This paper examines whether the Solow growth model is consistent with the international variation in the standard of living. It shows that an augmented Solow model that includes accumulation of human as well as physical capital provides an excellent description of the cross-country data. The paper also examines the implications of the Solow model for convergence in standards of living, that is, for whether poor countries tend to grow faster than rich countries. The evidence indicates that, holding population growth and capital accumulation constant, countries converge at about the rate the augmented Solow model predicts. This paper takes Robert Solow seriously. In his classic 1956 article Solow proposed that we begin the study of economic growth by assuming a standard neoclassical production function with decreasing returns to capital. Taking the rates of saving and population growth as exogenous, he showed that these two vari- ables determine the steady-state level of income per capita. Be- cause saving and population growth rates vary across countries, different countries reach different steady states. Solow's model gives simple testable predictions about how these variables influ- ence the steady-state level of income. The higher the rate of saving, the richer the country. The higher the rate of population growth, the poorer the country. This paper argues that the predictions of the Solow model are, to a first approximation, consistent with the evidence. Examining recently available data for a large set of countries, we find that saving and population growth affect income in the directions that Solow predicted. Moreover, more than half of the cross-country variation in income per capita can be explained by these two variables alone. Yet all is not right for the Solow model. Although the model correctly predicts the directions of the effects of saving and

/pdf/a-contribution-to-the-empirics-of-economic-growth-27cl5gkqam.pdf

A Contribution to the Empirics of Economic Growth

Explaining cross-country differences in growth rates requires not only an understanding of the link between growth and public policies, but also an understanding of why countries choose different public policies. This paper shows that ethnic diversity helps explain cross-country differences in public policies and other economic indicators. In the case of Sub-Saharan Africa, economic growth is associated with low schooling, political instability, underdeveloped financial systems, distorted foreign exchange markets, high government deficits, and insufficient infrastructure. Africa's high ethnic fragmentation explains a significant part of most of these characteristics.

https://williameasterly.files.wordpress.com/2010/08/17_easterly_levine_africasgrowthtragedy_prp.pdf

Africa's Growth Tragedy: Policies and Ethnic Divisions

The present historical moment may seem a particularly inopportune time to review Bowling Alone, Robert Putnam's latest exploration of civic decline in America. After all, the outpouring of volunteerism, solidarity, patriotism, and self-sacrifice displayed by Americans in the wake of the September 11 terrorist attacks appears to fly in the face of Putnam's central argument: that \"social capital\" -defined as \"social networks and the norms of reciprocity and trustworthiness that arise from them\" (p. 19)'has declined to dangerously low levels in America over the last three decades. However, Putnam is not fazed in the least by the recent effusion of solidarity. Quite the contrary, he sees in it the potential to \"reverse what has been a 30to 40-year steady decline in most measures of connectedness or community.\"' As an example of how the current \"war on terrorism\" could generate a durable civic renewal, Putnam points to the burst in civic practices that occurred during and after World War II, which he says \"permanently marked\" the generation that lived through it and had a \"terrific effect on American public life over the last half-century.\" 3 If Americans can follow this example and channel their current civic

Bowling alone: The collapse and revival of American community

This paper analyzes the role of wealth distribution in macroeconomics through investment in human capital. It is shown that in the presence of credit markets' imperfections and indivisibilities in investment in human capital, the initial distribution of wealth affects aggregate output and investment both in the short and in the long run, as there are multiple steady states. This paper therefore provides an additional explanation for the persistent differences in per-capita output across countries. Furthermore, the paper shows that cross-country differences in macroeconomic adjustment to aggregate shocks can be attributed, among other factors, to differences in wealth and income distribution across countries.

