forces that brought about the transition ofdeveloped countries from stagnation to growth and hence un-able to shed light of the hurdles faced by LDCs in their attemptto take-o¤ to a state of sustained economic growth

Unable to capture fundamental aspects of sustained di¤erencesin income per-capita across countries






Lessons from other Scientic Disciplines

Theories that are founded on the basis of a subset of existingobservations and their driving forces, may be attractive in theshort run, but non-robust and ultimately non-durable in thelong run:

Classical Thermodynamics:

Lacks micro-foundations - has been ultimately superseded bythe micro-based Statistical Mechanics

Unied Field Theory

Proposes to unify by general laws the four distinct forces thatcontrol observed interactions in matter: electromagnetism, grav-itation, the weak force, and the strong force






...Lessons from other Scientic Discipline

Attempts to develop unied theories in Physics have been basedon the conviction that all physical phenomena should ultimatelybe explainable by some underlying unity

The entire process of development and its fundamental forcesought to be captured by a unied growth theory






Virtues of Unied Growth Theory

Sheds light on historical and contemporary patterns of devel-opment

Identies the forces the permitted the currently developed econ-omy to transit from an epoch of Malthusian stagnation to sus-tained economic growth

Uncovers the hurdles faced by LDCs in their transitions fromstagnation to growth

Derives policies that may expedite the transition of LDCs tosustained economic growth






...Virtues of Unied Growth Theory

Demonstrates the critical role played by the demographic tran-sition and the emergence of the demand for human capital inthe shift to modern growth

Identies the micro-foundations - the central driving forces - forthe main aspects of the growth process

provides a meta-theory that naturally encompasses existing hy-pothesis about the role of geography, institutions, and the com-position of human traits, in comparative development





The Malthusian EpochThe Post-Malthusian RegimeThe Modern Growth Regime

Historical Evidence


The Post-Malthusian Regime

The Sustained-Growth Regime

The Great Divergence






World Income per Capita: 0-2000

GDP Per Capita

300

1300

2300

3300

4300

5300

6300

0 250 500 750 1000 1250 1500 1750 2000

GDP

Per

Cap

ita(1

990

Int'l

$)

6049409121111525875667615595566436445GDP20011973195019131870182017001600150010000Year6049409121111525875667615595566436445GDP20011973195019131870182017001600150010000Year






Regional Income per Capita, 0-2000

0

4000

8000

12000

16000

20000

24000

0 250 500 750 1000 1250 1500 1750 2000

GD

P P

er C

apita

(199

0In

t'l $

)

Western Europe Western Offshoots AsiaLatin America Africa Eastern Europe






Inequality in Income Per Capita, 0-2000

26,943

1202

400

400

WesternOffshoots

3861

581

450

450

Asia

18 : 11,4896,15019,2652001

3 : 14186921,2041820

1.1 : 14164004001000

1.1 : 14254004500

Ratio:Rich/Poor

AfricaLatinAmerica

WesternEurope

Year

26,943

1202

400

400

WesternOffshoots

3861

581

450

450

Asia

18 : 11,4896,15019,2652001

3 : 14186921,2041820

1.1 : 14164004001000

1.1 : 14254004500

Ratio:Rich/Poor

AfricaLatinAmerica

WesternEurope

Year







Economies are in a Malthusian stagnation:

Population growth is positively a¤ected by the level of incomeper capita

Technological progress exits but it is slow and it results in aproportional increase in output and population

Output per capita uctuates around a subsistence level






Malthusian Fluctuations in GDP Per Capita:England, 1260-1870

40

50

60

70

80

90

100

110

12609 13609 14609 15609 16609 17609 18609

Rea

l GD

P Pe

r Cap

ita(1

860

100)






Malthusian Relationship between World Income andPopulation

0

1000

2000

3000

4000

5000

6000

0 500 1000 1500 2000

GD

P Pe

r Cap

ita

0

1

2

3

4

5

6

7

8

Popu

latio

n

GDP Per Capita (1990 Int's Dollars) Population (in Billions)






Malthusian Relationship between World Income andPopulation Growth

0

1000

2000

3000

4000

5000

6000

1300 1400 1500 1600 1700 1800 1900 2000

GD

P Pe

r Cap

ita

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

2

Rat

e of

Pop

ulat

ion

Gro

wth

GDP Per Capita (1990 Int'l $) Population Growth






Malthusian Relationship between Income and Population:England 1250-1750

0

20

40

60

80

100

120

140

160

180

200

1255 1295 1335 1375 1415 1455 1495 1535 1575 1615 1655 1695 1735

Rea

l Far

m W

ages

(177

5=10

0)

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

Pop

ulat

ion (

milli

ons)

Population

Real Wages






Testable Implications

Variations in technology and land quality across countries willbe reected primarily in variation in population density:

Technological superiority will result primarily in higher popula-tion density without any sizable e¤ect on income per-capita inthe long-run

Superior land quality will result primarily in higher populationdensity without any sizable e¤ect on income per-capita in thelong-run






Timing of Neolithic and Population Density in 1500 CE






Land Productivity and Population Density in 1500 CE






The Post-Malthusian Regime

Economies take-o¤ from a Malthusian equilibrium:

Population growth is still positively a¤ected by the level of in-come per capita

Technological progress accelerates and it results in a larger in-crease in output than in population

