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Economic Growth
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Lecture notes of 80 pages for the course Economic Growth at UoEX
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Economic GrowthTable of Contents
Week 1 – Neoclassical Growth Theory................................................................................5
Solow Model b. 1956 ..................................................................................................................5
Summary .......................................................................................................................................................5
The Produc on Func on...............................................................................................................................5
The Investment Func on ..............................................................................................................................5
The Investment-You-Need Func on..............................................................................................................6
Growth Accoun ng.....................................................................................................................7
A Linear Regression for Growth ....................................................................................................................7
What Ma ers Most? .....................................................................................................................................8
Weil’s Study...................................................................................................................................................8
Aghion and Howi ’s Study............................................................................................................................8
Weil and Aghion/Howi ................................................................................................................................8
Easterly, The Elusive Quest for Growth .........................................................................................................8
What’s Wrong with Growth? ........................................................................................................................9
Reading ......................................................................................................................................9
How Growth Happens: Liberalism, Innovism, and the Great Enrichment by Deirdre Nansen McCloskey....9
Week 2 – Neoclassical Growth Theory ..............................................................................10
Seminar – 18th January 2021 ....................................................................................................10
How Technology Di uses ............................................................................................................................10
The Interna onal Di usion of Technology ..................................................................................................10
Endogenous Growth Theory 1980s ...........................................................................................13
Central Proposi on: No Diminishing Returns to Capital .............................................................................13
Learning by Doing .......................................................................................................................................13
Deriving the Endogenous Growth Produc on Func on .............................................................................13
The Constant Returns Case – the AK Model................................................................................................14
Main Neoclassical Predic ons Are Now Reversed ......................................................................................14
Summary .....................................................................................................................................................17
The Convergence of Na ons .....................................................................................................17
Convergence – Do Poorer Countries Catch Up?..........................................................................................17
Ways of Tes ng for Convergence – First Test – Condi onal Convergence Test ...........................................18
Convergence Clubs......................................................................................................................................18
Convergence Between Con nents ..............................................................................................................19
Developed vs Developing Countries ...........................................................................................................19
Ways of Tes ng for Convergence – Second Test – Uncondi onal Convergence Test ..................................20
Ways of Tes ng for Convergence – by Robert Barro ...................................................................................20
Ways of Tes ng for Convergence – Third Test.............................................................................................20
Summary .....................................................................................................................................................21
Lucas’s Millennium Model ........................................................................................................21
Lucas’ Technological Di usion Model .........................................................................................................21
Predic ons ..................................................................................................................................................22
Evidence that the Lead Country (US) has the Steadiest Growth.................................................................23
More Evidence ............................................................................................................................................23
Since 2000, Inequality Between Countries has Fallen.................................................................................24
, Inequality Has Started to Fall ......................................................................................................................24
Against Lucas’ Model ................................................................................................................25
Hausman et al – Growth Accelera ons.......................................................................................................25
Sta s cally Signi cant Factors in Growth Accelera ons .............................................................................25
Movements Towards and Away from Democracy is Equally Good for Growth?.........................................26
Reading ....................................................................................................................................26
The Great Interna onal Divergence Can Be Overcome, Bourgeois Equality, McCloskey ............................26
Are Developing Countries Catching Up? By Jomo and Popov .....................................................................26
Growth Accelera ons by Hausmann, Pritche and Rodrik.........................................................................26
Week 3 – Technology and Growth ....................................................................................27
Seminar – 25th January 2021 ....................................................................................................27
Steady State ................................................................................................................................................27
Seminar – 8th March 2021 ........................................................................................................27
Why is Produc vity Growth So Low? From Focus Economics.....................................................................27
The Broad-based Produc vity Slowdown, in Seven Charts by Alistair Dieppe............................................27
Cracks in the Great Stagna on by Caleb Watney ........................................................................................27
The Great Produc vity Slowdown.............................................................................................28
