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Economic Reform and the Process of Global Integration

01 Jan 1995-Vol. 1995, Iss: 1, pp 1-118
TL;DR: The World Trade Organization (WTO) was established by agreement of more than 120 economies, with almost all the rest eager to join as rapidly as possible as mentioned in this paper, and the agreement included a codification of basic principles governing trade in goods and services.
Abstract: WHEN T H E BROOKINGS Panel on Economic Activity began in 1970, the world economy roughly accorded with the idea of three distinct economic systems: a capitalist first world, a socialist second world, and a developing third world which aimed for a middle way between the first two. The third world was characterized not only by its low levels of per capita GDP, but also by a distinctive economic system that assigned the state sector the predominant role in industrialization, although not the monopoly on industrial ownership as in the socialist economies. The years between 1970 and 1995, and especially the last decade, have witnessed the most remarkable institutional harmonization and economic integration among nations in world history. While economic integration was increasing throughout the 1970s and 1980s, the extent of integration has come sharply into focus only since the collapse of communism in 1989. In 1995 one dominant global economic system is emerging. The common set of institutions is exemplified by the new World Trade Organization (WTO), which was established by agreement of more than 120 economies, with almost all the rest eager to join as rapidly as possible. Part of the new trade agreement involves a codification of basic principles governing trade in goods and services. Similarly, the International Monetary Fund (IMF) now boasts nearly universal membership, with member countries pledged to basic principles of currency convertibility. Most programs of economic reform now underway in the developing world and in the post-communist world have as their strategic aim the

Summary (4 min read)

Liberalization and Global Integration before 1970

  • One and one-half centuries ago, two close observers of the capitalist revolution in Western Europe made a pithy prediction about the course of global economic change.
  • It is often forgotten today, in the flush of the communist collapse after 1989, that global capitalism has emerged twice, at the end of the nineteenth century as well as the end of the twentieth century.
  • Starting around 1840, Western European powers wielded their superior industrial-and hence military-power to challenge traditional societies around the world.
  • It is often suggested that this free trade era ended in 1879 with a renewed wave of protectionism, starting with Bismarck's acceptance of the famous tariff of bread and iron, which raised imports duties on agriculture and steel.
  • International gold and silver standards became nearly universal after the 1870s, eventually embracing North and South America, Europe, Russia, Japan, China, as well as other European colonies and independent countries.

Ironically, while

  • Probably the most important factor behind the advent of SLI policies after World War II was the collapse of the world trading system itself.
  • Since almost none of the richer countries had convertible currencies or low external tariff rates, the government of any individual developing country naturally viewed its trading prospects with considerable skepticism.
  • This "export pessimism" was shared by a wide range of postwar economic analysts.
  • Nor does the closed nature of the world economy in the late 1940s explain the persistence of closed policies in developing countries even after the United States, Canada, the European Community, and Japan had adopted more outward policies in the 1960s.
  • A full explanation must therefore look to other factors.

MACROECONOMIC

  • The pressures of wartime inflationary finance were probably an even greater factor in the spread of inconvertibility.
  • In India, for example, various attempts to relax price controls and to reestablish free trade led to a spurt in prices and a subsequent reversal of the policy.
  • In the post-World War II world, the founding fathers of the newly independent industrial economies almost all viewed state-managed development in political as well as economic terms, and specifically as a way to foster national unity and the political power of the national government.
  • The first was licensing of exports to direct these to specific destinations.
  • In Latin America from the 1950s to the 1980s, for example, protectionism tended to be favored during democratic periods, since workers (who, as the scarce factor, favored protection) could outvote landowners; free trade, on the other hand, was typically promoted by authoritarian governments, siding with large landowners and mineowners.

