Wibbels, E, and M Arce. 2003. Globalization, Taxation, and Burden-Shifting in Latin America. International Organization 57, no. 01: 111-136.
This paper explores the relationship of taxation policy in Latin America and the possible effects of globalization. "The question becomes: If capital flows and deregulation cause burden-shifting, are governments that reform tax systems rewarded with greater flows? We hypothesize that capital flows do respond to tax policy, but that markets evaluate tax systems as a whole, not just capital's burden of taxation"
The rosy assessment of tax policies that come out of Europe cannot be generalized to the rest of the world. Short-term capital needs require clear signals of country intention to be generated. This having been said, it is not entirely a dire situation for all developing countries, and there is still national room for movement and adjustment.
"In sum, globalization seems to bring a mixed bag for policymakers; it brings a broad set of constraints onto the outlines of policy but provides room for policy choices therein. The most direct evidence of this flexibility is the fact that longer-term markets seem to be less interested in the relative share of taxes paid by capital than in how market friendly tax systems are as a whole. While net capital flows have not rewarded shifts to increase the burden of taxation on labor, these flows have rewarded market-oriented reforms of tax systems. Thus, national policy-makers can attract capital by streamlining tax codes, eliminating distortionary taxes on trade, or increasing the efficiency of existing taxes, rather than contributing to ongoing trends in inequality by eliminating progressive components of tax codes" (131-2).
Showing posts with label Convergence. Show all posts
Showing posts with label Convergence. Show all posts
Monday, March 23, 2009
Saturday, March 21, 2009
Williamson: Globalization, Convergence and History
Williamson, JG. 1996. Globalization, convergence, and history. Journal of Economic History: 277-306.
From 1850 to the present, the author highlights three main stages of global growth from the perspective of convergence. "Thus history offers an unambiguous positive correlation between globalization and convergence. When the pre-World War I years are examined in detail, the correlation turns out to be causal: globalization played the critical role in contributing to convergence" (from abstract; 277).
What is the meaning of convergence? "The critical bottom line for me is whether the living standard gap between rich and poor countries falls over time. Convergence implies an erosion in this gap, at least in percentage terms. New growth theorists call this sigma-convergence. To get sigma-convergence poor countries must grow faster than rich, an event new growth theorists call beta-convergence" (279).
From 1850 to the present, the author highlights three main stages of global growth from the perspective of convergence. "Thus history offers an unambiguous positive correlation between globalization and convergence. When the pre-World War I years are examined in detail, the correlation turns out to be causal: globalization played the critical role in contributing to convergence" (from abstract; 277).
What is the meaning of convergence? "The critical bottom line for me is whether the living standard gap between rich and poor countries falls over time. Convergence implies an erosion in this gap, at least in percentage terms. New growth theorists call this sigma-convergence. To get sigma-convergence poor countries must grow faster than rich, an event new growth theorists call beta-convergence" (279).
Heichel, Pape and Sommerer: Is There Convergence in Convergence Research?
Heichel, S, J Pape, and T Sommerer. 2005. Is there convergence in convergence research? An overview of empirical studies on policy convergence. Journal of European Public Policy 12, no. 5: 817-840.
"This article reveals that there is no homogenous picture of policy convergence: Although frequently observed, empirical studies often disagree as to its extent. The representation of policy fields, geographical regions and periods analyzed differ, which makes an overall assessment of policy convergence impossible. The comparability is further constrained by differences in the operationalization and research methods applied by scholars in this field" (from abstract; 817).
The scholarship on convergence is born from a variety of schools with various interests and various approaches. These authors are interested in research projects that focus on empirical results stemming from convergence, and does not make the same set of rigorous distinctions between different kinds of convergence that Knill makes (2005). On pages 820-3 the authors list all of the studies that they explore, their issue area focus, their regional focus, the period in question and whether or not convergence was found.
"This article reveals that there is no homogenous picture of policy convergence: Although frequently observed, empirical studies often disagree as to its extent. The representation of policy fields, geographical regions and periods analyzed differ, which makes an overall assessment of policy convergence impossible. The comparability is further constrained by differences in the operationalization and research methods applied by scholars in this field" (from abstract; 817).
The scholarship on convergence is born from a variety of schools with various interests and various approaches. These authors are interested in research projects that focus on empirical results stemming from convergence, and does not make the same set of rigorous distinctions between different kinds of convergence that Knill makes (2005). On pages 820-3 the authors list all of the studies that they explore, their issue area focus, their regional focus, the period in question and whether or not convergence was found.
Holzinger and Knill: Causes and Conditions of Cross-National Policy Convergence
Holzinger, K, and C Knill. 2005. Causes and conditions of cross-national policy convergence. Journal of European Public Policy 12, no. 5: 775-796.
The study of policy convergence started in the 60s, but grew rapidly in the 90s as European integration and globalization became important phenomena. There is, however, very little robust understanding of the causes and contexts in which policy convergence occurs. "This deficit can be traced to two problems. First, as Seeliger (1996) argues, much more emphasis has been placed on the presentation of empirical results than on systematic theory-building. Second, policy convergence is a rather heterogeneous research field, with scholars coming from different academic backgrounds and disciplines" (775).
Table 1 on 777 explains a relationship of measures of convergence. Table 2 (778) points to different ways that these measures can be conceptualized and measured (Degree of Convergence, Convergence Direction and Convergence Scope). Imposition, Internal Harmonization, Regulatory Competition, Transnational Communication, Independent Problem-Solving are all seen as different reasons that convergence in policy can arise. See Table 4 (793) for an overview. This table combines the different ways convergence can be measured (Table 2) with the different drivers of convergence (previous sentence).
The study of policy convergence started in the 60s, but grew rapidly in the 90s as European integration and globalization became important phenomena. There is, however, very little robust understanding of the causes and contexts in which policy convergence occurs. "This deficit can be traced to two problems. First, as Seeliger (1996) argues, much more emphasis has been placed on the presentation of empirical results than on systematic theory-building. Second, policy convergence is a rather heterogeneous research field, with scholars coming from different academic backgrounds and disciplines" (775).
Table 1 on 777 explains a relationship of measures of convergence. Table 2 (778) points to different ways that these measures can be conceptualized and measured (Degree of Convergence, Convergence Direction and Convergence Scope). Imposition, Internal Harmonization, Regulatory Competition, Transnational Communication, Independent Problem-Solving are all seen as different reasons that convergence in policy can arise. See Table 4 (793) for an overview. This table combines the different ways convergence can be measured (Table 2) with the different drivers of convergence (previous sentence).
Knill: Introduction: Cross-National Policy Convergence
Knill, C. 2005. Introduction: Cross-national policy convergence: concepts, approaches and explanatory factors. Journal of European Public Policy 12, no. 5: 764-774.
"While there is a broad consensus on the definition of convergence as 'the tendency of societies to grow more alike, to develop similarities in structures, processes, and performance' (Kerr 1983: 3), the empirical and theoretical assessment of policy convergence is generally hampered by the use of different, partially overlapping concepts (Tews 2002). Policy convergence is equated with related notions, such as isomorphism, policy transfer or policy diffusion. This terminological variety often coincides with analytical confusion" (3).
The author highlights two concepts, those of policy transfer and policy diffusion. Both of these focus on process and are less concerned with outcome, thus making analysis and conclusion partially complex. On page 5 there is an overview of different kinds of policy convergence.
"While there is a broad consensus on the definition of convergence as 'the tendency of societies to grow more alike, to develop similarities in structures, processes, and performance' (Kerr 1983: 3), the empirical and theoretical assessment of policy convergence is generally hampered by the use of different, partially overlapping concepts (Tews 2002). Policy convergence is equated with related notions, such as isomorphism, policy transfer or policy diffusion. This terminological variety often coincides with analytical confusion" (3).
The author highlights two concepts, those of policy transfer and policy diffusion. Both of these focus on process and are less concerned with outcome, thus making analysis and conclusion partially complex. On page 5 there is an overview of different kinds of policy convergence.
Friday, March 20, 2009
Cao: Convergence, Divergence, and Networks in the Age of Globalization
Cao, X. 2006. Convergence, Divergence, and Networks in the Age of Globalization: A Social Network Analysis Approach to IPE.
"Convergence denotes a process wherein distinctive domestic institutions and economic policies fade away over time, giving away to common economic structures whose efficiency and universality produce super strength in the market...Divergence, on the other hand, refers to persistent and maybe increasing diversity of national policies and institutions among which the efficiency-mandated minimalism is only one of the many varieties" (1).
"Empirical studies following this fashion unsuprisingly leave us with confusion by revealing a mixed picture of convergence-divergence caused by economic forces of globalization...We still have to ask why and how convergence has happened in some countries, in some policy areas (but to different extents), but not others?" (2).
The author explores the convergence-divergence debate by exploring the relationship different countries have with regard to the international system; how are different countries engaged with the global system?
"The empirical findings indicate that proximity in IGO [inter-governmental organizations; number of shared memberships, closer countries are in the 'web' of inter-governmental connections (12)] networks ahs the most consistent converging effect on domestic economic policies. We also find that network position similarly induces convergence through the network of transnational portfolio investment. Trade, the most intensively studied network in international political economy, has no consistent effects on convergence in domestic economic policies. Given the fact that most of the works on convergence-divergence to date use some measure of trade exposure to capture the extent a country is subject to the pressure of globalization, the finding of this research on trade reminds us that the research in this area might have to target some new sources of globalization pressure" (22).
"Convergence denotes a process wherein distinctive domestic institutions and economic policies fade away over time, giving away to common economic structures whose efficiency and universality produce super strength in the market...Divergence, on the other hand, refers to persistent and maybe increasing diversity of national policies and institutions among which the efficiency-mandated minimalism is only one of the many varieties" (1).
