CONTENTS OF VOLUME 1A

Introduction to the Series v

Contents of the Handbook vii

Preface to the Handbook of Economic Growth xi

INTRODUCTION: GROWTH IN RETROSPECT AND PROSPECT

Reflections on Growth Theory 3

ROBERT M.

Abstract 3

Keywords 3

PART I: THEORIES OF ECONOMIC GROWTH

Chapter 1

Neoclassical Models of Endogenous Growth: The Effects of Fiscal Policy, Inno­vation and Fluctuations

LARRY E. JONES AND RODOLFO E. MANUELLI 13

Abstract 14

Keywords 14

1. Introduction 15

2. Endogenous growth: Infinite lifetimes 16

2.1. Growth and the Solow model 17

2.2. Aonesectormodelofequilibriumgrowth 19

2.3. Fiscalpolicyandgrowth 21

2.4. Innovation in the neoclassical model 27

3. Fluctuations and growth 32

3.1. Introduction 32

3.2. Empirical evidence 32

3.3. Theoretical models 39

3.4. A simple linear endogenous growth model 39

3.5. Physical and human capital 49

3.6. The opportunity cost view 54

3.7. More on government spending, taxation, and growth 56

3.8. Quantitativeeffects 59

4. Concluding comments 62

Acknowledgements 63

References 63

Chapter 2

Growth with Quality-Improving Innovations: An Integrated Framework

PHILIPPE AGHION AND PETER HOWITT 67

Abstract 68

Keywords 68

1. Introduction 69

2. Basic framework 69

2.1. AtoyversionoftheAghion-Howittmodel 69

2.2. Ageneralization 71

2.3. Alternativeformulations 75

2.4. Comparativestaticsongrowth 75

3. Linking growth to development: convergence clubs 76

3.1. A model of technology transfer 78

3.2. World growth and distribution 81

3.3. Theroleoffinancialdevelopmentinconvergence 81

3.4. Concluding remark 84

4. Linking growth to IO: innovate to escape competition 84

4.1. The theory 86

4.2. Empirical predictions 89

4.3. Empirical evidence and relationship to literature 89

4.4. Aremarkoninequalityandgrowth 92

5.

5.1. Theory 92

5.2. Evidence 94

5.3. Concluding remarks 97

6. Linking growth to institutional change 98

6.1. From Schumpeter to Gerschenkron 98

6.2. Asimplemodelofappropriateinstitutions 100

6.3. Appropriateeducationsystems 101

7. Conclusion 106

References 107

Chapter 3

Horizontal Innovation in the Theory of Growth and Development

GINO GANCIA AND FABRIZIO ZILIBOTTI 111

Abstract 112

Keywords 112

1. Introduction 113

2. Growth with expanding variety 116

2.1. The benchmark model 116

2.2. Twovariationsofthebenchmarkmodel: “lab-equipment” and “labor-for intermediates” 120

2.3. Limitedpatentprotection 122

3. Trade, growthandimitation 124

3.1. Scale effects, economic integration and trade 124

3.2. Innovation, imitation and product cycles 127

4. Directedtechnicalchange 130

4.1. Factor-biased innovation and wage inequality 131

4.2. Appropriate technology and development 136

4.3. Trade, inequality and appropriate technology 140

5. Complementarityininnovation 144

6. Financial development 150

7. Endogenous fluctuations 157

7.1. Deterministiccycles 158

7.2. Learning and sunspots 162

8. Conclusions 166

Acknowledgements 166

References 166

Chapter 4

From Stagnation to Growth: Unified Growth Theory

ODED GALOR 171

Abstract 172

Keywords 173

1. Introduction 174

2. Historical evidence 178

2.1. TheMalthusianepoch 179

2.2. The Post-Malthusian Regime 185

2.3. The Sustained Growth Regime 195

2.4. The great divergence 218

3. The fundamental challenges 219

3.1. Mysteries of the growth process 220

3.2. The incompatibility of non-unified growth theories 221

3.3. Theories of the demographic transition and their empirical assessment 224

4. Unified growth theory 235

4.1. From stagnation to growth 237

4.2. Complementary theories 256

5. Unified evolutionary growth theory 264

5.1. Human evolution and economic development 264

5.2.