The Classification and Timing of Trade Policies

  • The outcome of these various forces produced an overwhelming turn toward socialism or SLI in the developing world during the 1940s and 1950s, which was only gradually reversed over the next forty years.
  • According to their classifications, shown in tables 1-5, seventy-eight developing countries outside of the Soviet bloc chose some form of inward-looking development strategy in the postwar period.
  • Of these, forty-three had opened their economies by 1994 (see the authors have found eight other developing countries that followed this pattern (see table 1 ) and thirteen that had episodes of temporary liberalization (these periods are identified in parentheses in tables 1-5).
  • The quantification of nontariff barriers is also inherently difficult.
  • The authors also include a dummy variable if the country is a British Commonwealth country, and another dummy variable if it is a former French colony, on the grounds that the type of colonial relationship might affect the timing of postcolonial trade liberalization.

Liberalization Episodes in the 1950s and 1960s

  • While the typical developing country started out as a closed economy and liberalized later, the authors have identified fifteen countries that had an ini-47.
  • Liberalization of former French colonies in Africa has tended to be delayed because of overvalued exchange rates in the French franc zone.
  • This is corroborated by economic histories of these countries, which rarely give slow growth as a reason for the policy switch.
  • In the notes to the table, the authors also report high average growth rates in two later temporary liberalizations, in Sri Lanka and Venezuela.

The Impact of Postwar Global Integration on Economic Performance, 1970-89

  • Avoidance of extreme macroeconomic crises, and structural change.the authors.
  • In the process the authors demonstrate the close relationship between economic integration and economic convergence, that is, poor countries tend to grow faster than richer countries, as long as the poor and rich countries are linked together by international trade.
  • Poor, closed economies have often performed significantly less well than the richer countries.
  • For the purposes of this section, the authors define a country as open if it satisfies the five policy criteria for the duration of the 1970s and 1980s.
  • Countries that were closed during part of this period but subsequently liberalized are treated as closed economies.

Openness and Growth

  • During 1970-89, the authors find a strong association between openness and growth, both within the group of developing and the group of developed.
  • If convergence predominated in the data, then there would be a negative relationship between initial income in 1970 and subsequent growth between 1970 and 1989.
  • The far more common case is that developing countries started closed, performed poorly, and then opened.
  • "I have found some clear evidence that during 1980-90 more exports are positively associated with higher growth rates across Chinese cities, also known as To quote his conclusions.
  • Based on the regression analysis, the authors may make four conclusions: -There is strong evidence of unconditional convergence for open countries, and no evidence of unconditional convergence for closed countries .7 -Closed countries systematically grow more slowly than do open countries, showing that "good" policies matter.

Trade Policy and Changes in the Export Structure

  • One of the original arguments for SLI was the promotion of manufacturing exports.
  • Raul Prebisch and other economists worried that raw materials exporters that maintained free trade would be unable to industrialize, and would therefore be vulnerable to long-term adverse movements in the terms of trade between primary and manufactured goods.
  • Paul Krugman gave an influential exposition of this infant-industry argument in a formal model of increasing-returns-to-scale production resulting from learning by doing.
  • An alternative, and formally equivalent, way to state their conclusion is that convergence is conditional on policies, not on structural variables (for example, initial income or level of education).
  • The authors therefore argue against the notion of a low-income "development trap," since open trade policies (and correlated market policies) are available to even the poorest countries.

Trade Policy and Macroeconomic Crises

  • Jeffrey Sachs argued in 1985 that the outward orientation of the East Asian economies had saved them from the developing country debt crisis that ravaged Latin America.
  • To address this issue the authors classify countries according to their trade orientation in the 1970s and then examine whether the countries that were open in the 1970s were less likely to experience a severe macroeconomic crisis in the 1980s and 1990s.
  • For these purposes, the authors define a severe macroeconomic crisis by any one of the following three occurrences: -A rescheduling of foreign debt in the Paris Club (official creditors) or the London Club (commercial bank creditors).
  • First, and most important, closed economies often borrowed heavily from foreign sources in order to overcome economic stagnation caused by the deeper problem of poor economic policies.
  • Of these, only Jordan succumbed to a macroeconomic crisis after opening: debt reschedulings in 1987 and 1992, and external payments arrears in 1993.