"Empirical studies following this fashion unsuprisingly leave us with confusion by revealing a mixed picture of convergence-divergence caused by economic forces of globalization...We still have to ask why and how convergence has happened in some countries, in some policy areas (but to different extents), but not others?" (2).
The author explores the convergence-divergence debate by exploring the relationship different countries have with regard to the international system; how are different countries engaged with the global system?
"The empirical findings indicate that proximity in IGO [inter-governmental organizations; number of shared memberships, closer countries are in the 'web' of inter-governmental connections (12)] networks ahs the most consistent converging effect on domestic economic policies. We also find that network position similarly induces convergence through the network of transnational portfolio investment. Trade, the most intensively studied network in international political economy, has no consistent effects on convergence in domestic economic policies. Given the fact that most of the works on convergence-divergence to date use some measure of trade exposure to capture the extent a country is subject to the pressure of globalization, the finding of this research on trade reminds us that the research in this area might have to target some new sources of globalization pressure" (22).
Thursday, January 29, 2009
Pauly: Opening Financial Markets
Pauly, LW. Opening financial markets. Cornell University Press.
"Technological innovation, market deepening, and capital mobility are widely credited with linking formerly discrete markets so inextricably that a truly global financial marketplace has finally emerged. That marketplace, it is often said, now overwhelms the political forces that once clearly controlled it. National governments are seen to be fundamentally constrained" (1).
However, this may be quite simplistic. Look, for example, at a case where a company from one country attempts to buy assets in another company (a bank, or ports, for example). The reaction that is created is indicative of the continued importance of the political within this process. This text explores these issues.
"Through an examination of a key aspect of increasing international financial interdependence--the institutional interpenetration of banking markets in advanced capitalist countries--this book demonstrates that considerable distance remains between the vision of a truly global market and contemporary reality" (1-2).
The global village of finance is not something that evolves without constraint from the political process. In fact, the political process is instrumental in the creation of this global village. This book explores how that international community of financiers and financial institutions has been changing; how this group with relatively uniform interests has moved to decrease things like heterogeneity in regulatory frameworks and instruments. What is the process of policy convergence vis-a-vis banks in this era of globalization?
Another interrelated focus of this work is the banking sector. Banks are creatures of states, and thus contain a certain amount of institutional uniqueness in relation to the charge for which they were created. Banks are also unique institutions, as they represent a kind of nexus between the political power and the economic power that seem to butt heads in these debates about national autonomy and international financial deregulation.
A history of bank and finance regulation is glossed over nicely: "Among the countries examined in the following chapters, a tacit consensus emerged around regulatory norms that allowed enduring pressures of nationalism, competition, and integration to coexist in the banking sector. Comparable domestic regulatory policies converged toward an acceptance of market openness. They did so by extending the scope of nondiscriminatory treatment for foreign institutions operating in national markets and by rendering more equivalent the conditions of access across those markets. By the late 1980s effectively reciprocal developments created a normative base that helped sustain the institutional interpenetration of markets still structurally distinct. The character of those developments provided evidence that states remain the central actors in the real global village" (7).
"Although the United States, Japan, Canada, and Australia developed access policies within unique domestic structures, the convergence of policy toward more common standards of regulatory treatment suggests an overarching process of interstate communication. The four states did not simply set ground rules for foreign banks interested in operating inside controlled markets. They communicated expectations to one another, and through their actual practices began to create an intersubjective normative framework that helped stabilize their relations in this sector" (177-8).
"After three decades of policy development, the institutional interpenetration of national banking markets in the advanced industrial world is now well developed. Convergent domestic laws and practices are creating a basic normative foundation for necessary interstate coordination on market access issues. Increasingly accepted regulatory standards, embedded in unique domestic structures, are important elements in any evolving process through which competition in one sector of modern capitalism is broadened and equilibrated by the interaction of the states at its core" (184-5).
"Technological innovation, market deepening, and capital mobility are widely credited with linking formerly discrete markets so inextricably that a truly global financial marketplace has finally emerged. That marketplace, it is often said, now overwhelms the political forces that once clearly controlled it. National governments are seen to be fundamentally constrained" (1).
However, this may be quite simplistic. Look, for example, at a case where a company from one country attempts to buy assets in another company (a bank, or ports, for example). The reaction that is created is indicative of the continued importance of the political within this process. This text explores these issues.
"Through an examination of a key aspect of increasing international financial interdependence--the institutional interpenetration of banking markets in advanced capitalist countries--this book demonstrates that considerable distance remains between the vision of a truly global market and contemporary reality" (1-2).
The global village of finance is not something that evolves without constraint from the political process. In fact, the political process is instrumental in the creation of this global village. This book explores how that international community of financiers and financial institutions has been changing; how this group with relatively uniform interests has moved to decrease things like heterogeneity in regulatory frameworks and instruments. What is the process of policy convergence vis-a-vis banks in this era of globalization?
Another interrelated focus of this work is the banking sector. Banks are creatures of states, and thus contain a certain amount of institutional uniqueness in relation to the charge for which they were created. Banks are also unique institutions, as they represent a kind of nexus between the political power and the economic power that seem to butt heads in these debates about national autonomy and international financial deregulation.
A history of bank and finance regulation is glossed over nicely: "Among the countries examined in the following chapters, a tacit consensus emerged around regulatory norms that allowed enduring pressures of nationalism, competition, and integration to coexist in the banking sector. Comparable domestic regulatory policies converged toward an acceptance of market openness. They did so by extending the scope of nondiscriminatory treatment for foreign institutions operating in national markets and by rendering more equivalent the conditions of access across those markets. By the late 1980s effectively reciprocal developments created a normative base that helped sustain the institutional interpenetration of markets still structurally distinct. The character of those developments provided evidence that states remain the central actors in the real global village" (7).
"Although the United States, Japan, Canada, and Australia developed access policies within unique domestic structures, the convergence of policy toward more common standards of regulatory treatment suggests an overarching process of interstate communication. The four states did not simply set ground rules for foreign banks interested in operating inside controlled markets. They communicated expectations to one another, and through their actual practices began to create an intersubjective normative framework that helped stabilize their relations in this sector" (177-8).
"After three decades of policy development, the institutional interpenetration of national banking markets in the advanced industrial world is now well developed. Convergent domestic laws and practices are creating a basic normative foundation for necessary interstate coordination on market access issues. Increasingly accepted regulatory standards, embedded in unique domestic structures, are important elements in any evolving process through which competition in one sector of modern capitalism is broadened and equilibrated by the interaction of the states at its core" (184-5).
Tuesday, January 27, 2009
Boyer: The Convergence Hypothesis Revisited
Boyer, R, and CEPREMAP (Center). 1993. The Convergence Hypothesis Revisited: Globalization But Still the Century of Nations? CEPREMAP.
The convergence argument seed domestic institutions and unique attributes being increasingly homogenized as the logic of capital dictates a certain kind of economic performance and institutional construction so as to maximize efficiency of production and transaction. However, Boyer argues that this strong hypothesis may miss the mark a bit, and that the end of the nation-state should not be glibly foretold. Instead, one should see this transition as a diverse process where different institutions matter.
"The argument proceeds along the following lines: First, ambiguities in the definition of convergence are spelled out by disentangling three distinct meanings: economic convergence, similarity in the style of development, and finally the characteristics of institutional settings that organize interactions between economy and polity. Second, when precise tests of the main macroeconomic variables are built, we see that no clear trend to convergence or divergence emerges. Third, even though the socialist bloc has collapsed, this has not reduced diversity. Rather it has revealed the coexistence and competition of various kinds of capitalism" (30).
"According to the first definition of convergence, the globalization of finance, labor, technologies, and products proceeds so that each nation comes to resemble a small-or medium-size firm in an ocean of pure and perfect competition. Consequently, any Keynesian-style intervention is bound to fail, given that the competition is now international and foreign producers will capture the domestic market if local producers do not adjust to the costs and prices achieved by competitors" (30).
"For many social scientist, convergence has another meaning: not pure economic performance, but the basic constitutional order, organizing interactions between polity and economy...Convergence in this sense is to be demonstrated by the collapse of authoritarian regimes and their replacement by more democratic constitutions" (31).
The third possibility is the most complex option, and involved mixed convergence: each economy is a combination of a wide variety of distinct factors that help to shape its output. If these institutions matched closely with the institutions of another economy and that economy was performing better, it would be possible to converge.
Boyer then explores empirical data on convergence of productivity since WWII. The author finds the evidence to be mixed and argues that results depend heavily on sample size and selection.
There is some evidence that things have converged in the late 20th century. However, this is not universal, and this evidence does not take into consideration that convergence typically occurs within a core set of countries that have already experienced a certain degree of industrialization and development.
"The 1990s and the next century, too, are likely to be still the epoch of nations. The complex set of contradictory forces that are pushing simultaneously toward convergence and divergence are far from moving toward a single best institutional design" (59).
The following chapter is also excellent, though I did not write an abstract:
Wade, R. 1996. Globalization and its limits: reports of the death of the national economy are greatly exaggerated. National Diversity and Global Capitalism: 60-88.
The convergence argument seed domestic institutions and unique attributes being increasingly homogenized as the logic of capital dictates a certain kind of economic performance and institutional construction so as to maximize efficiency of production and transaction. However, Boyer argues that this strong hypothesis may miss the mark a bit, and that the end of the nation-state should not be glibly foretold. Instead, one should see this transition as a diverse process where different institutions matter.
"The argument proceeds along the following lines: First, ambiguities in the definition of convergence are spelled out by disentangling three distinct meanings: economic convergence, similarity in the style of development, and finally the characteristics of institutional settings that organize interactions between economy and polity. Second, when precise tests of the main macroeconomic variables are built, we see that no clear trend to convergence or divergence emerges. Third, even though the socialist bloc has collapsed, this has not reduced diversity. Rather it has revealed the coexistence and competition of various kinds of capitalism" (30).
