The New Growth Theory: Does It Work?

Diploma Thesis by Jana Riedel
February 20, 2004

Abstract:

Recent Growth Theory focuses on the importance of political economy, using mainly exogenous growth frameworks. However, there is another strand of research. The Jones Critique on scale effects causes the development of semi-endogenous R&D based growth models, which are consistent with time series evidence. Furthermore, accumulation of human capital is taken serious again. However, education is no longer an ordinary input in the production function. Instead, investment in education is considered and Mincerian returns to schooling are estimated. Moreover, researchers start to model complementary effects of knowledge and technology directly. Papageorgiou and Perez-Sebastian (2002) provide one interesting example.

I am curious about the models' ability to cope with several facts of economic growth. The facts include divergence and the failure of many explanatory variables in cross country growth regressions to be robust to changes in the underlying information set. In addition, growth rate changes show no persistent trend.

After confirming these facts, I analyse the underlying model and compare its characteristics and implications to them. The steady state growth rates depend solely on exogenously given population growth and parameters. Average schooling years turn out to be a constant in steady state. Labor movements do matter. the model can replicate the transition paths of miracles as well as the growth experience of developed economies, closed to their steady states, pushing forward the technology frontier. Indeed, this model predicts convergence, although there could be ways to introduce divergence by accounting for barriers in form of monopoly rights. Unfortunately I not managed to do so.

However, I use cross-country, panel data analysis to check the influence of infomation technology and schooling on growth. The results are ambigious. Secondary schooling does matter in each case. Personal computer endowment and other variables show varying results, dependent on the underlying estimaion technique. Finally, policy conclusions are drawn. Since complementary effects are worth for growth, polititions should subsidies both, research and puplic, especially secondary, education. However, simply subsidizing jobs in R\&D and providing school material is not the key for future growth. Incentives and control mechanisms have to be set correctly.