Produc vity Growth....................................................................................................................................28
Causes of the Slowdown .............................................................................................................................28
Summary – Non-Technical Reasons for Produc vity Slowdown .................................................................30
Technological Pessimism...........................................................................................................31
Fall in the Number of Innova ons...............................................................................................................31
Is the Produc vity of R&D Falling?..............................................................................................................31
Reading ....................................................................................................................................31
The Produc vity Slowdown: Is It The ‘New Normal’? by Nicholas Cra s ...................................................31
Why Is US Produc vity Growth So Slow? By Baily and Montalbano...........................................................32
Crea ve Destruc on by Phil Mullan............................................................................................................33
Week 4 – Technology and Growth ....................................................................................33
Seminar – 1st February 2021.....................................................................................................33
Technology, Growth and Popula on ...........................................................................................................33
Tim Harford, The Logic of Life .....................................................................................................................34
Technological Op mism............................................................................................................34
Predic ng the Future ..................................................................................................................................34
The Op mis c View ....................................................................................................................................34
Genius Theories ..........................................................................................................................................34
Automa on and Ar cial Intelligence.......................................................................................35
AI as a General Purpose Technology & The Singularity...............................................................................35
What Does Automa on and Ar cial Intelligence Mean for Economic Growth? .......................35
Automa on and Produc vity ......................................................................................................................35
Distribu on E ects......................................................................................................................................36
Ar cial Intelligence ...................................................................................................................................36
Fully Automated Luxury Communism .........................................................................................................36
Readings...................................................................................................................................37
Robots at Work by Graetz and Michaels .....................................................................................................37
Modern Produc vity Paradox: A Clash of Expecta ons and Sta s cs by Brynjolfsson, Rock & Syverson ..37
Are We Approaching an Economic Singularity? Informa on Technology and the Future of Economic
Growth by Nordhaus...................................................................................................................................38
, Seminar – 22nd February 2021 .................................................................................................38
Automa on and Ar cial Intelligence ........................................................................................................38
Week 5 – Post-Keynesian Growth Theory..........................................................................40
Post-Keynesian Proposi ons .....................................................................................................40
Post-Keynesian Principles............................................................................................................................40
Why You Must Disaggregate .......................................................................................................................40
Is Growth Sectoral or Structural? ................................................................................................................41
Amount of Interdependence Between Industries Varies ............................................................................41
Summary .....................................................................................................................................................42
Increasing Returns, Rising Wages and Growth...........................................................................42
Virtuous Circle.............................................................................................................................................42
The Increasing-Returns Op mists ...............................................................................................................42
Why Should Manufacturing Have Increasing Returns? ...............................................................................43
Evidence for Increasing Returns..................................................................................................................43
How Low Demand A ects Long Run Growth ..............................................................................................43
Actual and Natural Rate of Growth.............................................................................................................43
Wages, Pro ts and Growth .........................................................................................................................44
Summary .....................................................................................................................................................44
The Balance of Payments Constraint on Growth........................................................................44
Balance of Payments Constrained Growth..................................................................................................44
A Simple Balance of Payments Constrained Growth Model .......................................................................44
Why Might π Exceed ε?...............................................................................................................................45
Why Can’t You Solve Your De cit with a Falling Exchange Rate Instead? ...................................................45
Tes ng for a Balance of Payments Constraint .............................................................................................46
Cri cism of the Balance of Payments-Constrained Growth Theory............................................................46
Summary .....................................................................................................................................................46
Readings...................................................................................................................................46
Maybe We Have the Economic-Growth Equa on Backward by Noah Smith..............................................46
Against the Whole Concept and Construc on of the Balance of Interna onal Payments by Robert Higgs47
A Sectoral Explana on of Per Capita Income Convergence and Divergence: Es ma ng Verdoorn’s Law for
Countries at Di erent Stages of Development by Magacho and McCombie..............................................47
Economic Growth in an Open Developing Economy: The Role of Structure and Demand by A.P. Thirlwall48
Week 7 – Trade and Growth .............................................................................................49