"According to the first definition of convergence, the globalization of finance, labor, technologies, and products proceeds so that each nation comes to resemble a small-or medium-size firm in an ocean of pure and perfect competition. Consequently, any Keynesian-style intervention is bound to fail, given that the competition is now international and foreign producers will capture the domestic market if local producers do not adjust to the costs and prices achieved by competitors" (30).
"For many social scientist, convergence has another meaning: not pure economic performance, but the basic constitutional order, organizing interactions between polity and economy...Convergence in this sense is to be demonstrated by the collapse of authoritarian regimes and their replacement by more democratic constitutions" (31).
The third possibility is the most complex option, and involved mixed convergence: each economy is a combination of a wide variety of distinct factors that help to shape its output. If these institutions matched closely with the institutions of another economy and that economy was performing better, it would be possible to converge.
Boyer then explores empirical data on convergence of productivity since WWII. The author finds the evidence to be mixed and argues that results depend heavily on sample size and selection.
There is some evidence that things have converged in the late 20th century. However, this is not universal, and this evidence does not take into consideration that convergence typically occurs within a core set of countries that have already experienced a certain degree of industrialization and development.
"The 1990s and the next century, too, are likely to be still the epoch of nations. The complex set of contradictory forces that are pushing simultaneously toward convergence and divergence are far from moving toward a single best institutional design" (59).
The following chapter is also excellent, though I did not write an abstract:
Wade, R. 1996. Globalization and its limits: reports of the death of the national economy are greatly exaggerated. National Diversity and Global Capitalism: 60-88.
Berger and Dore: National Diversity and Global Capitalism
Berger, S, and RP Dore. 1996. National Diversity and Global Capitalism. Cornell University Press.
Suzanne Berger: Introduction:
Do advanced economies converge on a set of practices or not? In the positive: "...competition, imitation, diffusion of best practice, trade and capital mobility naturally operate to produce convergence across nations in the structures of production and in the relations among economy, society, and state. Variations may be found from country to country, because of different historical legacies" (1).
Neoclassical economic theory would predict that convergence of factor prices would generally take hold in countries that were involved within the system of globalization, however, not all are in agreement. Some argue (Boyer) that it depends on what is being looked at when; at times one can see convergence, and at other times, convergence is a bit more difficult to notice.
"The fundamental cleavage cuts between one group of the authors who conclude (with varying degrees of enthusiasm or regret) that national diversities are likely to disappear; and on the other side, the authors who (with varying degrees of enthusiasm or regret) predict the long-term persistence of fundamentally different national models" (11).
"In sum, those who see convergence on the horizon of advanced countries have very different conceptions of how this process is likely to operate. Among the contributors to the volume, three distinct notions emerge: convergence as the triumph of market forces, abetted by complicit or passive governments; convergence as the result of diffusion of best practice and competition among institutional forms; and convergence as the internationally negotiated or coerced choice of one set of rules and institutions" (16).
"A second cluster of contributions in this volume sharply opposes the convergence perspective. The common theme here is the long-term resilience and expansion of diverse national systems and models of capitalism. The arguments against convergence laid out in these essays build on different analyses of how markets work, ideas about institutional coherence and adaptation, and alternative understandings of how politics shapes the economy" (19).
These views argue that the diversity of institutions is not necessarily a problem, that the ideal-type global market to which people should converge is just that: not a reality; and that domestic political considerations and push-backs should not be discounted.
"The conclusion that emerges from the essays in this volume is that the space for political vision and choice--and for a diversity of choices--is open and wide. The biggest question left unanswered is not whether politics can seize and use this space, but which politics and for whom?" (25).
Suzanne Berger: Introduction:
Do advanced economies converge on a set of practices or not? In the positive: "...competition, imitation, diffusion of best practice, trade and capital mobility naturally operate to produce convergence across nations in the structures of production and in the relations among economy, society, and state. Variations may be found from country to country, because of different historical legacies" (1).
Neoclassical economic theory would predict that convergence of factor prices would generally take hold in countries that were involved within the system of globalization, however, not all are in agreement. Some argue (Boyer) that it depends on what is being looked at when; at times one can see convergence, and at other times, convergence is a bit more difficult to notice.
"The fundamental cleavage cuts between one group of the authors who conclude (with varying degrees of enthusiasm or regret) that national diversities are likely to disappear; and on the other side, the authors who (with varying degrees of enthusiasm or regret) predict the long-term persistence of fundamentally different national models" (11).
"In sum, those who see convergence on the horizon of advanced countries have very different conceptions of how this process is likely to operate. Among the contributors to the volume, three distinct notions emerge: convergence as the triumph of market forces, abetted by complicit or passive governments; convergence as the result of diffusion of best practice and competition among institutional forms; and convergence as the internationally negotiated or coerced choice of one set of rules and institutions" (16).
"A second cluster of contributions in this volume sharply opposes the convergence perspective. The common theme here is the long-term resilience and expansion of diverse national systems and models of capitalism. The arguments against convergence laid out in these essays build on different analyses of how markets work, ideas about institutional coherence and adaptation, and alternative understandings of how politics shapes the economy" (19).
These views argue that the diversity of institutions is not necessarily a problem, that the ideal-type global market to which people should converge is just that: not a reality; and that domestic political considerations and push-backs should not be discounted.
"The conclusion that emerges from the essays in this volume is that the space for political vision and choice--and for a diversity of choices--is open and wide. The biggest question left unanswered is not whether politics can seize and use this space, but which politics and for whom?" (25).
Wednesday, December 17, 2008
Pauly and Reich: National Structures and Multinational Corporate Behavior
LW Pauly and S Reich, “National structures and multinational corporate behavior: enduring differences in the age of globalization,” International Organization 51, no. 01 (2003): 1-30.
Many make the case that globalization is changing the world's political economy. If this is truly the case, one would expect to see a set of converging practices among leading multinational firms. However, this is not necessarily played out by prevailing evidence. "...this article shows that MNCs continue to diverge fairly systematically in their internal governance and long-term financing structures, in their approaches to research and development...as well as in the location of core R&D facilities, and in their overseas investment and intrafirm trading strategies" (1).
Standard arguments about firm convergence are explored.
"But we argue that the underlying nationality of the firm remains the vitally important determinant of the nature of its adaption...there remain systematic and important national differences in the operations of MNCs--in their internal governance and long-term financing, in their R&D activities, and in their intertwined investment and trading strategies" (4).
There is then much evidence provided to support this thesis.
Many make the case that globalization is changing the world's political economy. If this is truly the case, one would expect to see a set of converging practices among leading multinational firms. However, this is not necessarily played out by prevailing evidence. "...this article shows that MNCs continue to diverge fairly systematically in their internal governance and long-term financing structures, in their approaches to research and development...as well as in the location of core R&D facilities, and in their overseas investment and intrafirm trading strategies" (1).
Standard arguments about firm convergence are explored.
"But we argue that the underlying nationality of the firm remains the vitally important determinant of the nature of its adaption...there remain systematic and important national differences in the operations of MNCs--in their internal governance and long-term financing, in their R&D activities, and in their intertwined investment and trading strategies" (4).
There is then much evidence provided to support this thesis.
Ito: Convergence or Divergence? The Political Functions of the International Trading Regime on the Democratizing and Liberalizing Reforms
K Ito, “Convergence or Divergence?: The Political Functions of the International Trading Regime on the Democratizing and Liberalizing Reforms.”
Reliance on state-based economic decision making was in vogue as the Soviet and Chinese governments consolidated power and developed after WWII. However, this preeminence of bureaucratic decision making began to wane throughout the 1980s. This paper explores to what degree the GATT or WTO affected this transition. "I argue that the international trading regime, especially GATT, didn't lead these socialist and developing states to the liberalizing reforms directly by means of obliging them to abstain from intervening the international trade...At the same time, however, we can identify the indirect functions of the international trading regime which significantly contributed to the democratization and trade liberalization in those states. First, the beneficiaries of state-intervening economic policies in those states, such as the authoritarian political elites and import-competing business sectors, were all the more encouraged for the very permission of protectionist measures by the international trading regime...Second, the international trading regime has facilitated the commerce on goods and services among advanced industrial states, and has contributed to the dramatic increase in the amount and value of international trade" (1-2).
"This paper examines how the international trading regime has legally and politically affected the processes of democratization and liberalization in the developing and (former-)socialist states, with the emphasis placed on the effects of convergence and divergence of policies across those states, to which, I argue, the international trading regime has significantly contributed" (4).
Two different schools of thought are explored vis-a-vis the development and promotion of international trade regimes and their potential effects on units with the system. The first is hegemonic stability theory promoted by Kindleberger (though he didn't use the term). The second is neo-liberal institutionalism, promoted notably by Keohane.
GATT, for example, helped to spread the westerns sphere of influence throughout the Cold War. Specifically, it provided developing countries with large amounts of contingency plans if they were to join the trade regime. GATT restrictions applied most truly to only a handful of industrialized countries.
There were even more indirect effects that the author attributes to GATT. They helped promote policies that exacerbated the need for international institutions in the wake of the global recession threatening in the early 1980s. They also promoted policies that helped to spurn effects of globalization. Finally, they were stanch opponents of authoritarianism and protectionism.
However, after organizations like GATT did provide certain incentives to shy away from state-centered economic planning, there were additional effects that brought about an increased intensity of international trade that then went on to slightly constrain early adopters of the original organization.
While there was convergence around trade policy, this was not entirely uniform. The final section of the paper addresses issues of divergence.