Demand for education increases towards the end of the period

Income per capita and population grow at an increasingly fasterpace






Take-o¤ in World Income Per Capita

GDP Per Capita

300

1300

2300

3300

4300

5300

6300

0 250 500 750 1000 1250 1500 1750 2000

GDP

Per

Cap

ita(1

990

Int'l

$)

6049409121111525875667615595566436445GDP

20011973195019131870182017001600150010000Year

6049409121111525875667615595566436445GDP

20011973195019131870182017001600150010000Year






Regional Variations in the Timing of the Take-o¤ (Levels):Early Take-O¤

0

4000

8000

12000

16000

20000

24000

28000

1700 1750 1800 1850 1900 1950 2000

GDP

Per C

apita

(199

0 Int'

l $)

Western Europe Western Offshoots






Regional Variations in the Timing of the Take-o¤: (Levels)Late Take-O¤

0

1000

2000

3000

4000

5000

6000

1700 1750 1800 1850 1900 1950 2000

GDP

Per C

apita

(199

0 Int'

l $)

Asia Latin America Africa






Growth of GDP Per Capita and Population:Western Europe, 1500-2000

Western Europe

0

0.5

1

1.5

2

2.5

3

1500 1600 1700 1800 1900 2000

Perc

ent G

row

th R

ates output growthpopulation growth






Growth of GDP Per Capita and Population:Western O¤shoots, 1500-2000

Western Offshoots(US, Canada, Australia, New Zeland)

0

0.5

1

1.5

2

2.5

3

1500 1600 1700 1800 1900 2000

Perc

ent G

rowt

h R

ates

output growthpopulation growth






Growth of GDP Per Capita and Population:Latin America 1500-2000

Latin America

0

0.5

1

1.5

2

2.5

3

1500 1600 1700 1800 1900 2000

Perc

ent G

row

th R

ates







Growth of GDP Per Capita and Population:Africa 1500-2000

Africa

0

0.5

1

1.5

2

2.5

3

1500 1600 1700 1800 1900 2000

Perc

ent G

rowt

h Rate

s







Industrialization: Less Developed Economies

Asia (excluding Japan)

0

0.6

1.2

1.8

2.4

3

3.6

1500 1600 1700 1800 1900 2000

Perce

nt G

rowt

h Rate

s


0

100

200

300

400

500

600

700

1750 1800 1850 1900 1950 2000

Per C

apita

Indu

stria

lizat

ion

.

USA Germany Canada United Kigdom France Japan

1

6

11

16

21

26

31

36

41

1750 1800 1850 1900 1950 2000

Per C

apita

Indu

stria

lizat

ion .

Third World India China Mexico






The Modern Growth Regime

Sustained economic growth:

Technological progress accelerates

Human capital becomes a major factor of production

Population growth declines The Demographic Transition

Gains in total output are not counterbalanced by populationgrowth

Output per capita grows at a high sustainable level






The Rise in the Demand for Human Capital

The acceleration in the rate of technological progress increasedthe demand for human capital

The rise in the demand for human capital induced a substitu-tion of quality for quantity of children triggering a demographictransition

The demographic transition should be observed at the sametime period across economies, that may di¤er in their levelsof incomes per capita, but are similar in their growth rates ofincome per capita






...The Rise in the Demand for Human Capital

0.00%

1.00%

2.00%

England Germany Sweeden Finland

Annual Growth Rates of Income PerCapita 18701913

18

22

26

30

34

38

42

1670 1720 1770 1820 1870 1920

Cru

de B

irth

Rat

es(p

er10

00)

England France Sweden Finland Germany






...The Rise in the Demand for Human Capital

10

15

20

25

30

35

40

1720 1740 1760 1780 1800 1820 1840 1860 1880 1900 1920 1940

CBR

and

CD

R(p

er10

00)

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

Frac

tion

of C

hild

ren

Age

514

in S

choo

l

Crude Death Rate

Crude Birth Rate

Fraction of Children Age 514 in Primary School






Timing of the Demographic Transition across Regions:Early Transition

Early Demographic Tansition

0

0.5

1

1.5

2

2.5

3

1750 1800 1850 1900 1950 2000

Rate

of P

opul

atio

n G

rowt

h

Western Europe Western Offshoots Eastern Europe






Timing of the Demographic Transition across Regions:Late Transition

Late Demographic Transition

0

0.5

1

1.5

2

2.5

3

1750 1800 1850 1900 1950 2000

Rat

e of

Pop

ulat

ion

Gro

wth

Latin America Asia Africa






Variations in the timing of the Transition: The GreatDivergence: Income per Capita

0

4000

8000

12000

16000

20000

24000

28000

1820 1870 1913 1950 1998

GDP

PerC

apita

Western Offshoots

Western Europe

Latin America

AsiaAfrica

Eastern Europe






The Great Divergence in Population:Africa and Latin America Vs. Western Europe

0

200

400

600

800

1870 1890 1910 1930 1950 1970 1990

Pop

ulat

ion

(Mill

ions

)

W estern Europe Latin Am erica A frica






Sustained Economic Growth:Western Europe and Western O¤shoots, 1870-2001

0

900

1800

2700

3600

1870 1890 1910 1930 1950 1970 1990

Pop

ulat

ion(

Mill

ions

)

Western Europe Asia

1870 1890 1910 1930 1950 1970 1990

Log

GD

P Pe

r Cap

ita

Western Europe Western Offshoots






Growth of Income Per Capita:Africa, Asia and Latin America, 1950-2001

1950 1960 1970 1980 1990 2000

Log

GD

P P

er C

apita

Asia

Africa

Latin America





ContributionsThe Fundamental ChallengesMajor PuzzlesSuggestive Evidence: Characteristics of the Main Transitions

