Transcript On the Mechanics of Economic Development

On the Mechanics of Economic
Development
By Robert E. Lucas
Discussant: Wang Xiongjian
Oct 2, 2004
Overview of the Theory of
Economic Development

Stylized facts on economic development -levels and rates of growth of national incomes:
1) great diversity of per capita income levels
across countries;
2) diversity of rates of growth of real per
capita GNP;
3) relationship between growth rates and
income levels.
…
Overview of the Theory of
Economic Development

What should a successful theory of
economic development explain:
1) sustained income growth;
2) sustained or increasing inequality;
3) trade-related growth phenomenon;
4) demographic transition;
…
Overview of the Theory of
Economic Development

Central questions of economic growth
and development (Charles I. Jones
1995) :
1) the world distribution of per capita
incomes and the levels of development;
2) what is the engine of economic
growth?
3) “growth miracles” – catch up
phenomenon in economic growth.
The basic idea of the paper

To see if modern growth theory could
also be adapted for use as a theory of
economic development.
• growth theory: for highly successful
society;
• development theory: the relationships
between economies with sustained
growth and those remain stagnant.
The basic idea of the paper

To provide some kind of framework for
organizing facts, for judging which
represent opportunities and which
necessities.
What has the paper done?

Three growth models:
1) Neo-classical growth model: physical
capital accumulation and technological
change;
2) human capital accumulation through
schooling;
3) Specialized human capital
accumulation through learning-by-doing.
What has the paper done?

Neo-classical growth model:
• key assumption: factor mobility;
• fits U.S. data well;
• however, predicts the tendency toward
income equalization (because of diminishing
return);
• fails to explain the flow of factors from
poorer countries to richer ones;
…
It is not an adequate model of economic
development.
What has the paper done?

Human capital and growth:
• motivation: to obtain a theoretical
account of cross-country differences in
income levels and growth rates;
What has the paper done?

Human capital and growth – content :
• Romer (1986) – externality of the
stock of knowledge, human capital;
increasing returns;
• Uzawa (1965) – physical capital k and
human capital h; constant returns;
What has the paper done?

Human capital and growth – content :
• one-sector model: interaction of
physical and human capital
accumulation;
What has the paper done?

Human capital and growth – content :
• Features of the model: there exist
balanced paths and each country’s
relative income position is dictated by
its initial situation, and inequality
persists;
• the engine of growth: human capital.
What has the paper done?

Learning-by-doing and comparative
advantage:
• motivation: model the evolution of
national incomes in a two-good world;
What has the paper done?

Learning-by-doing and comparative
advantage:
• connects trade volumes with
knowledge acquisition.
Accumulation of
human capital
Economic
growth
International
trade
What has the paper done?

Learning-by-doing and comparative
advantage:
• assumption: the production of one
good results in productivity-improving
learning, the other does not;
What has the paper done?

Learning-by-doing and comparative
advantage:
• results: the dynamics work to
intensify static comparative advantages
over time, and incomes become ever
unequal;
• can not explain catch-up growth.
What has the paper
succeeded in?




Providing a framework for analyzing
endogenous growth;
Providing possible answers to the
engine of endogenous growth ;
Explaining the diversities in income
levels across countries;
Combining growth with trades among
countries;
What are the deficiencies?




No demographic transition in the
models provided – taking population
growth as given;
No answer to the “growth miracles”
question;
Still ad hoc assumption in the model;
No answer to the mobility of productive
factors;
Comments


In fact, it is unfair to require all these
matters related to economic
development be settled within one
model;
No monetary policy and fiscal policy;
Methodology

“There is no point in arguing over a
model’s assumptions until one is clear
on what question it will be used to
answer.”
Methodology

“A model as explicit as this one, by the
very nakedness of its simplifying
assumptions, invites criticism and
suggests refinements to itself. This is
exactly why we prefer explicitness, or
why I think we ought to.”
Methodology

“The role of theory is not to catalogue
the obvious, but to help us to sort out
effects that are crucial, quantitatively,
from those that can be set aside.”
The end