Reliance on state-based economic decision making was in vogue as the Soviet and Chinese governments consolidated power and developed after WWII. However, this preeminence of bureaucratic decision making began to wane throughout the 1980s. This paper explores to what degree the GATT or WTO affected this transition. "I argue that the international trading regime, especially GATT, didn't lead these socialist and developing states to the liberalizing reforms directly by means of obliging them to abstain from intervening the international trade...At the same time, however, we can identify the indirect functions of the international trading regime which significantly contributed to the democratization and trade liberalization in those states. First, the beneficiaries of state-intervening economic policies in those states, such as the authoritarian political elites and import-competing business sectors, were all the more encouraged for the very permission of protectionist measures by the international trading regime...Second, the international trading regime has facilitated the commerce on goods and services among advanced industrial states, and has contributed to the dramatic increase in the amount and value of international trade" (1-2).
"This paper examines how the international trading regime has legally and politically affected the processes of democratization and liberalization in the developing and (former-)socialist states, with the emphasis placed on the effects of convergence and divergence of policies across those states, to which, I argue, the international trading regime has significantly contributed" (4).
Two different schools of thought are explored vis-a-vis the development and promotion of international trade regimes and their potential effects on units with the system. The first is hegemonic stability theory promoted by Kindleberger (though he didn't use the term). The second is neo-liberal institutionalism, promoted notably by Keohane.
GATT, for example, helped to spread the westerns sphere of influence throughout the Cold War. Specifically, it provided developing countries with large amounts of contingency plans if they were to join the trade regime. GATT restrictions applied most truly to only a handful of industrialized countries.
There were even more indirect effects that the author attributes to GATT. They helped promote policies that exacerbated the need for international institutions in the wake of the global recession threatening in the early 1980s. They also promoted policies that helped to spurn effects of globalization. Finally, they were stanch opponents of authoritarianism and protectionism.
However, after organizations like GATT did provide certain incentives to shy away from state-centered economic planning, there were additional effects that brought about an increased intensity of international trade that then went on to slightly constrain early adopters of the original organization.
While there was convergence around trade policy, this was not entirely uniform. The final section of the paper addresses issues of divergence.
Monday, November 17, 2008
Barro: Economic Growth in a Cross Section of Countries
RJ Barro, “Economic Growth in a Cross Section of Countries,” NBER Working Paper (1991).
"For 98 countries in the period of 1960-1985, the growth rate of real per capita GDP is positively related to initial human capital (proxied by 1960 school enrollment rates) and negatively related to the initial (1960) level of real per capital GDP. Countries with higher human capital also have lower fertility rates and higher ratios of physical investment to GDP. Growth is inversely related to the share of government consumption in GDP, but insignificantly related to the share of public investment. Growth rates are positively related to measures of political stability and inversely related to a proxy for market distortions"
In standard neoclassical models of economic growth, a country's growth rate tends to increase in an inverse relationship with the relative size of that country's starting degree of income. "The main element behind the convergence result in neoclassical growth models is diminishing returns to reproducible capital. Poor countries, with low ratios of capital to labor, have high marginal products of capital and thereby tend to grow at high rates. This tendency for low-income countries to grow at high rates is reinforced in extensions of the neoclassical models that allow for international mobility of capital and technology" (407). However, this study claims that this does not fit with empirical evidence.
"Although the simple correlation between per capita growth...and the initial...level of per capita GDP is close to zero, the correlation becomes substantially negative if measures of initial human capital...are held constant. Moreover, given the level of initial per capital GDP, the growth rate is substantially positively related to the starting amount of human capital. Thus, poor countries tend to catch up with rich countries if the poor countries have high human capital per person...but not otherwise. As a related matter, countries with high human capital have low fertility rates and high ratios of physical investment in GDP" (438).
"For 98 countries in the period of 1960-1985, the growth rate of real per capita GDP is positively related to initial human capital (proxied by 1960 school enrollment rates) and negatively related to the initial (1960) level of real per capital GDP. Countries with higher human capital also have lower fertility rates and higher ratios of physical investment to GDP. Growth is inversely related to the share of government consumption in GDP, but insignificantly related to the share of public investment. Growth rates are positively related to measures of political stability and inversely related to a proxy for market distortions"
In standard neoclassical models of economic growth, a country's growth rate tends to increase in an inverse relationship with the relative size of that country's starting degree of income. "The main element behind the convergence result in neoclassical growth models is diminishing returns to reproducible capital. Poor countries, with low ratios of capital to labor, have high marginal products of capital and thereby tend to grow at high rates. This tendency for low-income countries to grow at high rates is reinforced in extensions of the neoclassical models that allow for international mobility of capital and technology" (407). However, this study claims that this does not fit with empirical evidence.
"Although the simple correlation between per capita growth...and the initial...level of per capita GDP is close to zero, the correlation becomes substantially negative if measures of initial human capital...are held constant. Moreover, given the level of initial per capital GDP, the growth rate is substantially positively related to the starting amount of human capital. Thus, poor countries tend to catch up with rich countries if the poor countries have high human capital per person...but not otherwise. As a related matter, countries with high human capital have low fertility rates and high ratios of physical investment in GDP" (438).
Pritchett: Divergence, Big Time
L Pritchett, “Divergence, Big Time,” Development (1995).
"Recently, much attention has been paid in the literature on economic growth to the phenomenon of 'conditional convergence,' the tendency of economies with lower-level incomes to grow faster, conditional on their rate of factor accumulation...regardless of conditional convergence, perhaps the basic fact of modern economic history is massive absolute divergence in the distribution of income across countries...[the author] estimates that between 1879 and 1985 the ratio of incomes in the richest and poorest countries increased six fold, the standard deviation of (natural log_ per capita incomes increased by between 60 and 100 percent, and the average income gap between the richest and poorest countries grew almost nine fold" (abstract).
The recent focus on convergence of income or productivity per capital is based on faulty numbers from 1870. Firstly, most countries that could afford to produce good numbers did produce good numers and these countries obviously had higher levels of production and income. There also had to be many assumptions made about the initial levels of production and income for many countries. To fit the model implied in the convergence literature, countries would have had to be impossibly poor in 1870.
Pritchett uses two methods to determine the levels of divergence.
"Whichever way the debate about whether there has been some 'conditional' convergence in the recent period is settled, the fact remains that one overwhelming feature of the period of modern economic growth is massive divergence of absolute and relative incomes across countries, a fact which must be grappled with in a fully satisfactory model of economic growth and development" (37).
"Recently, much attention has been paid in the literature on economic growth to the phenomenon of 'conditional convergence,' the tendency of economies with lower-level incomes to grow faster, conditional on their rate of factor accumulation...regardless of conditional convergence, perhaps the basic fact of modern economic history is massive absolute divergence in the distribution of income across countries...[the author] estimates that between 1879 and 1985 the ratio of incomes in the richest and poorest countries increased six fold, the standard deviation of (natural log_ per capita incomes increased by between 60 and 100 percent, and the average income gap between the richest and poorest countries grew almost nine fold" (abstract).
The recent focus on convergence of income or productivity per capital is based on faulty numbers from 1870. Firstly, most countries that could afford to produce good numbers did produce good numers and these countries obviously had higher levels of production and income. There also had to be many assumptions made about the initial levels of production and income for many countries. To fit the model implied in the convergence literature, countries would have had to be impossibly poor in 1870.
Pritchett uses two methods to determine the levels of divergence.
"Whichever way the debate about whether there has been some 'conditional' convergence in the recent period is settled, the fact remains that one overwhelming feature of the period of modern economic growth is massive divergence of absolute and relative incomes across countries, a fact which must be grappled with in a fully satisfactory model of economic growth and development" (37).
Jones: Convergence Revisited
CI Jones, “Convergence Revisited,” Journal of Economic Growth (1997).
"The recent literature on convergence has departed from the earlier literature by focusing on the shape of the production function and the rate at which an economy converges to its own steady state. This article uses advances from the recent literature to look back at the question that originally motivated the convergence literature: what will the distribution of per capita income look like in the future? Several results are highlighted by the analysis, including the suggestion that there is little reason to expect the United States to maintain its position as world leader in terms of output per worker" (131).
Jones identifies two strands of convergence literature. The first, stemming from Abramovitz ('86) and Baumol ('86) explores the phenomena of rich country convergence without global convergence. Another school of thought, stemming from the work of Barro ('91) and Mankiw, Romer and Weil ('92) explores the effects of convergence after factor accumulation is normalized, with convergence taking place globally at about 2%. "Much of the later empirical work on growth has grappled with interpreting this finding in the context of neoclassical and endogenous growth theory and with estimating parameters related to the shape of the production function. in this later work, however, the empirical growth literature has largely neglected the question that motivated the focus on convergence in the first place. Countries are approaching different steady states at a common rate, but how different are the steady-state values that they are approaching?" (131).
Through a neoclassical methodology, this article explores steady state income per capita as being a function of population, physical capital, human capital and technological growth/investment rates. Three conclusions appear from this: many of the explored income distributions are the very similar to the 1990 distribution; this general overlap does not mean that there is not much of interest at the margins: many newly industrializing countries and OECD countries have not fully reached their steady-state; and finally, total factor productivity emerges as a crucial determinant of income distribution.
"Finally, the model predicts a great deal of 'overtaking' in per capita incomes. The analysis emphasizes that simple neoclassical growth models are consistent with a kind of growth miracle and with changes in leaders in the world distribution of income. In general, the analysis considered here suggests that there is no reason to think that the United States will continue to have the world's highest output per worker, observed in both 1960 and 1990. Economies such as Spain, Singapore, France, and Italy are examples of economies with output per worker predicted to be 9 to 40 percent higher than in the United States, based on current policies" (132)..