Contributions

Underlying Philosophy:"Towards a Unied Theory of Economic Growth: Oded Galor on theTransition from Malthusian Stagnation to Modern EconomicGrowth," An interview by Brian Snowdon (World Economics 2008)

Foundations:Galor (HB of Ec. Growth, 2005), Galor and Weil (AER 1999, 2000)

Extensions:Hansen and Prescott (AER 2002), Lagerlof (IER (2003), Boucekkine,de la Croix and Peeters (JEEA 2006), ORourke, Rhaman and Taylor(2007)

Human Evolution and Economic Development:Galor and Moav (QJE 2002, 2007), Galor and Michalopolous (2006),Ashraf and Galor (2008)






...Main Contributions

UGT and Comparative Development:Galor and Mountford (AER 2006, RES 2008), Galor, Moav and Voll-rath (RES 2008), Voigtländer and Voth (JEG 2006), Ashraf and Galor(2007)

Calibrations:Jones (2001), Doepke (JEG 2004), Lagerlof (RED, 2006), Fernandez-Vilaverde (2005)

Historical Evidence and EvaluationsLucas (2002), Broadberry (2007), Crafts and Mills (2007), Mokyrand Voth (2007)






The Fundamental Challenges

Development of a unied growth theory that accounts for:

An epoch of Malthusian stagnation

Take-o¤ to a Post-Malthusian Regime

Emergence of human capital formation

Demographic transition

A shift to sustained economic growth






...The Fundamental Challenges

Two dimensions of unication:

Unifying the entire process of development

Unifying the micro structure of the economy(i.e., the structure of preferences and technologies remain un-changed, but endogenous changes in the economic environmenttriggers di¤erent choices in di¤erent stages of development)







A dynamical system that permits an escape from a stableMalthusian Steady-State:

A major shock in an environment characterized by multiple lo-cally stable equilibria(inconsistent with evidence of a gradual transition (Crafts))

A gradual escape from an absorbing (stable) equilibrium(contradiction to the essence of a stable equilibrium)







Methodological innovation:

Phase transition via the evolution of latent state variables thatultimately a¤ects the qualitative properties of the dynamicalsystem

Although output per capita remains unchanged, the evolutionof latent state variables (technology and population) ultimatelychanges the dynamical system qualitatively, the Malthusianequilibrium vanishes endogenously, leaving the arena to thegravitational forces of the emerging Sustained Growth Regime






Major Puzzles Resolved by UGT


What accounts for the epoch of stagnation that characterizedmost of human history?

What is the origin of the sudden spurt in growth rates of outputper capita and population?

Why had episodes of technological progress in the pre-industrializationera failed to generate sustained economic growth?






...Major Puzzles Resolved by UGT


What triggered the demographic transition?

Would the transition to a state of sustained economic growthhave been feasible without the demographic transition?

What are the underlying behavioral and technological structuresthat could simultaneously account for these distinct phases ofdevelopment and what are their implications for the contem-porary growth process of developed and underdeveloped coun-tries?






...Major Puzzles Resolved by UGT

Context: The Great Divergence

What accounts for the sudden take-o¤ from stagnation to growthin some countries and the persistent stagnation in others?

Why has the positive link between income and population growthreversed its course in some economies but not in others?

Why have the di¤erences in per capita income across countriesincreased so markedly in the last two centuries?

Has the transition to a state of sustained economic growth inadvanced economies adversely a¤ected the process of develop-ment in less-developed economies






Suggestive Evidence: Characteristics of the MainTransitions

Transition from Malthusian to Post-Malthusian Regime:

Faster rates of technological progressFaster rate of population growth

Transition from the Post-Malthusian to Modern Growth Regime:

Faster rate of technological progressFaster rate of human capital accumulationDecline in population growth






Suggestive Evidence

A solution to these fundamental puzzles may be hidden there-fore in the understanding of how:

changes in the technological environment a¤ects the populationsize and its quality.

the size and the quality of the population a¤ect the rate oftechnological progress





The Main ElementsThe Fundamental MechanismThe ModelThe Dynamical SystemCalibrationsTestable ImplicationsConvergence ClubsMain Elements

The Malthusian Structure

Sources of Technological Progress

Origins of Human Capital Formation

Triggers of the Demographic Transition





The Main ElementsThe Fundamental MechanismThe ModelThe Dynamical SystemCalibrationsTestable ImplicationsConvergence ClubsThe Malthusian Structure

A subsistence consumption constraint

Positive e¤ect of income on population

reecting households optimization

Output per capita is stationary

reecting diminishing returns to labor in agriculture and a pos-itive e¤ect of income on population





The Main ElementsThe Fundamental MechanismThe ModelThe Dynamical SystemCalibrationsTestable ImplicationsConvergence ClubsSources of Technological Progress

Early stage of development

Population size positively a¤ects technological progress via:

Supply of innovations

Demand for innovations

Di¤usion of knowledge

Division of labor

Extent of trade





The Main ElementsThe Fundamental MechanismThe ModelThe Dynamical SystemCalibrationsTestable ImplicationsConvergence Clubs...Sources of Technological Progress

Later Stages of Development

Human capital positively a¤ects technological progress

Educated individuals have a comparative advantage inadopting and advancing new technologies

Population scale is still benecial, as long as it does not comeon the account of population quality