75. Sachs (1985). 76. See Sachs (1994).

  • Rather than focus on the large majority of countries that succumbed to crisis, it is easier to assess the fourteen that did not: Bangladesh, Botswana, Burundi, China, Colombia, Hungary, India, Iran, Nepal, Papua New Guinea, Rwanda, Sri Lanka, Tunisia, and Zimbabwe.
  • Moreover, Burundi and Rwanda have been subject to extreme internal unrest.

Recent Reforms and Economic Performance

  • The previous section compared countries with long-standing policies of open trade during the nineteen-year period 1970-89, with countries that were closed during some or all of the period.
  • In addition to this group of countries, the authors also examine the recent growth performance of the twenty-five post-communist economies of eastern Europe and the former Soviet Union, to see how growth performance relates to trade reform and overall economic reform.
  • Here, the authors stress again that trade reform is almost always accompanied by a much broader range of reforms, including macroeconomic stabilization, internal liberalization (for example, the end of price controls), legal reform, and often extensive privatization.
  • First, it could be objected that if growth outcomes were purely random, and countries reformed only when growth fell below a critical threshold, then although the authors would tend to observe higher growth after reform, it would be incorrect to attribute the higher growth to the reform.
  • The authors have also found that certain countries that are sometimes cited as recent reformers, such as the Dominican Republic in the early 1980s and Nigeria between 1986 and 1992, actually did not reform sufficiently (by their criteria), while others that did reform temporarily, such as Venezuela, experienced rapid growth during the episode of liberalization.

Conclusions

  • The authors analysis is necessarily impressionistic and imprecise at several crucial points.
  • There is the spread of an international rule of law, largely through institutions such as the World Trade Organization and the International Monetary Fund.
  • The spread of capitalism in the twenty-five years since the start of the Brookings Panel is an historic event of great promise and significance, but whether the authors will be celebrating the consolidation of a democratic and market-based world system at its fiftieth anniversary will depend on their own foresight and good judgments in the coming years.
  • With monetary instability likely to impede capital flows, the need for a credible monetary policy becomes greater: that may help explain why the gold standard was part of the institutional structure within which capital flowed internationally a century ago.
  • Openness is not enough to produce growth; stable macroeconomic policies, structural policies, and institutions are needed too.

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JEFFREY D.
SACHS
Harvard University
ANDREW WARNER
Harvard
University
Economic Reform and the Process
of
Global Integration
WHEN THE
BROOKINGS Panel on Economic Activity began
in
1970, the
world economy roughly accorded with the idea of three distinct eco-
nomic systems: a capitalist first world, a socialist second world, and a
developing third world which aimed for a middle way between the first
two. The third
world
was
characterized
not
only by
its low levels
of per
capita GDP,
but
also
by
a distinctive economic
system
that
assigned
the
state
sector
the
predominant
role
in
industrialization, although
not the
monopoly
on industrial
ownership
as
in the
socialist economies.
The
years
between 1970 and
1995,
and
especially
the
last
decade,
have
witnessed
the
most
remarkable institutional
harmonization
and
economic
integration among
nations
in
world
history.
While
economic
integration was increasing throughout
the
1970s
and
1980s,
the
extent
of
integration
has come
sharply
into focus
only
since the
collapse
of com-
munism
in
1989.
In
1995
one dominant
global
economic
system
is
emerg-
ing.
The
common set of institutions
is
exemplified by
the new World
Trade
Organization (WTO), which was established by agreement
of
more than 120
economies,
with almost
all the rest
eager
to
join
as
rapidly
as
possible.
Part
of
the new trade
agreement
involves
a
codification
of
basic
principles governing
trade in
goods
and services.
Similarly,
the In-
ternational
Monetary
Fund
(IMF)
now
boasts
nearly
universal member-
ship,
with member
countries
pledged
to basic
principles
of
currency
convertibility.
Most
programs
of economic reform now
underway
in the
developing
world and in the
post-communist
world have as their
strategic
aim
the
1