"The recent literature on convergence has departed from the earlier literature by focusing on the shape of the production function and the rate at which an economy converges to its own steady state. This article uses advances from the recent literature to look back at the question that originally motivated the convergence literature: what will the distribution of per capita income look like in the future? Several results are highlighted by the analysis, including the suggestion that there is little reason to expect the United States to maintain its position as world leader in terms of output per worker" (131).
Jones identifies two strands of convergence literature. The first, stemming from Abramovitz ('86) and Baumol ('86) explores the phenomena of rich country convergence without global convergence. Another school of thought, stemming from the work of Barro ('91) and Mankiw, Romer and Weil ('92) explores the effects of convergence after factor accumulation is normalized, with convergence taking place globally at about 2%. "Much of the later empirical work on growth has grappled with interpreting this finding in the context of neoclassical and endogenous growth theory and with estimating parameters related to the shape of the production function. in this later work, however, the empirical growth literature has largely neglected the question that motivated the focus on convergence in the first place. Countries are approaching different steady states at a common rate, but how different are the steady-state values that they are approaching?" (131).
Through a neoclassical methodology, this article explores steady state income per capita as being a function of population, physical capital, human capital and technological growth/investment rates. Three conclusions appear from this: many of the explored income distributions are the very similar to the 1990 distribution; this general overlap does not mean that there is not much of interest at the margins: many newly industrializing countries and OECD countries have not fully reached their steady-state; and finally, total factor productivity emerges as a crucial determinant of income distribution.
"Finally, the model predicts a great deal of 'overtaking' in per capita incomes. The analysis emphasizes that simple neoclassical growth models are consistent with a kind of growth miracle and with changes in leaders in the world distribution of income. In general, the analysis considered here suggests that there is no reason to think that the United States will continue to have the world's highest output per worker, observed in both 1960 and 1990. Economies such as Spain, Singapore, France, and Italy are examples of economies with output per worker predicted to be 9 to 40 percent higher than in the United States, based on current policies" (132)..
Friday, November 14, 2008
Barro et al.: Convergence Across States and Regions
Robert J. Barro et al., “Convergence Across States and Regions,” in (1991: The Brookings Institution, 1991), 107-182, http://www.jstor.org/stable/2534639 .
"An important economic question is whether poor countries or regions tend to converge toward rich ones...Although some economic theories predict convergence, the empirical evidence has been a subject of debate. In this study we add to the evidence by extending our previous analysis of economic growth across the US states...The overall evidence weighs heavily in favor of convergence: both for sectors and for state aggregates, per capita income and product in poor states tend to grow faster than in rich states. The rate of convergence3 is, however, not rapid: the gap between the typical poor and rich state diminishes at roughly 2 percent a year" (107-8). This method is then applied to Europe with similar results recorded.
The origin of convergence in the neoclassical model is centered on the assumption of diminishing returns to capital. Because countries who have lower ratios of capital to labor experience these diminishing returns less acutely, they are able to grow more quickly and converge on countries with higher levels of income per capita. The further a country finds itself below the "steady-state", the more likely it is to grow relatively more quickly.
An additional great variety of factors affects convergence. For example, if there are high levels of capital mobility, the diminished capital to labor ratios in poorer countries may actually improve and the affects of diminishing returns may be more strongly felt. Additionally, greater technology transfer from more wealthy countries to more poor countries could speed up the affects of convergence.
The remainder of the paper is the statistical analysis.
"An important economic question is whether poor countries or regions tend to converge toward rich ones...Although some economic theories predict convergence, the empirical evidence has been a subject of debate. In this study we add to the evidence by extending our previous analysis of economic growth across the US states...The overall evidence weighs heavily in favor of convergence: both for sectors and for state aggregates, per capita income and product in poor states tend to grow faster than in rich states. The rate of convergence3 is, however, not rapid: the gap between the typical poor and rich state diminishes at roughly 2 percent a year" (107-8). This method is then applied to Europe with similar results recorded.
The origin of convergence in the neoclassical model is centered on the assumption of diminishing returns to capital. Because countries who have lower ratios of capital to labor experience these diminishing returns less acutely, they are able to grow more quickly and converge on countries with higher levels of income per capita. The further a country finds itself below the "steady-state", the more likely it is to grow relatively more quickly.
An additional great variety of factors affects convergence. For example, if there are high levels of capital mobility, the diminished capital to labor ratios in poorer countries may actually improve and the affects of diminishing returns may be more strongly felt. Additionally, greater technology transfer from more wealthy countries to more poor countries could speed up the affects of convergence.
The remainder of the paper is the statistical analysis.
Barro: Economic Growth in a Cross Section of Countries
RJ Barro, “Economic Growth in a Cross Section of Countries,” NBER Working Paper (1991).
"For 98 countries in the period 1960-1985, the growth rate of real per capita GDP is positively related to initial human capital (proxied by 1960 school-enrollment rates) and negatively related to the initial...level of real per capital GDP. Countries with higher human capital also have lower fertility rates and higher ratios of physical investment to GDP. Growth is inversely related to the share of government consumption in GDP, but insignificantly related to the share of public investment. Growth rates are positively related to measures of political stability and inversely related to a proxy for market distortions" (407).
"The main element behind the convergence result in neoclassical growth models is diminishing returns to reproducible capital. Poor countries, with low ratios of capital to labor, have high marginal products of capital and thereby tend to grow at high rates. This tendency for low-income countries to grow at high rates is reinforced in extensions of the neoclassical models that allow for international mobility of capital and technology" (407).
The effects of human capital are varied, but many have posited that the rate of return increases after a certain point of investment. "As an example, the return to some kinds of ability, such as talent in communications, is higher if other people are also more able. In this setting, increases in the quantity of human capital per person tend to lead to higher rates of investment in human and physical capital, and hence, to higher per capita growth. A supporting force is that more human capital per person reduces fertility rates, because human capital is more productive in producing goods and additional human capital rather than more children" (409).
"For 98 countries in the period 1960-1985, the growth rate of real per capita GDP is positively related to initial human capital (proxied by 1960 school-enrollment rates) and negatively related to the initial...level of real per capital GDP. Countries with higher human capital also have lower fertility rates and higher ratios of physical investment to GDP. Growth is inversely related to the share of government consumption in GDP, but insignificantly related to the share of public investment. Growth rates are positively related to measures of political stability and inversely related to a proxy for market distortions" (407).
"The main element behind the convergence result in neoclassical growth models is diminishing returns to reproducible capital. Poor countries, with low ratios of capital to labor, have high marginal products of capital and thereby tend to grow at high rates. This tendency for low-income countries to grow at high rates is reinforced in extensions of the neoclassical models that allow for international mobility of capital and technology" (407).
The effects of human capital are varied, but many have posited that the rate of return increases after a certain point of investment. "As an example, the return to some kinds of ability, such as talent in communications, is higher if other people are also more able. In this setting, increases in the quantity of human capital per person tend to lead to higher rates of investment in human and physical capital, and hence, to higher per capita growth. A supporting force is that more human capital per person reduces fertility rates, because human capital is more productive in producing goods and additional human capital rather than more children" (409).
Thursday, October 23, 2008
Abramovitz: Catching Up, Forging Ahead and Falling Behind
Abramovitz, M., 1986. Catching Up, Forging Ahead, and Falling Behind. Journal of Economic History, 46(2), 385-406.
“A widely entertained hypothesis holds that, in comparisons among countries, productivity growth rates tend to vary inversely with productivity levels” (385). Convergence happened most clearly in the quarter century following WWII. This article puts forth a hypothesis that convergence takes place because of catch-up phenomena.
The story of convergence is quite a simple one, especially after WWII: The US had amassed such a degree of technology that was not available in other countries and, once the peace was established, other nations were able to achieve the gains from that technology without having to go up the steep learning curve of an initial adopter. When you are further back in your “technological age” (which correlates to the actual age of the technology chronologically), you have more potential to catch up. As you get closer to the hegemon, this growth slows.
Four extensions to the basic idea of technological convergence are listed:
1.) “The same technological opportunity that permits rapid progress by modernization encourages rapid growth of the capital stock parly because of the returns to modernization itself…So—besides a reduction of technological age towards chronological age, the rate of rise of the capital-labor ratio tends to be higher”
2.) “Growth of productivity also makes for increase in aggregate output”
3.) “Backwardness carries an opportunity for modernization in disembodied, as well as in embodied, technology”
4.) “If countries at relatively low levels of industrialization contain large numbers of redundant workers in farming and petty trade, as is normally the case, there is also an opportunity for productivity growth by improving the allocation of labor” (387).
Countries who have the greatest opportunity to gain from technological convergence are those that are “socially advanced” but technologically backwards.
Restatement of hypothesis: “Countries that are technologically backward have a potentiality for generating growth more rapid than that of more advanced countries, providing their social capabilities are sufficiently developed to permit successful exploitation of technologies already employed by the technological leaders. The pace at which potential for catch-up is actually realized in a particular period depends on factors limiting the diffusion of knowledge, the rate of structural change, the accumulation of capital, and the expansion of demand. The process of catching up tends to be self-limiting, but the strength of the tendency may be weakened or overcome, at least for limited periods, by advantages connected with the convergence of production patterns as followers advance towards leaders or by an endogenous enlargement of social capabilities” (391).
Abramovits then explores historical data related to the phenomena of catching up.
Catching-up is a phenomena that occurs when some are behind technologically but where they have achieved sufficient social capital to make the adoption of new technologies feasible.
“A widely entertained hypothesis holds that, in comparisons among countries, productivity growth rates tend to vary inversely with productivity levels” (385). Convergence happened most clearly in the quarter century following WWII. This article puts forth a hypothesis that convergence takes place because of catch-up phenomena.