The Main ElementsThe Fundamental MechanismThe ModelThe Dynamical SystemCalibrationsTestable ImplicationsConvergence ClubsOrigins of Human Capital Formation

The increase in the rate of technological progress increases thedemand for human capital

Human capital permits individuals to better cope with the changesin the technological environment

The introduction of new technologies is skill-biased in the short-run, although the nature of the technology is skill-biased or skill-saving in the long run





The Main ElementsThe Fundamental MechanismThe ModelThe Dynamical SystemCalibrationsTestable ImplicationsConvergence ClubsTriggers of the Demographic Transition

The rise in the demand for human capital in the second phase ofIndustrialization induces parents to substitute quality for quan-tity of children

The rise in income along with the rise in the potential returnto human capital generates:

An income e¤ect - more income to spend on children

Substitution e¤ects -

the opportunity cost of raising children increasesthe potential return to investment in childrens human capitalincreases





The Main ElementsThe Fundamental MechanismThe ModelThe Dynamical SystemCalibrationsTestable ImplicationsConvergence Clubs...Triggers of the Demographic Transition

Early part of the second phase of industrialization:

The income e¤ect dominates and population growth and humancapital formation increases:

The subsistence consumption constraint (that adversely a¤ectresources devoted to children) has a larger e¤ect at low levelsof income

The demand for human capital is moderate





The Main ElementsThe Fundamental MechanismThe ModelThe Dynamical SystemCalibrationsTestable ImplicationsConvergence Clubs...Triggers of the Demographic Transition

Later part of the second phase of industrialization:

The substitution e¤ect dominates, population growth declinesand human capital formation increases further

The subsistence consumption constraint (that adversely a¤ectresources devoted to children) has a lower e¤ect at high levelsof income

The demand for human capital is more signicant





The Main ElementsThe Fundamental MechanismThe ModelThe Dynamical SystemCalibrationsTestable ImplicationsConvergence ClubsThe Malthusian Regime

The economy is a Malthusian steady-state equilibrium

Technological progresses is slow

The return to human capital is low, and parents have no incen-tive to substitute child quality for quantity

The temporary increase in income increases population propor-tionally

Output per capita uctuates initially around a stationary level,and then around an increasing, but minor trend.





The Main ElementsThe Fundamental MechanismThe ModelThe Dynamical SystemCalibrationsTestable ImplicationsConvergence ClubsThe Post-Malthusian Regime

Technological progress becomes more rapid due to the increasein the population size and quality and it permits the economyto take-o¤ from the Malthusian regime

The pace of technological progress increases

The demand gradually increases towards the end of the period





The Main ElementsThe Fundamental MechanismThe ModelThe Dynamical SystemCalibrationsTestable ImplicationsConvergence Clubs...The Post-Malthusian Regime

Technological progress and the rise in the demand for humancapital has two e¤ects on population growth:

Income E¤ect: More resources for raising childrenSubstitution E¤ect: Reallocation towards child quality

The income e¤ect dominates and both population quantity andquality increases

Output per capita increases along with an increase in the rateof population growth





The Main ElementsThe Fundamental MechanismThe ModelThe Dynamical SystemCalibrationsTestable ImplicationsConvergence ClubsDemographic Transition and Sustained Growth

Technological progress intensies further due to the gradualincrease in the level of human capital

The demand for human capital further increases

Parents are induced to further substitute child quality for quan-tity

The substitution e¤ect dominates and fertility rates decline per-manently

The economy converges to a steady-state where output percapita may grow at a positive rate and population growth ismoderate





The Main ElementsThe Fundamental MechanismThe ModelThe Dynamical SystemCalibrationsTestable ImplicationsConvergence ClubsThe Basic Structure of the Model

Overlapping-generations economy

t = 0; 1; 2; 3:::1

One homogeneous good

2 factors of production:

Labor (measured in e¢ ciency units)Land





The Main ElementsThe Fundamental MechanismThe ModelThe Dynamical SystemCalibrationsTestable ImplicationsConvergence ClubsProduction

The output produced in period t

Yt = Ht (AtX )1

Ht - e¢ ciency units of laborX - land

Output per worker produced at time t

yt = ht x(1)t y(ht ; xt)

ht Ht=Lt e¢ ciency units per-workerxt (AtX )=Lt e¤ective resources per worker





The Main ElementsThe Fundamental MechanismThe ModelThe Dynamical SystemCalibrationsTestable ImplicationsConvergence ClubsFactor Supply

Land is xed over time

E¢ ciency units of labor evolves endogenously

determined by householdsdecisions about the number andlevel of human capital of their children





The Main ElementsThe Fundamental MechanismThe ModelThe Dynamical SystemCalibrationsTestable ImplicationsConvergence ClubsIndividuals

Live for 2 period

Childhood: (1st Period):

Consume a fraction of their parental unit-time endowment.The required time increases with childrens quality

Parenthood (2nd Period):

Allocate time between childrearing and workChoose the optimal mixture of quantity and quality of childrenSupply their remaining e¢ ciency units of laborEarn the competitive market wageConsume.