2
Brookings Paper-s
on
Economic
Activity,
1:1995
integration of
the national economy with the
world economy. Integra-
tion
means
not
only increased market-based trade and
financial
flows,
but also
institutional harmonization with
regard
to
trade policy, legal
codes,
tax
systems, ownership patterns, and other
regulatory arrange-
ments.
In
each of
these areas, international norms
play
a
large
and
often
decisive role
in
defining the terms of the
reform policy. Most
recently,
China made
commitments on international
property rights and trade pol-
icy with a view
toward membership in the
WTO, and membership in
the
world system
more generally. Russian
economic reforms are
similarly
guided by the
overall
aim
of reestablishing the
country's place within the
world market
system.
In
several sections
of its April 1995 agreement
with
the IMF, the
Russian government
commits to abide
by
WTO
princi-
ples, even in
advance of membership.
The goal of this
paper is to document
the
process of global integration
and
to assess its effects
on
economic
growth
in
the
reforming countries.
Using
cross-country
indicators of trade
openness
as the
measures of
each country's
orientation to the world
economy,
we examine the
timing
of
trade
liberalization,
and the
implications
of trade
liberalization for
subsequent growth
and for the
onset or avoidance of
economic crises.
Of
course,
trade liberalization is
usually just
one
part
of a
government's
overall reform
plan for integrating
an
economy
with the
world
system.
Other
aspects
of
such a
program
almost
always
include
price
liberaliza-
tion, budget
restructuring, privatization,
deregulation,
and the
installa-
tion
of a
social
safety
net.
Nonetheless,
the international
opening
of the
economy
is
the
sine
qua
non of the
overall
reform
process.
Trade
liberal-
ization not
only establishes
powerful
direct
linkages
between the econ-
omy
and the
world
system,
but also
effectively
forces the
government
to
take
actions on
the
other
parts
of
the
reform
program
under the
pres-
sures of
international
competition.
For these
reasons,
it
is
convenient
and
fairly
accurate
to gauge
a
country's
overall reform
program
ac-
cording
to the
progress
of
its trade
liberalization.
Our
analysis
helps
to answer several debates
concerning
cross-coun-
try growth patterns.
Most
important,
we
help
to resolve
the
widely
dis-
cussed conundrum
concerning
economic
convergence
in
the world
economy. Long-held
judgments
about
the
development process,
as well
as the
workhorse formal models of economic
growth, suggest
that
poorer
countries
should tend to
grow
more
rapidly
than
richer
countries
and
therefore
should close the
proportionate
income
gap
over time. The

Jeffrey
D.
Sachs
and Andrew
Warner
3
main
reason
for expecting
economic
convergence is that the
poorer
countries can
import capital
and modern
technologies
from
the wealth-
ier countries,
and thereby
reap the
"advantages of
backwardness." Yet
in
recent
decades, there has
been no
overall tendency for
the poorer
countries
to catch
up,
or
converge,
with
the richer
countries.
We
show that
this problem
is readily
explained by the
trade regime:
open economies tend to
converge, but closed economies do
not. The
lack of
convergence in
recent decades
results from the
fact that the
poorer
countries have been
closed to the
world. This is now
changing
with the
spread of trade
liberalization
programs, so that
presumably the
tendencies toward
convergence
will
be
markedly strengthened.
The
power of trade
to promote
economic
convergence is
perhaps the most
venerable
tenet of classical
and neoclassical
economics,
dating
back
to
Adam Smith. As
Smith's
followers have stressed for
generations, trade
promotes growth
through a
myriad channels:
increased
specialization,
efficient resource
allocation
according to
comparative
advantage, diffu-
sion of
international
knowledge through
trade,
and
heightened
domestic
competition
as
a
result of
international
competition.
I
This
paper
has three main
parts.
In the
first section we discuss the
patterns
and
chronology of trade
policy
reforms
in
the
postwar
period.
Viewed from the
perspective of world economic
history since
1850,
the
closed nature
of the
world
trading system
at
the end
of World War
II
was
a
historical
anomaly. The open trade of the late nineteenth and
early
twentieth centuries had
collapsed
following
two world
wars and a
global
depression.
Postwar
liberalization has
painstakingly
restored an
open
trading system somewhat
reminiscent
of
the
world
in
1900,
with
two cru-
cial differences.
First,
developing
countries
in
Africa and Asia are now
sovereign,
rather than
colonies
of the Western
powers.
Second,
the
world
economy
is
increasingly supported
by
international commercial
law agreed to
by individual
governments and
implemented
with the
sup-
port
of international
institutions such as
the WTO and the IMF.
1. Lucas (1988) and Young (1991) observe that standard trade theory predicts an effect
of openness on the level, not the long-run growth rate, of
GDP.
Of course,
a level
effect
can appear as a growth effect for long periods of time, since adjustments
in
real economies
may take place over decades. Some recent theory has introduced various forms of increas-
ing returns to scale with the result that openness can affect long-term growth as well as the
level of income. See Young (1991), Grossman and Helpman (1991), Eicher (1993), and Lee
(1993).