The story of convergence is quite a simple one, especially after WWII: The US had amassed such a degree of technology that was not available in other countries and, once the peace was established, other nations were able to achieve the gains from that technology without having to go up the steep learning curve of an initial adopter. When you are further back in your “technological age” (which correlates to the actual age of the technology chronologically), you have more potential to catch up. As you get closer to the hegemon, this growth slows.
Four extensions to the basic idea of technological convergence are listed:
1.) “The same technological opportunity that permits rapid progress by modernization encourages rapid growth of the capital stock parly because of the returns to modernization itself…So—besides a reduction of technological age towards chronological age, the rate of rise of the capital-labor ratio tends to be higher”
2.) “Growth of productivity also makes for increase in aggregate output”
3.) “Backwardness carries an opportunity for modernization in disembodied, as well as in embodied, technology”
4.) “If countries at relatively low levels of industrialization contain large numbers of redundant workers in farming and petty trade, as is normally the case, there is also an opportunity for productivity growth by improving the allocation of labor” (387).
Countries who have the greatest opportunity to gain from technological convergence are those that are “socially advanced” but technologically backwards.
Restatement of hypothesis: “Countries that are technologically backward have a potentiality for generating growth more rapid than that of more advanced countries, providing their social capabilities are sufficiently developed to permit successful exploitation of technologies already employed by the technological leaders. The pace at which potential for catch-up is actually realized in a particular period depends on factors limiting the diffusion of knowledge, the rate of structural change, the accumulation of capital, and the expansion of demand. The process of catching up tends to be self-limiting, but the strength of the tendency may be weakened or overcome, at least for limited periods, by advantages connected with the convergence of production patterns as followers advance towards leaders or by an endogenous enlargement of social capabilities” (391).
Abramovits then explores historical data related to the phenomena of catching up.
Catching-up is a phenomena that occurs when some are behind technologically but where they have achieved sufficient social capital to make the adoption of new technologies feasible.
Thursday, October 9, 2008
Drezner: Globalization and Policy Convergence
Drezner, D., 2001. Globalization and Policy Convergence. The International Studies Review, 3(1), 53-78.
“Globalization is the cluster of technological, economic, and political innovations that have drastically reduced the barriers to economic, political, and cultural exchange” (53).
“An implicit assumption of most policy analysts and some academics is that globalization leads to a convergence of traditionally national policies governing environmental regulation, consumer health and safety, the regulation of labor, and the ability to tax capital. Convergence is the tendency of policies to grow more alike, in the form of increasing similarity in structures, processes and performances” (53).
The author believes that globalization is a phenomena that, because it broadly affects so many different aspects of life, is tackled differently, and potentially redundantly, but different disciplines. The author explores to what degree globalization is effecting the ability to gather taxes, and regulatory frameworks, specifically those of labor and the environment. “Two conclusions follow. First, theories of policy convergence diverge on whether the driving force is economic or ideational, and whether states retain agency in the face of globalization or are dominated by structural determinants. These divergences mirror the divisions among international relations paradigms. Globalization therefore has not led to the development of new theories of international relations, but merely transported existing theories to new issue areas of the global political economy. Second, the evidence on policy convergence across multiple issue areas suggests that the structurally based theories lack support. Globalization cannot be reduced to a set of deterministic forces. This suggests that the transnational economic and ideational forces commonly cited are not as powerful as previously suggested” (54).
“Most discussions of globalization stress two facets. The first is the magnitude of private economic forces such as capital flows and traded goods. The second is the deterministic quality of the phenomena; once states decide to lower their barriers to exchange, a Pandora’s box is unleashed that cannot be reversed. A review of the policy convergence literature suggests that both claims have been exaggerated. Although globalization has increased the size of transnational economic flows, it has not forced a race to the bottom in regulatory standards. Ideational forces have played an equally significant role in determining the rate and location of policy convergence on labor and environmental standards. Where harmonization has occurred, it has been a conscious choice of states made under the aegis of an international organization” (75).
“Globalization has led to the emergence of new issues to be analyzed by international relations scholars; it does not imply that new paradigms are needed to explain these issues” (78).
“Globalization is the cluster of technological, economic, and political innovations that have drastically reduced the barriers to economic, political, and cultural exchange” (53).
“An implicit assumption of most policy analysts and some academics is that globalization leads to a convergence of traditionally national policies governing environmental regulation, consumer health and safety, the regulation of labor, and the ability to tax capital. Convergence is the tendency of policies to grow more alike, in the form of increasing similarity in structures, processes and performances” (53).
The author believes that globalization is a phenomena that, because it broadly affects so many different aspects of life, is tackled differently, and potentially redundantly, but different disciplines. The author explores to what degree globalization is effecting the ability to gather taxes, and regulatory frameworks, specifically those of labor and the environment. “Two conclusions follow. First, theories of policy convergence diverge on whether the driving force is economic or ideational, and whether states retain agency in the face of globalization or are dominated by structural determinants. These divergences mirror the divisions among international relations paradigms. Globalization therefore has not led to the development of new theories of international relations, but merely transported existing theories to new issue areas of the global political economy. Second, the evidence on policy convergence across multiple issue areas suggests that the structurally based theories lack support. Globalization cannot be reduced to a set of deterministic forces. This suggests that the transnational economic and ideational forces commonly cited are not as powerful as previously suggested” (54).
“Most discussions of globalization stress two facets. The first is the magnitude of private economic forces such as capital flows and traded goods. The second is the deterministic quality of the phenomena; once states decide to lower their barriers to exchange, a Pandora’s box is unleashed that cannot be reversed. A review of the policy convergence literature suggests that both claims have been exaggerated. Although globalization has increased the size of transnational economic flows, it has not forced a race to the bottom in regulatory standards. Ideational forces have played an equally significant role in determining the rate and location of policy convergence on labor and environmental standards. Where harmonization has occurred, it has been a conscious choice of states made under the aegis of an international organization” (75).
“Globalization has led to the emergence of new issues to be analyzed by international relations scholars; it does not imply that new paradigms are needed to explain these issues” (78).
Monday, September 1, 2008
Jones: Introduction to Economic Growth
Jones, C., 1998. Introduction to Economic Growth. New York.
Why are we so rich and they are so poor? That is a fundamental question driving theories of economic growth. This was famously explored by Smith in The Wealth of Nations. More recently, this was explored by Solow. “Solow’s theories helped to clarify the role of the accumulation of physical capital and emphasized the importance of technological progress as the ultimate driving force behind sustained economic growth” (2). This work continued apace throughout the 60s and 70s, eventually building to contributions made by Romer and Lucas. These authors focused on human capital and the importance of ideas for economic growth. Barro quantified many of these ideas.
The book is an exploration of economic growth theory from the perspective of the relationship between observation and theory. The author uses the analogy of astronomy in the hard sciences.
1: Per-capita income varies between countries
2: Economic growth rates vary from country to country
3: Growth not entirely consistent over time
4: Countries can become wealthy or poor
5: US has seen steady growth
“Facts” about the US over the last century: Kaldor: “…economic theorists should begin with a summary of the ‘stylized’ facts a theory was supposed to explain” (14). First fact: “…the rate of return to capital is roughly constant…” (14). Secondly: the labor share has been mostly constant across history, looking specifically at the US. The combination of stylized fact one and two is that the ratio of K/Y is relatively stable. The third stylized fact alters one of Kaldor’s facts: there is relative consistent growth in economic growth.
6: Growth in output and trade are related (15)
7: Skilled and unskilled workers show a tendency to move from poor to rich countries
Three questions explored here: Why are some rich and some poor? What drives economic growth? And finally: how do some countries transition so quickly to becoming rich?
Solow’s Model:
Assumptions: world comprised of countries producing a single good. No international trade because there is only one good. Consumers have a percentage that they save for future consumption and a percentage that they use for consumption.
The model is constructed around two equations: production function and capital accumulation.
The production function acts as a saturating curve with respect to increases in capital relative to workers: there are diminishing returns on investment. Secondly, capital accumulation change is equal to the amount of investment minus the amount of depreciation.
Consumers save a portion of their income, which is invested, or rented, for use in production.
Capital accumulation per worker is determined by three things. It is increased with investment in workers, it is decreased with depreciation and the new term is change in the size of labor relative to capital.
A basic Solow diagram is shown that compares two plotted equations. One is a saturating curve that represents the amount of investment per person. The second curve is a line that represents the amount of new capital investment required per person required to keep the ratio of capital to worker consistent. Both equations begin at 0,0. When capital growth occurs per worker, capital deepening takes place. When per worker change is not taking place but capital grows, capital widening takes place. The amount of capital per worker constantly tries to approach the point where both lines intersect.
What happens if there is an increase in the investment rate? The saturating curve that represents the amount of investment per person shifts up. This starts a process of capital deepening.
What happens if there is an increase in the population growth? That shifts the degree of the relationship between the amount of capital investment required to keep the amount of capital per worker constant. “Investment per worker is now no longer high enough to keep the capital-labor ratio constant in the face of the rising population. Therefore, the capital-labor ratio begins to fall…At this point, the economy has less capital per worker than it began with and is therefore poorer: per capita output is ultimately lower after the increase in population growth…” (31-2).
The Steady State: “By definition, the steady-state quantity of capital per worker is determined by the condition that…” capital change is equal to zero (32).
“This equation reveals the Solow model’s answer to the question ‘Why are we so rich and they so poor?’ Countries that have higher savings/investment rates will tend to be richer…” (32). More capital/worker equals more output/worker. If you have high population growth, you will have lower production because you will have lower capital/worker: ie, these countries will focus on just trying to keep the capital/labor ratio stable and will have to emphasize capital widening with less of an opportunity to explore capital deepening.
These effects are then explored vis-Ã -vis empirical evidence: real GDP is compared to savings rate and real GDP is compared to population growth rates. There is seen to be a correlation (though the later graph, figure 2.7, doesn’t appear to display this correlation as well as claimed).