/pdf/income-distribution-and-macroeconomics-1a56oblrfr.pdf

Income Distribution and Macroeconomics

This paper examines stock market co-movements. It begins with a discussion of several conceptual issues involved in measuring these movements and how to test for contagion. Standard tests examine if cross-market correlation in stock market returns increase during a period of crisis. The measure of cross-market correlations central to this standard analysis, however, is biased. The unadjusted correlation coefficient is conditional on market movements over the time period under consideration, so that during a period of turmoil when stock market volatility increases, standard estimates of cross-market correlations will be biased upward. It is straightforward to adjust the correlation coefficient to correct for this bias. The remainder of the paper applies these concepts to test for stock market contagion during the 1997 East Asian crises, the 1994 Mexican peso collapse, and the 1987 U.S. stock market crash. In each of these cases, tests based on the unadjusted correlation coefficients find evidence of contagion in several countries, while tests based on the adjusted coefficients find virtually no contagion. This suggests that high market co-movements during these periods were a continuation of strong cross-market linkages. In other words, during these three crises there was no contagion, only interdependence.

No Contagion, Only Interdependence: Measuring Stock Market Co-Movements

Standard one-sector growth models often have the counterfactual implication that economies with access to similar technologies will converge to a common balanced growth path. We propose an elaboration of the Diamond model that permits multiple, locally stable stationary states. This multiplicity is due to increasing social returns to scale in the accumulation of human capital.

Threshold Externalities in Economic Development

PRINCETON, NEW JERSEY account libcralization as a signal of commitmcnt to economic reform. Wc also summarizc thc empirical rcscarch on political determinants of capital controls. Another major issue in open-economy macroeconomics is sovereign debt, that is, the debt owed by a government to foreign creditors. hsucs of sovereign debt arc substantially different than those concerning nonsovereign debt and arc inherently political. For example, since it is oWed by the government, repayment decisions are not connectcd with any question of the ability to repay. With few exceptions, a borrower country has the technical ability to repay the debt, so that non-repayment is a political issue. In Section 12.8, we analyze basic models of sovereign ,c,, borrowing and its repayment, especially the role of penalties in enforcing repayment. We also consider the importance of political versus nonpolitical penalties in the decision of whether to issue debt at home or abroad. The final topic considered is foreign assistance, especially lending by governments and international financial organizations to developing countries for the purpose of structural adjustment. Our point of departure is the strikingly disappointing results that foreign aid programs have had in alleviating poverty and stimulating growth in the recipient countries, a failure that we argue reflects the political nature of aid. Foreign assistance is inherently political for a number of reasons. First, the incentives of the donors may be political, not only in the obvious sense that aid is often given for strategic political reasons, but also because the nature of aid (and especially its ineffectiveness) often reflects political and bureaucratic conflicts within the donor organizations. Second, the ineffectiveness of aid is also very much attributed to misappropriation by the recipients, where this is widely believed to reflect political factors. There are a number of models which formalize the role of political factors, as well as much empirical work detailing the role of political factors in explaining the ineffectiveness of aid.

Political economy in macroeconomics

When a stabilization has significant distributional implications (e.g., tax increases to eliminate a large budget deficit), socioeconomic groups may attempt to shift the burden of stabilization onto other groups. The process leading to stabilization becomes a "war of attrition," each group attempting to wait the others out and stabilization occurring only when one group concedes and bears a disproportionate share of the burden. The authors solve for the expected time of stabilization in a model of "rational" delay and relate it to several political and economic variables. They motivate this approach and its results by comparison to historical and current episodes. Copyright 1991 by American Economic Association.

/pdf/why-are-stabilizations-delayed-4o7rpmkekr.pdf

Why Are Stabilizations Delayed

Like other recent studies, we find a political deficit cycle in a large cross-section of countries, but show that this result is driven by the experience of "new democracies". The political budget cycle in new democracies accounts for the finding of a budget cycle in larger samples that include these countries and disappears when they are removed from the larger sample. The political deficit cycle in new democracies accounts for findings in both developed and less developed economies, for the stronger cycle in weaker democracies, and for differences in the political cycle across governmental and electoral systems. Our findings may reconcile two contradictory views of pre-electoral manipulation, one that it is a useful instrument to gain voter support and a widespread empirical phenomenon, the other that voters punish rather than reward fiscal manipulation.

Political Budget Cycles in New Versus Established Democracies

https://www.nber.org/system/files/working_papers/w10539/w10539.pdf

Allan Drazen

Papers

Threshold Externalities in Economic Development

Political economy in macroeconomics

Why Are Stabilizations Delayed

Political Budget Cycles in New Versus Established Democracies

Political budget cycles in new versus established democracies