Neoclassical Growth Theory

ANTONIUS VICTOR
P022191019
Content

 Definitions
 Thepurpose of regional development
 Regional Development Theories
 Neoclassical Theory
 Empirical Studies of Neoclassical Theory
Definitions
 Regional planning is the determination of the steps used for certain areas
in accordance with the objectives set. These steps include setting goals,
estimating future conditions, estimating possible problems that will occur,
determining the location of activities (Law No. 26 of 2007).
 regional planning is an effort to intervene in market forces which in the
context of regional development have three main objectives namely
minimizing conflicts of interest between sectors, increasing sectoral
progress and bringing progress to society as a whole.
 Regional Planning is a development planning process that is intended to
make changes towards a better development direction for a community,
government, and environment in a particular area, by utilizing the various
available resources, and must have a comprehensive, complete,
permanent orientation adhere to the principle of priority (Riyadi and
Bratakusumah, 2003)
Definitions (2)
 Regional development is an effort to spur social economic
development, reduce regional disparity and preserve the
environment.
 Regional development is defined as an effort to formulate and
apply a theoretical framework into economic policies and
development programs in which regional aspects are considered
by integrating social and environmental aspects towards achieving
optimal and sustainable welfare (Nugroho and Dahuri, 2004).
 Regional development is a harmonious relationship between
natural, human and technological resources by taking into
account the capacity of the environment in empowering the
community. (Zen dalam Alkadri, 2001)
 Local resources

Market

Regional
Labor
development is
strongly influenced by
certain components Investment
(Friedman and
Allonso, 2008) Government capability

Transportation and Communication

Technology
The purpose of regional development

 Make optimal use of resources so that they can realize regional development
within a certain period of time with minimum impact in achieving economic
equality.
 Ensure equal planning and distribution of population and economic resources
of a region
 Manage the available land in the most profitable and productive spatial
patterns for the region and country on a large scale
 The allocation of certain resources to produce economic activities in the
underdeveloped region to stabilize its economy through planning a number of
medium cities that are adequate and to provide services, employment, and
social and cultural facilities
 Avoid unhealthy urban expansion
Regional Development Theories

 Neoclassical Growth Theory

 Export Base or Economic Base Theory
 Resource Endowment Theory
 New Theory of Regional Growth
 Theory of Growth in Geographical Perspective
Areas
Neoclassical Theory

This theory says that regional growth depends on three

factors namely :
 Labor
 Availability of capital (investment)
 Technology advances

 The greater the region's ability to provide these three

factors, the faster the regional growth (Harry W.
Richradson. 1973)
Neoclassical Theory (2)

Basic neoclassical theory for growth between regions (Harry W. Richadson)

Investment is the driver of regional development

Investments choose the place that gives the highest return on capital

High wages indicate low return on capital

High wages indicate low return on capital

High return on capital can be obtained in areas with low wages

capital flows from rich regions to poor areas and labor flow from poor areas to rich regions
Neoclassical Theory (3)

Capital
Poor region Rich region
o Low wages o High wages
o High return on o Low return on
capital capital
Labor

the flow of capital and labor will stop if there is a balance between
rich and poor regions
Neoclassical Theory (4)
Output (Regional Growth)

Technology Capital Labor

Inside (Investment Outside (Investment The number of Wage

from inside people) from outside people) people of difference
productive age
in the region
Saving Production costs,
taxes,
infrastructure
Neoclassical Theory (5)

 Neoclassical theory is a reaction from the classical theory which states

that a country's economic growth depends on market forces: capital,
labor and technology.

Where :
 Yt = t-year economic growth rates
 Kt = amount / capital stock / t-year capital growth rate
 Lt = the number of labor in the t-year
 Tt = t-year technological level
 a = capital's contribution to output
 B = Labor contribution to output
Empirical Studies of Neoclassical Theory

 Hulten and Schwab conducted a study of the effects of technological

development, capital stock growth, and internal labor determine differences
in regional growth in 1984 for 9 regions in the United States.
 Hulten and Schwab calculates revenue growth in the manufacturing sector
with three main factors, namely: labor growth, capital stock growth, and
residual components states technological developments.
 One important finding from the Hulten and Schwab study is in the track
region sun (sunbelt) has a faster income growth rate than at snowbelt region
and there is no difference in productivity growth between the region
 Other results show that the difference in growth in the region The United
States is mainly caused by differences in labor growth and moreover by the
difference in capital stock growth
Empirical Studies of Neoclassical Theory
(2)
Empirical Study of Sjoholm (1999) :

 An empirical study from Sjoholm (1999) looked at

productivity growth in Indonesia both nationally and
regionally
 Productivity growth theory used in Sjoholm's empirical
study based on studies conducted by MAR, Porter, and
Jacobs that interprets technological developments
becomes wider and is an externality factor called
Knowledge Spillover
Model
 Sjoholm uses growth terminology so operationally it uses equations

Where :
 yr= economic growth rates
 kr = capital growth rate
 lr = labor growth rate
 gr = technological level (knowledge spillover)
 a = income elasticity of capital
 B = income elasticity of labor
Data

 The data used in this empirical study are Industry Statistics data
from the Agency Statistics Center (BPS).
 Data is grouped into 3 different levels, namely: national
aggregate, province, and regency to consider regional
influence.
 As a sample data were taken for 1980 and 1991
 Industrial data 1980 consisted of 8,086 data company and for
1991 there were 16,382 data company
research result

 Study results show that growth labor and capital influence on productivity
growth both for national and regional aggregates
 labor growth shows a significant effect on productivity growth for each
level of analysis due to several factors :
1. factor considered only the quantity of labor and not quality
2. contains a scale effect which means that a company is getting bigger
will be more efficient
3. Indonesia's economy is characterized by a surplus of labor so labor
wages are lower than marginal productivity
research result (2)

 Specialization variables should have a positive influence. While the

regression results shows that the coefficient is negative and significant for
the national aggregate. This shows that many large industries have
productivity growth relatively low.
 Competition variables have positive coefficients for national aggregates
and negative for district level. The overall coefficient is not significant so it
can be said that competition has no effect on productivity growth in
Indonesia
 The DFI coefficient for national aggregate is positive and significant
Conclusions and suggestions

 The Neoclassical growth model provides a basis for understanding

differences in revenue growth between regions.
 The model emphasizes the presence of three factors which affects
regional growth differences, namely: labor growth, capital stock
growth, and technological development.
 Study conducted by Sjoholm (1999) for Indonesian data shows that
growth labor and capital influence on productivity growth both for
national and regional aggregates. While the knowledge spillover factor
for the regional level is lacking support the theory that emphasizes that
these factors can influence growth productivity.
 This model is still possible to be developed by looking at the level
regional, both provincial and regency based on smaller industrial
sectors, for example specifically for the food industry, for the textile
industry and so on.
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