4
Brookings
Papers
on Economic
Activity,
1:1995
The
second section
examines the impact of postwar trade liberaliza-
tion on economic performance
in the developing countries. We demon-
strate the
basic proposition that
open trade leads to convergent rates of
growth, that is, to higher
growth rates in poorer countries than in richer
countries. The
importance of trade
policy
is demonstrated
in
several
cross-country growth
equations in which we hold constant other deter-
minants
of growth. We also show that
open
economies
successfully
avoid balance-of-payments
crises, while many closed economies even-
tually
succumb to such crises.
The third section reviews the
evidence
on
the success of trade
liberal-
ization programs after 1980.
First,
we
show that
in
many developing
countries
trade
liberalization has followed
a severe macroeconomic cri-
sis
(such as
a
debt crisis or
very high inflation).
A
very
few
developing
countries have remained
relatively open
since World War II or since the
time
of
their
independence-Barbados, Cyprus, Malaysia, Mauritius,
Singapore, Thailand, and the Yemen Arab
Republic (North Yemen)-
but
most of the others opened
much later, mainly
in
the 1980s or 1990s,
and
usually
in
response to a
deep macroeconomic crisis.2 In many cases,
economic reform paid off
after a few years in terms of accelerated
growth of GDP. This is true in
all major regions of the world, including
sub-Saharan Africa. In a
small
number of
countries, however, a new
economic crisis ensued after the
start of full-fledged reforms. These set-
backs,
in
Chile
in the
early
1980s,
Venezuela
in
the
early 1990s, and
Mexico
in
late
1994,
seem to be related
to
financial
market liberalization
and
exchange
rate
mismanagement.3
We also
present evidence on the
growth
effects of reforms in
the post-
communist countries
of
eastern
Europe
and the
former Soviet Union.
Here too we
find evidence that
economic reforms lead to a renewal of
economic
growth. Strong reformers
seem
to
outperform
weak
reformers
both
in
terms of
a smaller decline
of
GDP
between
1990
and
1994,
and
in
terms of an earlier
resumption of economic
growth.
The
evidence is
necessarily fragmentary,
however, given
the
very
short
period
for
in
which the
reforms have been
in
operation.
2. Some
developing countries, such as Peru,
Sri Lanka, and several Central
American
countries,
were
rather open at
the
end of World
War
II,
but
then
moved into
a
prolonged
phase of import
substitution in the 1950s and
1960s.
3. See
Sachs,
Tornell, and Velasco (1995) and Warner
(1994) regarding
the
Mexican
crisis.