Trade – Gains from Trade, Barriers to Trade, Measuring the E ect of Growth on Trade .............49
Gains from Trade.........................................................................................................................................49
Does Trade Reform Promote Economic Growth? A Review of Recent Evidence by Douglas A. Irwin.........50
Mul -country Studies .................................................................................................................................50
Wacziarg & Welch (2008)............................................................................................................................51
Estraveordal & Taylor (2013).......................................................................................................................51
Correla on Doesn’t Mean Causa on – Does Trade Cause Growth or Does Growth Cause Trade? ............51
Summary .....................................................................................................................................................52
The Case Against Free Trade......................................................................................................52
Import Subs tu on.....................................................................................................................................53
Golden Age: The Claim................................................................................................................................54
Free Trade and Prosperity: How Openness Helps the Developing Countries Grow Richer and Combat
Poverty by Arvind Panagariya .....................................................................................................................54
Did Import Subs tu on Work? ...................................................................................................................54
What Kind of Country Bene ts from Free Trade? .......................................................................................55
Week 8 – Ins tu ons and Growth ....................................................................................55
, Government and Growth ............................................................................................................................55
Macroeconomic Policy and Growth ............................................................................................................56
Corrup on and Growth...............................................................................................................................57
Why are Some Countries Poorer than Others? ..........................................................................57
Explana on by Elimina on..........................................................................................................................57
Well-De ned Property Rights......................................................................................................................58
Trust ............................................................................................................................................................58
Democracy and Growth ............................................................................................................58
How Does Democracy A ect Growth?........................................................................................................58
Do Ins tu ons Ma er?.............................................................................................................61
It’s Not About Ins tu ons...........................................................................................................................61
Industrial Policy and Growth.......................................................................................................................61
How Does a Country Iden fy Where its Compara ve Advantage Lies?......................................................61
Readings...................................................................................................................................62
Bea ng the Odds: Jump-Star ng Developing Countries by Jus n Yifu Lin and Céles n Monga (2017)......62
Week 9 – Geography, Culture and Growth........................................................................63
Geography and Growth.............................................................................................................64
Shape, Coast, Climate and Growth .............................................................................................................64
Do Landlocked Countries Do Worse? ..........................................................................................................64
Growth and La tude ...................................................................................................................................64
The Reversal of Fortune ..............................................................................................................................65
Reversal of Fortune .....................................................................................................................................65
Why Micro Persistence but Macro Reversal?..............................................................................................66
What’s the Worst Number of Europeans to Have in Your Country? ...........................................................66
Culture and Growth ..................................................................................................................67
De ning and Measuring Culture .................................................................................................................67
Ancestry and Growth................................................................................................................67
The Persistence of (Subna onal) Fortune by Maloney and Caicedo...........................................................67
Growth Genes .............................................................................................................................................67
Religion .......................................................................................................................................................68
A Mix of Na onali es may Help or Hinder Growth.....................................................................................68
Gene c Closeness to Another Country Makes Convergence (Catching-up) Easier .....................................68
How Deep Are the Roots of Economic Development? By Spolaore and Wacziarg .....................................68
Week 10 – The Consequences of Growth ..........................................................................69
Weil page 484. ............................................................................................................................................69
More From Less ........................................................................................................................70
Growth and the Environment .....................................................................................................................70
How Climate Change Works ......................................................................................................71
Climate Change Uncertainty .......................................................................................................................72
Costs of Further Warming .........................................................................................................72
Costs of Climate Change .............................................................................................................................72
Meta-Studies...............................................................................................................................................72
Climate Change: Three Reasons to be Cheerful ..........................................................................................75
Readings...................................................................................................................................75
Be Agnos c About Growth: From Growth Addicted to Growth Agnos c by Kate Raworth (2017) ............75
Week 11 – The Consequences of Growth (con nued)........................................................76
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