Friday, January 25, 2013

About growth miracles and lost decades

What makes countries grow? That is probably the most important question in economics, especially when you think about the huge differences in economic well-being across the world's economies. Yet, we do not have good answers to date, except for explaining obvious growth disasters (North Korea and Zimbabwe come to mind). Empirical work may have identified some regularities ("institutions", "distance from equator"), but these factors are either vague, not that robust, or difficult to explain. In particular, why is it that some countries suddenly grow fast while similar ones go into prolonged stagnation?

Recent research by Nancy Stokey shows that the distance between growth miracles and "lost decades" can be surprisingly small in theory. Add to this more complexities of real economies, and I surmise they could even overlap according to observables. Her point is the following. Using a rather bare bones model with technology (which flows from abroad) and human capital (which needs to be accumulated domestically), she shows that there are multiple equilibria depending on initial conditions and policies. The key is that there are positive reinforcements in both directions between technology and human capital. More technology makes human capital more productive (and worthwhile), while more human capital makes adoption of new technology easier. Start with little human capital, and you'll never notice all the technology that is available and your economy is trapped in poverty. With a lot of human capital, you never miss a beat on what is new out there, and your economy grows.

Policy in here is represented by barriers to technology inflow and subsidies to human capital accumulation. Changing such policies can have a dramatic impact. A stagnating economy can tip over to a growing one with little change in policy, and as this economy is now catching up to the others, grow rates are impressive. Or small changes the other way can get an economy to suddenly stall. In Stokey's calibration, lowering barriers is more effective, because human capital accumulation takes away resources, but I am not convinced there is that much of a difference as human capital will end being accumulated anyway.

1 comment:

Aston Lockheed said...

This is all the story of "middle-income traps". This reminds me the recent paper of Agénor & Canuto. They don’t say it in their Vox’s column, but their paper highlights the interaction between human capital and technology in a multiple-equilibria settings…