On%20the%20Mechanics%20of%20Economic%20Development

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On the Mechanics of Economic Development

• By Robert E. Lucas
• Discussant Wang Xiongjian
• Oct 2, 2004

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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.

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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

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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.

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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.

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The basic idea of the paper

• To provide some kind of framework for organizing
  facts, for judging which represent opportunities
  and which necessities.

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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.

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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.

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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

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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

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What has the paper done?

• Human capital and growth content
• one-sector model interaction of physical
  and human capital accumulation

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What has the paper done?

• Human capital and growth content
• Features of the model there exist balanced
  paths and each countrys relative income position
  is dictated by its initial situation, and
  inequality persists
• the engine of growth human capital.

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What has the paper done?

• Learning-by-doing and comparative advantage
• motivation model the evolution of national
  incomes in a two-good world

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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
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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

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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.

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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

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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

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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

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Methodology

• There is no point in arguing over a models
  assumptions until one is clear on what question
  it will be used to answer.

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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.

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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.

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