“New Growth Theories”

Endogenous Growth Models

J.D. Han
King’s University College
UWO
 1. Problems of Neo-Classical Growth
Model = Solow Model
• Convergence
MPK eventually declines

• Technological Advances may eliminate

convergence, but they are Exogenous in the
model- The growth model itself does not explain
the TA, and technical innovation happens out of
blue, and is injected into Solow Model.
2. Endogenous Growth Model and
New Explanatory Variable
• Endogenous Economic Growth Model
• New Explanatory Variables
- Human Capital with Knowledge; It is separate
Physical Capital with Technical Innovation; we
can have an accumulation/evolution function for
Human Capital
- Other variables measuring quality of human
factors may be tried.
• No convergence – MPK does not have to decline
if there is an increase in Human Capital
The contribution of this model is that it
emphasizes the link between
Technical innovation, Human Capital, and
Institutions including Government.

Cf. The previous Neo-Classical economists

emphasized the close relationship between
Technical Innovation and Physical Capital.
Formal EG Model:
Romer-Mankiew-Weil Model
• Technological change is the result of the
intentional actions of people, such as Invention,
and Research and Development

• Some institutions promote innovation and R & D,

and others inhibit R & D.

• Romer supports Government-funding for

Educational Institution and R & D.
http://www.stanford.edu/~promer/EconomicGrowth.pdf
Growth, Technology and Education
Engelbrecht
– At an early stage of economic development, the level
of education plays important role in technological
catch-up

– Productivity growth is more rapid where countries

have higher levels of average schooling

– Human capital has largest effects when specific to

subcategories important for technological diffusion
(science, math, engineering)
 3. Human Capital:

• What is it?
 Human Capital Theory
pioneered by Gary S. Becker
• (1964, 1993, 3rd ed.). Human Capital: A
Theoretical and Empirical Analysis, with
Special Reference to Education. Chicago,
University of Chicago Press.
• human capital – “our knowledge, skills
learning, talents and abilities.” (Definition by
OECD)
http://www.oecd.org/document/43/0,3343,en_21571361_37705603_37781227_1_1_1_1,00.html
 Labor versus Human Capital
• Labor
- Quantity of workforce
- physical
- solated , invididual

• Human Capital
-Quality of workforce
-Intellectual
- Between Humans, Institutional
 Unlike physical labor (and the other
factors of production), knowledge is:
• Expandable and self-generating with use: as
doctors get more experience, their knowledge
base will increase, as will their endowment of
human capital. The economics of scarcity is
replaced by the economics of self-generation.
• Transportable and shareable: knowledge can
be moved and shared. This transfer does not
prevent its use by the original holder. It is
public goods.
 Quantification of Human Capital
• Now economists want to find the measure of
Haman Capital:

• They look at Education Indexes, such as the

years of Schooling.
 How to quantify Human Capital?
• Education*
• (years of )Schooling
• Literacy
Evidence: Economic Growth and the Quality of Human
Capital

• One standard deviation

increase in international
test scores (generalized)
impacts growth rate by 1%
per year
• 1% rise in literary scores
compared to the
international average
associated with 2.5% rise
in productivity and 1.5%

Robert Barro; The American Economic

in GDP per capita
Review; May 2001
 4. Math of the Formal Model:
Romer-Mankiew-Weil Model
• Instead of Y= A K L1-
of conventional Neo-Classical Model

• proposes Y = A K H L
• Because of H,
there is no Convergence;

an increase in H can cancels the decreasing MP.

H becomes the engine of growth

 5. Empirical Testing of Endogenous
Growth Model

• Run a restricted regression of

log (dY) = α0 + α1 log (dK) + α2 log (dH) + α3 log (dL).

Empirical results are mixed

• Remaining Ambiguity:
If H is measured by a narrow concept of “Schooling”, it
delays but eventually shows the DMR again.
http://www2.warwick.ac.uk/fac/soc/economics/seminars/macro/mankiw2.pdf
 6. Limitations and Extension

A Lot of Remaining Ambiguity of Human Capital

-not fully captured by a single, individual measure of
education
eg) military services, and non-school training and
services are not formally included in education, but
should be included in case of nation-wide compulsory
military services.
-not only quantity of education but also quality of
education
-some authors suggest that education system should be
included
* Example of Extension into a ‘system’
by Peter Howitt

– Education policies need to be appropriate to

country’s position in relation to the frontier
- May explain discrepancies in correlations
between education and growth
- Effects of liberal trade policy on domestic
innovation
7. Some Other Less Formal Models
of Endogenous Growth model
 Example 1) Financial Development
by King and Levine
• Y = f( H, M3/Y; K, L)
Y = f( H, M3/Y , G/Y, (M+X)/Y, I/Y, INF)

• Empirical results:
H, M3/Y, IY are significant: /t-value/>1.96
INF, G/Y, (M+X)/Y are not significant.
Example 2)Curse of Natural Resources
by Carlos Leite
http://ideas.repec.org/p/imf/imfwpa/99-
85.html

Model: Y = f( R; K, L)
Results: Resources have negative impacts on Y.

Conclusion: “Nature corrupts human beings”

- Natural resources decrease Human capital.
 Excellent References for
Corruption
http://qcpages.qc.cuny.edu/Writing/Sun%20-%20PSCI%20384W%20S08.pdf

• *TI Corruption Perception Index and Barometer,

www.transparency.org
• *WB Governance Indicators,
http://info.worldbank.org/governance/wgi2007/
• *WB and ERDB Business Environment and Enterprise
Performance Surveys,
• http://info.worldbank.org/governance/beeps/
• *UN Interregional Crime and Justice Research Institute,
International Crime
• Victims Surveys,
http://www.unicri.it/wwd/analysis/icvs/statistics.php
 Example 3) One of More
Comprehensive Models
• http://www.imf.org/external/pubs/ft/wp/
2004/wp04217.pdf
 Summary
Formal
Endogenous Capital
Growth Theory
Decreasing MP
Labor (Forces)

Technology
Growth R & D: New Tech
Diffusion: Existing

Government
Policy
Education:
Human Captial
Schooling
Literacy

Ad hoc
Endogenous
Growth Model Other Preliminary Variables:
(No) Corruption
Order (Crime Rate)
 The Bottom line is
Endogenous Growth Theory may be at the frontier line,
but still falls within the Neo-classical economics.
Just like Technology, Human Capital complements
Capital. But what exactly human capital is, and how
it is best measured are still ambiguous.
It is still very narrow: It does not give enough of weight
to ‘Invisible’ Mindset or Value System in explaining
East Asian Economic Growth. It is only because it
cannot be quantified, and if it is not quantified,
economists do not use it.