The Main ElementsThe Fundamental MechanismThe ModelThe Dynamical SystemCalibrationsTestable ImplicationsConvergence ClubsPreferences

The Utility function of individual t

ut = (ct)(1 )(ntht+1)

nt - number of children of individual t

ht+1 - level of human capital of each child





The Main ElementsThe Fundamental MechanismThe ModelThe Dynamical SystemCalibrationsTestable ImplicationsConvergence ClubsBudget Constraint

Second period budget constraint:

wthtnt( + et+1) + ct wtht

+ et+1 time needed to raise a child with education et+1 time required to raise a child, regardless of quality





The Main ElementsThe Fundamental MechanismThe ModelThe Dynamical SystemCalibrationsTestable ImplicationsConvergence ClubsHuman Capital Formation

Human capital of children of generation t

ht+1 = h(et+1; gt+1)

gt+1 (At+1 At)=At - rate of tech progress

et+1 - education

heg (et+1; g t+1) > 0

he (et+1; g t+1) > 0; hee (et+1; g t+1) < 0;hg (et+1; g t+1) < 0; hgg (et+1; g t+1) > 0





The Main ElementsThe Fundamental MechanismThe ModelThe Dynamical SystemCalibrationsTestable ImplicationsConvergence ClubsOptimization

fnt ; et+1g = argmaxfw tht [1 nt( + et+1)]g1 f(nth(et+1; g t+1)g

Subject to:

wtht [1 nt( + et+1)] ~c





The Main ElementsThe Fundamental MechanismThe ModelThe Dynamical SystemCalibrationsTestable ImplicationsConvergence ClubsIncome Expansion Path

Time Devoted toRaising Children

c~

γ

γ−1

SubsistenceConsumption

Income ExpansionPath

Consumption

Time Devoted toRaising Children

c~

γ

γ−1

SubsistenceConsumption

Income ExpansionPath

Consumption





The Main ElementsThe Fundamental MechanismThe ModelThe Dynamical SystemCalibrationsTestable ImplicationsConvergence Clubs...Optimal Investment in Child Quality

g t 1+

)g(ee 1t1t ++ =

1+te





The Main ElementsThe Fundamental MechanismThe ModelThe Dynamical SystemCalibrationsTestable ImplicationsConvergence ClubsTechnological Progress

Technological progress over time

gt+1 At+1 At

At= g(et ; Lt)

g(0; Lt) > 0

gi (et ; Lt) > 0 and gii (et ; Lt) < 0; i = e; L





The Main ElementsThe Fundamental MechanismThe ModelThe Dynamical SystemCalibrationsTestable ImplicationsConvergence ClubsPopulation Dynamics

Lt+1 = ntLt

Lt+1=

8<:nb(gt+1)Lt if zt ~z

na(gt+1; z(et ;gt ; xt))Lt if zt ~z





The Main ElementsThe Fundamental MechanismThe ModelThe Dynamical SystemCalibrationsTestable ImplicationsConvergence ClubsDynamics of the Level of Technology and Resources

gt+1 At+1 At

At= g(et ; Lt)

At+1 = (1+ gt+1)At = (1+ g(et ; Lt))At

xt+1 At+1XLt+1

=(1+ gt+1)AtX

ntLt=1+ gt+1nt

xt = (et ; gt ; xt ; Lt)xt





The Main ElementsThe Fundamental MechanismThe ModelThe Dynamical SystemCalibrationsTestable ImplicationsConvergence ClubsThe Dynamical System

fxt ; et ; gt ; Ltg1t=08>><>>:xt+1 = a(et ; gt ; xt ; Lt)xtet+1 = e(g(et ; Lt))gt+1 = g(et ; Lt)Lt+1 = na(g(et ; Lt); z(et ;gt ; xt))Lt :





The Main ElementsThe Fundamental MechanismThe ModelThe Dynamical SystemCalibrationsTestable ImplicationsConvergence ClubsThe Conditional Evolution of Technology and Education

fgt ; et ; Lg1t=0 such that:

gt+1 = g(et ; L)

et+1 = e(gt+1)





The Main ElementsThe Fundamental MechanismThe ModelThe Dynamical SystemCalibrationsTestable ImplicationsConvergence ClubsThe Evolution of Education and Technology

te

g t )( 11 ++ = tt gee

);(1 Legg tt =+

(L)g l






te

g t )( 11 ++ = tt gee

(L)g l

te

g t )( 11 ++ = tt gee

);(1 Legg tt =+

(L)g l






te

g t )( 11 ++ = tt gee

(L)g l






te

g t )( 11 ++ = tt gee

);(1 Legg tt =+

(L)g l






g t )g(ee 1t1t ++ =

)L;e(gg t1t =+

eu eh

gh

gu

(L)g l

te






g t )g(ee 1t1t ++ =)L;e(gg t1t =+

eh

gh

gu

te





The Main ElementsThe Fundamental MechanismThe ModelThe Dynamical SystemCalibrationsTestable ImplicationsConvergence ClubsThe Evolution of Education and Resources Per Worker:

Small Population

te

txtt xx =+1

)(Lx l

EE

)(Le

Conditional MalthusianFrontier






Intermediate Population

te

txtt xx =+1

)(Lx l

EE

EE EE

)(Leu )(Leh)(Le







Large Population

te

tx tt xx =+1 EE

)(Le )(Leh






The Main ElementsThe Fundamental MechanismThe ModelThe Dynamical SystemCalibrationsTestable ImplicationsConvergence Clubs...Calibrations of Galor-Weil - (Lagerlof RED 2006)





The Main ElementsThe Fundamental MechanismThe ModelThe Dynamical SystemCalibrationsTestable ImplicationsConvergence ClubsTestable Implications

UGT suggests that the transition from stagnation to growth isan inevitable by-product of the process of development