Jeffrey D. Sachs and Andrew Warner
5
Liberalization and Global Integration
before 1970
One
and one-half centuries ago, two close
observers of the capitalist
revolution in Western Europe made a pithy
prediction about the course
of global economic change. Marx and Engels
correctly sensed the un-
precedented efficiency of the industrial
capitalism that had emerged.
They predicted that as a result of superior
economic efficiency, capital-
ism would eventually sweep through the
entire world, compelling other
societies to restructure along the lines of
Western Europe. In the pun-
gent rhetoric of the Communist Manifesto
they expostulated that:
The bourgeoisie, by the rapid improvement
of all instruments of
production, by
the
immensely facilitated
means of
communication,
draws
all,
even the most
barbarian, nations
into civilization.
The
cheap prices
of
its
commodities are the
heavy artillery
with
which it batters
down all Chinese
walls,
with
which
it
forces
the barbarians' intensely obstinate
hatred of
foreigners
to
capitulate.
It
compels
all nations, on pain of extinction, to adopt
the
bourgeois
mode
of
production;
it
compels
them
to introduce
what it
calls civilization
into their
midst, i.e.,
to
be-
come
bourgeois
themselves. In one
word,
it creates a world after
its own
image.4
Marx and
Engels got
much
disastrously
wrong
in
their
predictions,
but they correctly sensed the decisive global
implications
of
capitalism.
As they foresaw, capitalism eventually
spread
to
nearly
the entire
world,
in a
complex
and sometimes violent
process
that
dramatically
raised worldwide living standards
but also
provoked
social upheaval and
war. It is often forgotten today,
in
the flush of
the
communist
collapse
after
1989, that global capitalism has emerged
twice,
at the end
of
the
nineteenth century as well as the end of the
twentieth century. The
ear-
lier
global capitalist system peaked around
1910
but
subsequently
disin-
tegrated
in the first half
of
the twentieth
century,
between the outbreak
of World War
I
and the end
of
World War
II.
The
reemergence
of a
global, capitalist
market
economy
since
1950,
and
especially
since
the
mid-1980s,
in
an
important
sense
reestablishes
the
global
market
econ-
omy
that
had
existed
one
hundred
years
earlier.
The first
episode of global capitalism,
of
course,
came about as much
through
the instruments of violent
conquest
and
colonial
rule as
through
economic
reform
and the
development
of international
institutions.
Starting
around
1840,
Western
European powers
wielded their
superior
4. Marx and Engels (1948, p. 225).

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Journal ArticleDOI
TL;DR: This article showed that the differences in capital accumulation, productivity, and therefore output per worker are driven by differences in institutions and government policies, which are referred to as social infrastructure and called social infrastructure as endogenous, determined historically by location and other factors captured by language.
Abstract: Output per worker varies enormously across countries. Why? On an accounting basis our analysis shows that differences in physical capital and educational attainment can only partially explain the variation in output per worker—we find a large amount of variation in the level of the Solow residual across countries. At a deeper level, we document that the differences in capital accumulation, productivity, and therefore output per worker are driven by differences in institutions and government policies, which we call social infrastructure. We treat social infrastructure as endogenous, determined historically by location and other factors captured in part by language. In 1988 output per worker in the United States was more than 35 times higher than output per worker in Niger. In just over ten days the average worker in the United States produced as much as an average worker in Niger produced in an entire year. Explaining such vast differences in economic performance is one of the fundamental challenges of economics. Analysis based on an aggregate production function provides some insight into these differences, an approach taken by Mankiw, Romer, and Weil [1992] and Dougherty and Jorgenson [1996], among others. Differences among countries can be attributed to differences in human capital, physical capital, and productivity. Building on their analysis, our results suggest that differences in each element of the production function are important. In particular, however, our results emphasize the key role played by productivity. For example, consider the 35-fold difference in output per worker between the United States and Niger. Different capital intensities in the two countries contributed a factor of 1.5 to the income differences, while different levels of educational attainment contributed a factor of 3.1. The remaining difference—a factor of 7.7—remains as the productivity residual. * A previous version of this paper was circulated under the title ‘‘The Productivity of Nations.’’ This research was supported by the Center for Economic Policy Research at Stanford and by the National Science Foundation under grants SBR-9410039 (Hall) and SBR-9510916 (Jones) and is part of the National Bureau of Economic Research’s program on Economic Fluctuations and Growth. We thank Bobby Sinclair for excellent research assistance and colleagues too numerous to list for an outpouring of helpful commentary. Data used in the paper are available online from http://www.stanford.edu/,chadj.