This model fails to describe increased per capital growth because output per unit of labor, and thus per person, is constant.
“To generate sustained growth in per capita income in this model, we must follow Solow and introduce technological progress to the model” (36). This is done through the variable a which increases labor’s productivity. This technology assumption is exogenously imposed.
“A situation in which capital, output, consumption, and population are growing at constant rates is called balanced growth path” (37).
“If the economy begins with a capital-technology ratio that is below its steady-state level…the capital-technology ratio {k~=K/AL} will rise gradually over time. Why? Because the amount of investment being undertaken exceeds the amount needed to keep the capital-technology ratio constant” (39).
“This exercise {Figure 2.10} illustrates two important points. First, policy changes in the Solow model increase growth rates, but only temporarily along the transition to the new steady state. That is, policy changes have no long-run growth effect. Second, policy changes can have level effects. That is, a permanent policy change can permanently raise (or lower) the level of per capita output” (41-3).
Some key aspects of the Solow Model: per capita growth happens because of exogenously imposed technology variables. Also, the reason some countries are better off than others is because they save and invest more, and thus increase the amount of capital per worker which makes them more efficient. There is also a more subtle explanation of why some countries grow more quickly than others: if their capital technology ratio (k~) is below the steady-state level for the long run, it will climb back quickly to that level. This might be an explanation for why Germany and Japan built back up their capital stocks so quickly after WWII. “Or it may explain why an economy that increases its investment rate will grow rapidly as it makes the transition to a higher output-technology ratio” (44-5). This may be applicable in situations like South Korea, for example.
Exploring output: as a stylized fact, output per person decreased after 1973. This was the case throughout the advanced countries. It remained relatively low into the end of the 1990s. Some thought that high energy prices could be the culprit, but this is improbable as real energy prices in the late 80s were lower than they were before the shock. Another thought is that the decreased productivity has to do with a transition from a manufacturing economy to a service economy. Another explanation blames a slow-down in funding for R&D in the late 1960’s. Alternatively, growth may have been artificially high in the 50s and 60s because of the rebuilding efforts after WWII.
The “New Economy” saw productivity increase in the late 1990s. This can be partially attributed to the increased use of information technology. Also, some posit that ICT can explain the slow-down in growth and the later improvement: the time-lag associated with diffusing new technologies in the early 1970s created productivity slowdowns that were only circumvented over 20 years later.
Ch. 3:
An influential paper by Mankiw, Romer and Weil put the Solow model to an empirical test, found that it was quite good, but added human capital to make it better. This extends the Solow model to include different levels of education and skills.
H, or the degree to that labor is skilled, is calculated based upon investment in education which rises at a relatively constant rate. For example, if someone invests one extra year on education, wages are expected to rise by about 10% for a life-time (Bils and Klenow (2000)). The amount that individuals invest in education is given exogenously.
K is also gathered by investing some output instead of consuming everything.
“Countries are rich because they have high investment rates in physical capital, spend a large fraction of time accumulating skills…, have low population growth rates, and have high levels of technology” (57).
An additional discussion about convergence and differences in growth rates. A piece by Gerschenkron (1952) and “backward” economies and how they grow faster to catch up is sited, as well as a piece by Abramovitz (1986).
Technology transfer may be a plausible cause of convergence, but the neoclassical model provides other explanations. “Why…do we see convergence among some sets of countries but a lack of convergence among the countries of the world as a whole? The neoclassical growth model suggests an important explanation for these findings” (66). “Among countries that have the same steady state, the convergence hypothesis should hold: poor countries should grow faster on average than rich countries” (68). This explains why there is convergence in some areas, but not all areas, as not every country has the same steady state, but countries who do have the same steady state are incentivized by structural forces to converge technologically.
There is then a brief discussion of income distribution, historical trends and future possible developments.
Ch. 4:
Neoclassical growth models explore the accumulation of physical and human capital in relation to labor stocks and technology, which is determined exogenously. Endogenous technological determination is crucial for the further establishment of economic growth models.
Romer writes about ideas. Ideas are nonrivalrous. Most goods are rivalrous, as my use of it excludes your use of it. Not ideas. An additional distinction made by Romer is that of excludability and non-excludability. “…the economics of ‘ideas’ is intimately tied to the presence of increasing returns to scale and imperfect competition” (83). Increasing returns to scale is seen in the initial costs of the development of an idea: these costs are fixed and may be large. Therefore, companies must charge a price that is above their marginal costs in order to recoup these fixed costs.
Authors like North (1981) see the imposition of intellectual property rights regimes as being crucial for the establishment of sustained economic growth because this incentivized innovation.
Ch. 5:
Endogenous technological change is explored through the lenses of Romer’s model. “The Romer model endogenizes technological progress by introducing the search for new ideas by researches interested in profiting from their inventions” (97).
As was the case with the Solow model, there are two main elements in the Romer model of endogenous technological change: an equation describing the production function and a set of equations describing how the inputs for the production function evolve over time” (98). “The Romer economy consists of three sectors: a final-goods sector, an intermediate-goods sector, and a research sector” (111).
The book continues and lays out different approaches to exploring technology endogenously and technology transfer issues.
Why are we so rich and they are so poor? That is a fundamental question driving theories of economic growth. This was famously explored by Smith in The Wealth of Nations. More recently, this was explored by Solow. “Solow’s theories helped to clarify the role of the accumulation of physical capital and emphasized the importance of technological progress as the ultimate driving force behind sustained economic growth” (2). This work continued apace throughout the 60s and 70s, eventually building to contributions made by Romer and Lucas. These authors focused on human capital and the importance of ideas for economic growth. Barro quantified many of these ideas.
The book is an exploration of economic growth theory from the perspective of the relationship between observation and theory. The author uses the analogy of astronomy in the hard sciences.
1: Per-capita income varies between countries
2: Economic growth rates vary from country to country
3: Growth not entirely consistent over time
4: Countries can become wealthy or poor
5: US has seen steady growth
“Facts” about the US over the last century: Kaldor: “…economic theorists should begin with a summary of the ‘stylized’ facts a theory was supposed to explain” (14). First fact: “…the rate of return to capital is roughly constant…” (14). Secondly: the labor share has been mostly constant across history, looking specifically at the US. The combination of stylized fact one and two is that the ratio of K/Y is relatively stable. The third stylized fact alters one of Kaldor’s facts: there is relative consistent growth in economic growth.
6: Growth in output and trade are related (15)
7: Skilled and unskilled workers show a tendency to move from poor to rich countries
Three questions explored here: Why are some rich and some poor? What drives economic growth? And finally: how do some countries transition so quickly to becoming rich?
Solow’s Model:
Assumptions: world comprised of countries producing a single good. No international trade because there is only one good. Consumers have a percentage that they save for future consumption and a percentage that they use for consumption.
The model is constructed around two equations: production function and capital accumulation.
The production function acts as a saturating curve with respect to increases in capital relative to workers: there are diminishing returns on investment. Secondly, capital accumulation change is equal to the amount of investment minus the amount of depreciation.
Consumers save a portion of their income, which is invested, or rented, for use in production.
Capital accumulation per worker is determined by three things. It is increased with investment in workers, it is decreased with depreciation and the new term is change in the size of labor relative to capital.
A basic Solow diagram is shown that compares two plotted equations. One is a saturating curve that represents the amount of investment per person. The second curve is a line that represents the amount of new capital investment required per person required to keep the ratio of capital to worker consistent. Both equations begin at 0,0. When capital growth occurs per worker, capital deepening takes place. When per worker change is not taking place but capital grows, capital widening takes place. The amount of capital per worker constantly tries to approach the point where both lines intersect.
What happens if there is an increase in the investment rate? The saturating curve that represents the amount of investment per person shifts up. This starts a process of capital deepening.
What happens if there is an increase in the population growth? That shifts the degree of the relationship between the amount of capital investment required to keep the amount of capital per worker constant. “Investment per worker is now no longer high enough to keep the capital-labor ratio constant in the face of the rising population. Therefore, the capital-labor ratio begins to fall…At this point, the economy has less capital per worker than it began with and is therefore poorer: per capita output is ultimately lower after the increase in population growth…” (31-2).
The Steady State: “By definition, the steady-state quantity of capital per worker is determined by the condition that…” capital change is equal to zero (32).
“This equation reveals the Solow model’s answer to the question ‘Why are we so rich and they so poor?’ Countries that have higher savings/investment rates will tend to be richer…” (32). More capital/worker equals more output/worker. If you have high population growth, you will have lower production because you will have lower capital/worker: ie, these countries will focus on just trying to keep the capital/labor ratio stable and will have to emphasize capital widening with less of an opportunity to explore capital deepening.
These effects are then explored vis-Ã -vis empirical evidence: real GDP is compared to savings rate and real GDP is compared to population growth rates. There is seen to be a correlation (though the later graph, figure 2.7, doesn’t appear to display this correlation as well as claimed).
This model fails to describe increased per capital growth because output per unit of labor, and thus per person, is constant.
“To generate sustained growth in per capita income in this model, we must follow Solow and introduce technological progress to the model” (36). This is done through the variable a which increases labor’s productivity. This technology assumption is exogenously imposed.
“A situation in which capital, output, consumption, and population are growing at constant rates is called balanced growth path” (37).
“If the economy begins with a capital-technology ratio that is below its steady-state level…the capital-technology ratio {k~=K/AL} will rise gradually over time. Why? Because the amount of investment being undertaken exceeds the amount needed to keep the capital-technology ratio constant” (39).
“This exercise {Figure 2.10} illustrates two important points. First, policy changes in the Solow model increase growth rates, but only temporarily along the transition to the new steady state. That is, policy changes have no long-run growth effect. Second, policy changes can have level effects. That is, a permanent policy change can permanently raise (or lower) the level of per capita output” (41-3).
