Chapter8-Endogenous Growth-10

Chapter8-Endogenous Growth-10 - de Janvry, Roland-Holst,...

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de Janvry, Roland-Holst, and Sadoulet 1 Chapter 8 Endogenous Economic Growth September 28, 2010 1. Explaining growth The classical and neo-classical growth theories provided respectively by Harrod-Domar and Solow identify technology as a major determinant of aggregate economic growth: the ICOR in Harrod-Domar, and the rate of technological progress in Solow. Yet these models are incomplete since they do not explain where technology is coming from nor how it could be enhanced. In the dual economy models we see greater specificity in the agriculture-industry interactions and the sectoral location of technological change in agriculture, but technological progress in agriculture remains equally exogenous. Clearly, if we are to give such great importance to technology in explaining growth, we need to have theories that can explain better how technology is produced, adopted, and diffused. This is what we do in this chapter. This includes issues of coordination of investment across sectors, increasing returns when technology generation is endogenous, limited access to international technology when there are intellectual property rights, and the role of policy in promoting the generation, adoption, and diffusion of technology. In recent years, new thinking has emerged to address the issue of the role of technology in growth. Objectives of these advances have in particular been to: Endogenize technological change , i.e., explain the origins of the Solow residual that determines the long-run rate of growth in the economy since there are decreasing returns to factors of production. Take home messages for chapter 8 1. Neo-classical growth theory identifies the primary driver of economic growth to be the rate of technological progress, but offers few insights about what determines it. The Solow prediction on universal convergence in income levels across countries is at odds with observed facts. 2. One of the biggest challenges to induce investment and achieve growth is coordination across firms to exploit production complementarities and reach high level investment equilibria. 3. Endogenous growth theories aim at explaining the origins of productivity gains by constructing models where firms invest in knowledge, making productivity growth endogenous. 4. The main result of endogenous growth is existence of increasing returns to scale in aggregate output. This implies divergence in growth rates across countries. 5. Because investment in research creates positive spillover effects across firms, the state is called to intervene to internalize positive externalities and induce the socially optimal level of investment in research. 6. Spillover effects are enhanced by proximity of firms in economic clusters, implying that firm location can be an important determinant of productivity growth. de Janvry, Roland-Holst, and Sadoulet
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This note was uploaded on 02/09/2011 for the course ECON c171 taught by Professor Alaindejanvry during the Fall '10 term at Berkeley.

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Chapter8-Endogenous Growth-10 - de Janvry, Roland-Holst,...

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