The inherent Malthusian interaction between technology andpopulation, accelerated the pace of technological progress, andeventually brought an industrial demand for human capital

Human capital formation, triggered a demographic transition,enabling economies to convert a larger share of the fruits offactor accumulation and technological progress into growth ofincome per capita

Variations in the timing of the take-o¤ from stagnation togrowth contributed signicantly to the Great Divergence





The Main ElementsThe Fundamental MechanismThe ModelThe Dynamical SystemCalibrationsTestable ImplicationsConvergence ClubsUGT and the Emergence of Convergence Clubs

Di¤erences in the timing of the take-o¤ from stagnation togrowth across countries contributed to the emergence of con-vergence clubs

Although the long-run equilibrium may not di¤er across economies,di¤erential timing of takeo¤s from stagnation to growth seg-mented economies into three fundamental regimes the di¤er intheir growth structure:

Slow growing economies in the vicinity of a Malthusian regime

Fast growing countries in a sustained growth regime

Economies in the transition from one regime to another





The Main ElementsThe Fundamental MechanismThe ModelThe Dynamical SystemCalibrationsTestable ImplicationsConvergence Clubs...UGT and the Emergence of Convergence Clubs

Convergence clubs may be temporary and endogenous forceswould permit economies to shift from the Malthusian Regimeinto the sustained growth regime

In contrast to existing research that links memberships in eachclub and the thresholds that permit economies to switch acrossthese regimes to critical levels of income or human capital, UGTsuggests that they are in fact associated primarily with criti-cal changes in the rates of technological progress, populationgrowth and human capital formation





Cultural DiversityGenetic DiversityInternational TradeConcentration of Land OwnershipConcluding Remarks


Variations in the economic performance across countries and regions(e.g., earlier industrialization in England than in China) reect ini-tial di¤erences in geographical factors and historical accidents andtheir manifestation in variations in institutional, demographic, andcultural factors, trade patterns, colonial status, and public policy

gt+1 = g(et ; L; )

= fculture, genetic diversity, institutions, trade, colonial history,...






...UGT and Comparative Development

Once a technologically-driven demand for human capital emerged inthe second phase of industrialization, the prevalence of human cap-ital promoting institutions (i.e. public education), and other factorsthat a¤ect the return to human capital, determined the extensive-ness of human capital formation, the timing of the demographictransition, and the pace of the transition from stagnation to growth

et+1 = e(gt+1; )

= finequality, capital markets, public policy, social structure, trade..






Variation in Economic Development

te

g t

);,(1 Ω=+ Legg tt

te

g t);( 11 Ψ= ++ tt gee

)(Lg l Ω;

)g(Ψ






Earlier Take-O¤

g t

);( 11 Ψ= ++ tt gee

);,(1 Ω=+ Legg tt

eh

gh

)(Ωg

te

)g(Ψ






Superior Long-Run Equilibrium

g t);( 11 Ψ= ++ tt gee

);,(1 Ω=+ Legg tt

eh

gh

te

)(Ψg

)(Ωg






Comparative Development: Geographic Determinism

Culture assimilation vs. cultural di¤usion

Fosters technological progress within a technological regime onthe account of the rapidity of the transitions across regimes

Concentration of land ownership

Delays the implementation of human capital promotinginstitutions

International trade

Di¤erential e¤ect on the demand for human capital






Comparative Development: Genetic Determinism

Genetic diversity and comparative development

Optimal diversity within a technological regime






Cultural Diversity and Comparative Development

Variation in cultural diversity across countries

Generates variation the timing of the transition fromMalthusian stagnation to sustained economic growth:

Divergence and Reversal of Fortunes

Domination of some societies in the Malthusian era

Domination of other societies in the transition to industry






The Fundamental Hypothesis

Two forces operate on the degree of cultural diversity within asociety:

Cultural Assimilation

Homogenization of cultural traits within a society) fosters the accumulation of society-specic humancapital & enhance societys ability to e¢ ciently exploitthe existing technological frontier

Cultural Di¤usion

Di¤usion of new (foreign) cultural traits into the society) diminishes the accumulation of society-specichuman capital but enhances the creation of knowledgeand universal human capital & the adaptability of societytoward a looming industrial regime






...The Fundamental Hypothesis

Within a given technological regime:

An uninterrupted accumulation of society-specic humancapital permits e¢ cient production with respect to thePPF and is benecial for economic prosperity

In the transition between technological regimes:

The accumulation of universal human capital (knowledge)increases the adaptability of society and facilitates earliertechnological transitions







Societies that were geographically vulnerable to cultural di¤usion:

Lagged behind during the agricultural stage of development

Experienced an earlier transition to industrial society






Cultural Diversity and Malthusian Development

Early stages of development

The adverse e¤ect of cultural diversity on the transmission ofsociety-specic human capital outweighs its benecial e¤ect on ruralproductivity (via the expansion of the knowledge frontier)

Cultural diversity is associated with an inferior Malthusianequilibrium: lower levels of rural productivity and working population

The long-run level of income per capita is una¤ected by the degreeof cultural diversity since lower level of rural productivity iscounter-balanced by a proportionately smaller population

) Societies that are less vulnerable to culturaldi¤usion will dominate in the Malthusian stage ofdevelopment






Cultural Diversity and Industrialization

Later stages of development

The benecial e¤ect of moderate level of diversity on theadvancement of latent manufacturing productivity outweighs itsadverse e¤ect on the transmission of society-specic human capital

A higher diversity (at moderate levels) is associated with an earliertake-o¤ to industry

) Societies that are less vulnerable to culturaldi¤usion will overtake the more vulnerable ones.