6,454 citations

Journal ArticleDOI
TL;DR: This paper found that trade has a quantitatively large and robust, though only moderately statistically significant, positive effect on income and that countries' geographic characteristics have important effects on trade, and are plausibly uncorrelated with other determinants of income.
Abstract: Examining the correlation between trade and income cannot identify the direction of causation between the two. Countries’ geographic characteristics, however, have important effects on trade, and are plausibly uncorrelated with other determinants of income. This paper therefore constructs measures of the geographic component of countries’ trade, and uses those measures to obtain instrumental variables estimates of the effect of trade on income. The results provide no evidence that ordinary least-squares estimates overstate the effects of trade. Further, they suggest that trade has a quantitatively large and robust, though only moderately statistically significant, positive effect on income. (JEL F43, 040)

5,537 citations

Journal ArticleDOI
TL;DR: In this paper, the authors estimate the respective contributions of institutions, geography, and trade in determining income levels around the world, using recently developed instrumental variables for institutions and trade, and conclude that the quality of institutions "trumps" everything else.
Abstract: We estimate the respective contributions of institutions, geography, and trade in determining income levels around the world, using recently developed instrumental variables for institutions and trade. Our results indicate that the quality of institutions “trumps” everything else. Once institutions are controlled for, conventional measures of geography have at best weak direct effects on incomes, although they have a strong indirect effect by influencing the quality of institutions. Similarly, once institutions are controlled for, trade is almost always insignificant, and often enters the income equation with the “wrong” (i.e., negative) sign. We relate our results to recent literature, and where differences exist, trace their origins to choices on samples, specification, and instrumentation.

3,768 citations

References
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01 Jan 1988
Abstract: This paper considers the prospects for constructing a neoclassical theory of growth and international trade that is consistent with some of the main features of economic development. Three models are considered and compared to evidence: a model emphasizing physical capital accumulation and technological change, a model emphasizing human capital accumulation through schooling, and a model emphasizing specialized human capital accumulation through learning-by-doing.

19,093 citations

Journal ArticleDOI
TL;DR: In this paper, the authors present a fully specified model of long-run growth in which knowledge is assumed to be an input in production that has increasing marginal productivity, which is essentially a competitive equilibrium model with endogenous technological change.
Abstract: This paper presents a fully specified model of long-run growth in which knowledge is assumed to be an input in production that has increasing marginal productivity. It is essentially a competitive equilibrium model with endogenous technological change. In contrast to models based on diminishing returns, growth rates can be increasing over time, the effects of small disturbances can be amplified by the actions of private agents, and large countries may always grow faster than small countries. Long-run evidence is offered in support of the empirical relevance of these possibilities.

18,200 citations

Journal ArticleDOI
TL;DR: In this article, the authors consider the prospects for constructing a neoclassical theory of growth and international trade that is consistent with some of the main features of economic development, and compare three models and compared to evidence.

16,965 citations

Journal ArticleDOI
TL;DR: The authors examined whether the Solow growth model is consistent with the international variation in the standard of living, and they showed that an augmented Solow model that includes accumulation of human as well as physical capital provides an excellent description of the cross-country data.
Abstract: 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

14,402 citations

ReportDOI
TL;DR: In this paper, the authors show that the stock of human capital determines the rate of growth, that too little human capital is devoted to research in equilibrium, that integration into world markets will increase growth rates, and that having a large population is not sufficient to generate growth.
Abstract: Growth in this model is driven by technological change that arises from intentional investment decisions made by profit-maximizing agents. The distinguishing feature of the technology as an input is that it is neither a conventional good nor a public good; it is a nonrival, partially excludable good. Because of the nonconvexity introduced by a nonrival good, price-taking competition cannot be supported. Instead, the equilibrium is one with monopolistic competition. The main conclusions are that the stock of human capital determines the rate of growth, that too little human capital is devoted to research in equilibrium, that integration into world markets will increase growth rates, and that having a large population is not sufficient to generate growth.

12,469 citations