Some key aspects of the Solow Model: per capita growth happens because of exogenously imposed technology variables. Also, the reason some countries are better off than others is because they save and invest more, and thus increase the amount of capital per worker which makes them more efficient. There is also a more subtle explanation of why some countries grow more quickly than others: if their capital technology ratio (k~) is below the steady-state level for the long run, it will climb back quickly to that level. This might be an explanation for why Germany and Japan built back up their capital stocks so quickly after WWII. “Or it may explain why an economy that increases its investment rate will grow rapidly as it makes the transition to a higher output-technology ratio” (44-5). This may be applicable in situations like South Korea, for example.
Exploring output: as a stylized fact, output per person decreased after 1973. This was the case throughout the advanced countries. It remained relatively low into the end of the 1990s. Some thought that high energy prices could be the culprit, but this is improbable as real energy prices in the late 80s were lower than they were before the shock. Another thought is that the decreased productivity has to do with a transition from a manufacturing economy to a service economy. Another explanation blames a slow-down in funding for R&D in the late 1960’s. Alternatively, growth may have been artificially high in the 50s and 60s because of the rebuilding efforts after WWII.
The “New Economy” saw productivity increase in the late 1990s. This can be partially attributed to the increased use of information technology. Also, some posit that ICT can explain the slow-down in growth and the later improvement: the time-lag associated with diffusing new technologies in the early 1970s created productivity slowdowns that were only circumvented over 20 years later.
Ch. 3:
An influential paper by Mankiw, Romer and Weil put the Solow model to an empirical test, found that it was quite good, but added human capital to make it better. This extends the Solow model to include different levels of education and skills.
H, or the degree to that labor is skilled, is calculated based upon investment in education which rises at a relatively constant rate. For example, if someone invests one extra year on education, wages are expected to rise by about 10% for a life-time (Bils and Klenow (2000)). The amount that individuals invest in education is given exogenously.
K is also gathered by investing some output instead of consuming everything.
“Countries are rich because they have high investment rates in physical capital, spend a large fraction of time accumulating skills…, have low population growth rates, and have high levels of technology” (57).
An additional discussion about convergence and differences in growth rates. A piece by Gerschenkron (1952) and “backward” economies and how they grow faster to catch up is sited, as well as a piece by Abramovitz (1986).
Technology transfer may be a plausible cause of convergence, but the neoclassical model provides other explanations. “Why…do we see convergence among some sets of countries but a lack of convergence among the countries of the world as a whole? The neoclassical growth model suggests an important explanation for these findings” (66). “Among countries that have the same steady state, the convergence hypothesis should hold: poor countries should grow faster on average than rich countries” (68). This explains why there is convergence in some areas, but not all areas, as not every country has the same steady state, but countries who do have the same steady state are incentivized by structural forces to converge technologically.
There is then a brief discussion of income distribution, historical trends and future possible developments.
Ch. 4:
Neoclassical growth models explore the accumulation of physical and human capital in relation to labor stocks and technology, which is determined exogenously. Endogenous technological determination is crucial for the further establishment of economic growth models.
Romer writes about ideas. Ideas are nonrivalrous. Most goods are rivalrous, as my use of it excludes your use of it. Not ideas. An additional distinction made by Romer is that of excludability and non-excludability. “…the economics of ‘ideas’ is intimately tied to the presence of increasing returns to scale and imperfect competition” (83). Increasing returns to scale is seen in the initial costs of the development of an idea: these costs are fixed and may be large. Therefore, companies must charge a price that is above their marginal costs in order to recoup these fixed costs.
Authors like North (1981) see the imposition of intellectual property rights regimes as being crucial for the establishment of sustained economic growth because this incentivized innovation.
Ch. 5:
Endogenous technological change is explored through the lenses of Romer’s model. “The Romer model endogenizes technological progress by introducing the search for new ideas by researches interested in profiting from their inventions” (97).
As was the case with the Solow model, there are two main elements in the Romer model of endogenous technological change: an equation describing the production function and a set of equations describing how the inputs for the production function evolve over time” (98). “The Romer economy consists of three sectors: a final-goods sector, an intermediate-goods sector, and a research sector” (111).
The book continues and lays out different approaches to exploring technology endogenously and technology transfer issues.
Wednesday, April 16, 2008
Romer: The Origins of Endogenous Growth
Romer, Paul M. (1994). The Origins of Endogenous Growth (Vol. 8, 3-22): American Economic Association.
Endogenous growth breaks from neoclassical growth theories by explaining that economic growth comes about because of an economic system, and not because of the forces that influence from the outside. While there are similarities to neoclassical growth theory (examining the economy as a whole, for example), endogenous growth theory does not see technical advances occurring outside the economic system as being highly relevant in the shaping of patterns of economic growth.
The paper tells two stories of endogenous growth. The first relates to the convergence controversy. The other story concerns the attempt to create a viable alternative theory for the perfect competition model.
The Convergence Controversy:
Is per capita income in different countries converging? If we use traditional understandings of the Cobb-Douglas model, it is not possible to explain conflicting stories across countries. The example that Romer gives is that of the US and the Philippines in the middle of the 20th century. Using a standard A variable before the LK calculation, as is common in the Cobb-Douglas function, one can calculate the production of both the Philippines and the US based on their relative labor and capital pools. The calculation shows that the US worker is much more productive, and implies that the Philippine worker is working with relatively less capital per worker. However, this is misleading, as the A variable used in the calculation was the same in both cases. It is not true empirically that the US and the Philippines had the same A value in the middle of the 20th century.
Romer proposes a spill-over effect to explain why the standard Cobb-Douglas formulation is ineffective in explaining productivity cross-nationally. This spill-over effect takes into consideration knowledge transfers that occur through extended use of technology. Barry and Sala i Martin also explore the transfer of knowledge. They note that this knowledge spill-over would be much greater with capital mobility. Other approaches to understanding this phenomena are explored briefly by Romer.
Romer concludes that the convergence approach only captures some of the phenomena that are missing in the standard, neo-classical account of growth.
The Passing of Perfect Competition:
This approach assumes that there is enough evidence to reject standard growth models. It suggests that, “There is a creative act associated with the construction of new models that is also crucial to the process” (11).
There are five facts that have been used to explain growth that, “…have long [been] taken for granted that poses a challenge for growth theorists…” (12). These are the following” There are many firms in a market economy, discoveries differ from other inputs in that many people can use them at the same time, it is possible to replicate physical activities, technological advance comes from things people do and that many individuals and firms have market power and earn monopoly rents on discoveries (12-3). Neoclassical economic theory addressed the first three growth and technology transfer assumptions above. Endogenous growth theory attempts to rectify the fourth, and possibly the fifth assumptions.
Neo-Schumpeterian Growth:
Two steps are required for this model. Firstly, growth theorists gave up on perfect competition. Secondly, there had to be a reconciliation of the equation: time derivative of a equals blank times a to a variable that was a constant. However, if the exponent was above 1, then technological growth was exponential. Below 1, and things ground to a halt.
Eventually, the models of economic growth have moved towards models of imperfect competition.
Endogenous growth breaks from neoclassical growth theories by explaining that economic growth comes about because of an economic system, and not because of the forces that influence from the outside. While there are similarities to neoclassical growth theory (examining the economy as a whole, for example), endogenous growth theory does not see technical advances occurring outside the economic system as being highly relevant in the shaping of patterns of economic growth.
The paper tells two stories of endogenous growth. The first relates to the convergence controversy. The other story concerns the attempt to create a viable alternative theory for the perfect competition model.
The Convergence Controversy:
Is per capita income in different countries converging? If we use traditional understandings of the Cobb-Douglas model, it is not possible to explain conflicting stories across countries. The example that Romer gives is that of the US and the Philippines in the middle of the 20th century. Using a standard A variable before the LK calculation, as is common in the Cobb-Douglas function, one can calculate the production of both the Philippines and the US based on their relative labor and capital pools. The calculation shows that the US worker is much more productive, and implies that the Philippine worker is working with relatively less capital per worker. However, this is misleading, as the A variable used in the calculation was the same in both cases. It is not true empirically that the US and the Philippines had the same A value in the middle of the 20th century.
Romer proposes a spill-over effect to explain why the standard Cobb-Douglas formulation is ineffective in explaining productivity cross-nationally. This spill-over effect takes into consideration knowledge transfers that occur through extended use of technology. Barry and Sala i Martin also explore the transfer of knowledge. They note that this knowledge spill-over would be much greater with capital mobility. Other approaches to understanding this phenomena are explored briefly by Romer.
Romer concludes that the convergence approach only captures some of the phenomena that are missing in the standard, neo-classical account of growth.
The Passing of Perfect Competition:
This approach assumes that there is enough evidence to reject standard growth models. It suggests that, “There is a creative act associated with the construction of new models that is also crucial to the process” (11).
There are five facts that have been used to explain growth that, “…have long [been] taken for granted that poses a challenge for growth theorists…” (12). These are the following” There are many firms in a market economy, discoveries differ from other inputs in that many people can use them at the same time, it is possible to replicate physical activities, technological advance comes from things people do and that many individuals and firms have market power and earn monopoly rents on discoveries (12-3). Neoclassical economic theory addressed the first three growth and technology transfer assumptions above. Endogenous growth theory attempts to rectify the fourth, and possibly the fifth assumptions.
Neo-Schumpeterian Growth:
Two steps are required for this model. Firstly, growth theorists gave up on perfect competition. Secondly, there had to be a reconciliation of the equation: time derivative of a equals blank times a to a variable that was a constant. However, if the exponent was above 1, then technological growth was exponential. Below 1, and things ground to a halt.
Eventually, the models of economic growth have moved towards models of imperfect competition.
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