Cultural Composition and Overtaking

The growth rate of (the latent) manufacturing productivity is:

gt+1 = !(1 !) Lt 1

Consider two societies C and E - society E has a higher culturaldiversity in the interval (0; !]






Evolution of the two Countries: Malthusian Regime






Domination of the Culturally Homogenous Country






Earlier Industrialization: Culturally Diverse Country

ESS

CSSLL

CAA|MtCAMM

RtA

tL

0

EAA

|MtEAMM






Overtaking by the Culturally Diverse Economy

ESS

CSSLL

CAA

|MtCAMM

RtA

tL

0

EAA

|MtEAMM






Later Industrialization: Culturally Homogeneous Country

ESS

LL

CAA

|MtCAMM

RtA

tL

0

EAA

|MtEAMM

CSS






Genetic Diversity and Comparative Development

Variation in genetic diversity across countries

Generates variation the timing of the transition fromMalthusian stagnation to sustained economic growth:

Divergence and Reversal of Fortunes

Domination of some societies in the Malthusian era

Domination of other societies in the transition to industry






The Fundamental Hypothesis

Trade-o¤ associated with genetic diversity:

Low Diversity: fosters the accumulation of society-specic humancapital & enhance societys ability to e¢ ciently exploit the existingtechnological frontier

Higher Diverse: enhances the creation of knowledge and universalhuman capital & the adaptability of society toward a loomingindustrial regime

=) Hump-shaped relationship between geneticdiversity and economic outcomes:







Within a given technological regime:

An uninterrupted accumulation of society-specic humancapital permits e¢ cient production with respect to thePPF and is benecial for economic prosperity

In the transition between technological regimes:

The accumulation of universal human capital (knowledge)increases the adaptability of society and facilitates earliertechnological transitions







Societies whose migratory distance from east Africa was small andthus it genetic diversity large (the Serial-Founder e¤ect):

Lagged behind during the agricultural stage of development

Experienced an earlier transition to industrial society






Genetic Diversity and Migratory Distance from East Africa






Predicted Genetic Diversity and Population Density in1500 CE

Predicted Diversity and Economic Development in 1500 CE

(1) (2) (3) (4) (5) (6)Dependent Variable is Log Population Density in 1500 CE

Pred. Diversity 250.99*** 213.54*** 203.02*** 195.42*** 199.73**(68.26) (63.50) (61.05) (56.09) (80.51)

Pred. Diversity Sqr. -177.40*** -152.11*** -141.98*** -137.98*** -146.17***(50.22) (46.65) (44.83) (40.84) (56.26)

Log Transition Timing 1.29*** 1.05*** 1.16*** 1.24***(0.18) (0.19) (0.15) (0.24)

Log Arable % of Land 0.52*** 0.40*** 0.39***(0.12) (0.09) (0.10)

Log Absolute Latitude -0.17* -0.34*** -0.42***(0.09) (0.09) (0.12)

Log Agri. Suitability 0.19 0.31*** 0.26***(0.12) (0.10) (0.10)

Continent Dummies No No No No No YesObservations 145 145 145 145 145 145R-squared 0.22 0.26 0.38 0.50 0.67 0.69

Notes: Bootstrap standard errors in parentheses; *** p<0.01, ** p<0.05, * p<0.1






Genetic Diversity and Population Density in 1500 CE






Genetic Diversity and Income Per Capita in 2000






International Trade and the Pace of the Transtion fromStagnation ot Growth

International trade in the early stages of industrialization had anasymmetric e¤ect on:

the demand for human capital in industrial and non-industrialeconomies

timing of the demographic transition in industrial andnon-industrial economies

the pace of the transition from Malthusian stagnation tosustained economic growth






The Main Hypothesis

International trade had an asymmetric e¤ect on DCs and LDCS:

Specialization

DCs - in the production of skilled intensivegoodsLDCs - in the production of unskilled intensivegoods

Demand for human capital

DCs - a rise the demand for human capitalLDCs - a decline in the demand for humancapital

Demographic Transition

DCs - acceleration of the DTLDCs - delay in the DT






...The Main Hypothesis

Gains from Trade

DCs - channeled towards income per capitaLDCs - channeled towards population growth) sustained di¤erences in income per capitaacross countries

Dynamics comparative advantage

DCs - an increase in the abundance in skilledlaborLDCs - an increase in the abundance in unskilledlabor






The Di¤erential E¤ect of Trade on Fertility

Dependent Variable:Total Fertility Rate (1985-1990)

Non-OECD OECD

OLS IV OLS IV(1) (2) (3) (6)

Explanatory Variables:

ln(Trade/GDP) 1985 0:33 0:70 0:04 0:13(0:14) (0:19) (0:09) (0:06)

ln(GDP/pc) 1985 0:39 0:44 0:14 0:10(0:27) (0:25) (0:23) (0:23)

Average Infant Mortality 0:03 0:03 0:03 0:03

1985-90 (0:005) (0:005) (0:005) (0:006)

Number of countries 108 108 24 24

R2 0:72 0:71 0:62 0:60






The E¤ect of Trade on Total Fertility Rate - Non-OECD

AGOARG BHS

BHR

BGDBRB

BLZ

BEN

BTNBOL

BWA

BRA BGR

BFA BDICMR

CPV

CAFTCDCHL

CHN

COL

COM

COG

CRI

CIV

CYP

CZE

COD DJI

DOMEGY SLVETH FJI GMB

GHAGTM

GINGNB

GUY

HTI

HND

HKGHUNIND

ISR

JAM

JOR

KEN

LAOLSO

LBRMDGMWI

MYS

MLI

MLTMRT

MUS

MEXMNG

MARMOZ

MMR

NAM

NPL

NIC

NER

OMN

PAK

PANPNG

PRY

PER

PHL

POLPRI

KOR ROMRUS

RWA

LCA

VCT

WSMSEN

SLE

SGP

SLB

SOMZAF

LKA

SDN

SUR

SWZ

SYR

THA

TGO

TON

TTOTUN

UGA

TZA

URY

VUT

YEM

ZMB

ZWE

42

02

45

Tota

l Fer

tility

Rat

e 19

859

0

1.5 1 .5 0 .5 1 1.5Log Trade Share in GDP 1985






The Transition from Stagnation to Growth

AUS

AUT

BEL

CAN

DNK

FIN

FRA

DEU

GRC

ISL

IRL

ITA

JPN

LUX

NLD

NZL

NOR

PRTESP

SWE

CHE

TURGBR

USA

.8.4

0.4

.8To

tal F

ertili

ty R

ate

1985

90

1 .5 0 .5 1 1.5 2Log Trade Share in GDP 1985






The E¤ect of Trade on Education

Dependent Variable:Changes in Education (1985-1990)Non-OECD OECD

OLS IV OLS IV(1) (2) (3) (6)

Explanatory Variables:

ln(Trade/GDP) 1985 0:10 0:27 0:26 0:35

(0:08) (0:12) (0:19) (0:20)

ln(GDP/pc) 1985 0:15 0:20 0:26 0:25(0:06) (0:07) (0:25) (0:22)

Number of countries 74 74 23 23

R2 0:05 0:01 0:08 0:08






The E¤ect of Trade on Education - Non-OECD

ARG

BHR

BGDBRB

BEN

BOL

BWA

BRA CMR

CAF

CHL

CHN

COL COGCRI

CYP

COD DOM

EGY SLV

FJI

GMB

GHAGTM GNBGUYHTIHND

HKG

HUN

IND

ISR

JAM

JOR

KEN

LSOLBRMWI

MYS

MLIMUS

MEX

MOZMMRNPL

NICNER

PAK

PAN

PNG

PRY

PER

PHLPOL

KOR

RWA

SEN

SLE

SGP

ZAFLKA

SDN

SWZ

SYRTHA TGO

TTO

TUN

UGA

TZAURY

YEM

ZMB

ZWE1

.51

.50

.51

1.5

Educ

atio

n Fl

ow 1

985

1990

1.5 1 .50 .5 1 1.5Log Trade Share in GDP 1985






The E¤ect of Trade on Education - OECD

AUSAUT BELCAN

DNK

FIN

FRADEU

GRCISL

IRL

ITAJPN NLD

NZL

NOR

PRT

ESP

SWE CHETURGBRUSA

2.5

21

.51

.50

.51

1.5

22.

5Ed

ucat

ion F

low 1

985

1990

1.25 1 .5 0 .5 .75Log Trade Share in GDP 1985






Concentration of Land Ownership and the Pace of theTranstion from Stagnation ot Growth

In the 2nd phase of industrialization the demand for humancapital increased as a by-product of the acceleration intechnological progress and generated a growth promoting rolefor:

Human capital formation

Human capital promoting institutions

Investment in human capital was sub-optimal






Concentration of Land Ownership and the Pace of theTranstion from Stagnation ot Growth

Lower complementarity between human capital and land vs.physical capital generated a conicts between landowners andcapitalists about the level of investment in public schooling

Unequal distribution of land was a hurdle for human capitalaccumulation and economic growth:

Delayed education reforms

Reduced the skill-intensity of the emerging industrial sector

Adversely a¤ected the growth path in the industrial stage






Concentration of Land Ownership and EducationExpenditure: US 1900-1940

Dependent Variable: Change inlog educational expend per childOLS IV(1) (2)

change in land concentration -2.34*** -3.23***(0.80) (0.91)

change in income per capita 0.72*** 0.72***(0.17) (0.17)

change in % of the black pop. -2.90*** -2.58***(0.96) (0.92)

change in % of the urban pop. -0.66* -0.51(0.40) (0.37)

National time xed e¤ects Yes YesR2 0.48First stage F-statistic 13.49First stage p-value <0.001Sargan test p-value 0.27






Concentration of Land Ownership and EducationExpenditure: US 1900-1940

.50

.51

1.5

2C

hang

e in

Log

Rea

l Exp

end

per C

hild

.2 .1 0 .1Lagged Change in Land Share of Largest Farms






Concluding Remarks

Unied growth theory provides a meta-theory that naturallyencompasses existing hypothesis about the role of geography,institutions, and the composition of human traits, in comparativedevelopment and permits that examination of variations theeconomic performance across countries and regions based onvariations initial geographic factors and their manifestation invariations in culture, genetic diversity, scientic structure, andeducational, institutional, geographical factors on the pace of thetransition from stagnation to growth.


Comparative Economic Development: Insights from Uni–ed ... lecture.pdf · Comparative Economic...

Documents

Transcript of Comparative Economic Development: Insights from Uni–ed ... lecture.pdf · Comparative Economic...