5.3. Complementary mechanisms 273

6. Differential takeoffs and the great divergence 276

6.1. Non-unified theories 277

6.2. Unified theories 279

7. Concluding remarks 283

Acknowledgements 285

References 285

Chapter 5

Poverty Traps

costas Azariadis and john stachurski 295

Abstract 296

Keywords 296

1. Introduction 297

2. Development facts 303

2.1. Povertyandriches 303

2.2. Abriefhistoryofeconomicdevelopment 304

3. Modelsanddefinitions 307

3.1. Neoclassical growth with diminishing returns 307

3.2. Convex neoclassical growth and the data 312

3.3. Poverty traps: historical self-reinforcement 317

3.4. Poverty traps: inertial self-reinforcement 326

4. Empiricsofpovertytraps 330

4.1. Bimodality and convergence clubs 330

4.2. Testing for existence 335

4.3. Model calibration 337

4.4. Microeconomic data 339

5. Nonconvexities, complementarities and imperfect competition 340

5.1. increasing returns and imperfect competition 341

5.2. Thefinancialsectorandcoordination 343

5.3. Matching 346

5.4. other studies of increasing returns 349

6. Credit markets, insurance and risk 350

6.1. Credit markets and human capital 351

6.2. Risk 355

6.3. Credit constraints and endogenous inequality 358

7. Institutions and organizations 363

7.1. Corruption and rent-seeking 364

7.2. Kinship systems 367

8. Other mechanisms 373

9. Conclusions 373

9.1. Lessons for economic policy 374

Acknowledgements 375

Appendix A: 375

A.1. Markov chains and ergodicity 375

A.2. Remaining proofs 378

References 379

Chapter 6

Institutions as a Fundamental Cause of Long-Run Growth

DARON ACEMOGLU, SIMON JOHNSON AND JAMES A. ROBINSON 385

Abstract 386

Keywords 387

1. Introduction 388

1.1. Thequestion 388

1.2. The argument 389

1.3. Outline 396

2. Fundamentalcausesofincomedifferences 396

2.1. Three fundamental causes 397

3.

3.1. TheKoreanexperiment 404

3.2. The colonial experiment 407

4. The Reversal of Fortune 407

4.1. The reversal among the former colonies 408

4.2. Timing of the reversal 412

4.3. Interpreting the reversal 412

4.4. Economic institutions and the reversal 414

4.5. Understanding the colonial experience 416

4.6. Settlements, mortality and development 417

5. Why do institutions differ? 421

5.1. The efficient institutions view - the Political Coase Theorem 422

5.2. The ideology view 424

5.3. The incidental institutions view 425

5.4. Thesocialconflictview 427

6. Sources of inefficiencies 428

6.1. Hold-up 430

6.2. Political losers 432

6.3. Economic losers 434

6.4. Theinseparabilityofefficiencyanddistribution 436

6.5. Comparative statics 437

6.6. The colonial experience in light of the comparative statics 438

6.7. Reassessment of the social conflict view 439

7. The social conflict view in action 439

7.1. Labor markets 440

7.2. Financialmarkets 441

7.3. Regulation of prices 443

7.4. Political power and economic institutions 445

8. A theory of institutions 448

8.1. Sources of political power 448

8.2. Political power and political institutions 449

8.3. A theory of political institutions 451

9. The theory in action 452

9.1. Rise of constitutional monarchy and economic growth in early modern Europe 452

9.2. Summary 457

9.3. Rise of electoral democracy in Britain 458

9.4. Summary 462

10. Future avenues 463

Acknowledgements 464

References 464

Chapter 7

Growth Theory through the Lens of Development Economics

ABHIJIT V. BANERJEE AND ESTHER DUFLO 473

Abstract 474

Keywords 474

1. Introduction: neo-classical growth theory 475

1.1. The aggregate production function 475

1.2. The logic of convergence 477

2. Rates of return and investment rates in poor countries 479

2.1. Are returns higher in poor countries? 479

2.2. Investment rates in poor countries 493

3.

tive approaches 499

3.1. Access to technology and the productivity gap 499

3.2. Human capital externalities 501

3.3. Coordination failure 503

3.4. Taking stock 504

4. Understanding rates of return and investment rates in poor countries: non-

aggregative approaches 505

4.1. Government failure 505

4.2. The role of credit constraints 509

4.3. Problems in the insurance markets 512

4.4. Local externalities 515

4.5. The family: incomplete contracts within and across generations 518

4.6. Behavioral issues 520

5. Calibrating the impact of the misallocation of capital 522

5.1. A model with diminishing returns 523

5.2. Amodelwithfixedcosts 527

6. Towards a non-aggregative growth theory 535

6.1. An illustration 535

6.2. Can we take this model to the data? 538

6.3. Where do we go from here? 542

Acknowledgements 544

References 544

PART II: EMPIRICS OF ECONOMIC GROWTH

Chapter 8

Growth Econometrics

STEVEN N. DURLAUF, PAUL A. JOHNSON AND JONATHAN R.W. TEMPLE 555 Abstract 556

Keywords 557

1. Introduction 558

2. Stylizedfacts 561

2.1. A long-run view 562

2.2. Data after 1960 562

2.3. DifferencesinlevelsofGDPperworker 563

2.4. Growth miracles and disasters 565

2.5. Convergence? 567

2.6. The growth slowdown 567

2.7. Does past growth predict future growth? 568

2.8. Growth differences by development level and geographic region 571

2.9. Stagnation and output volatility 573

2.10. A summary of the stylized facts 575

3. Cross-country growth regressions: from theory to empirics 576

3.1. Growth dynamics: basic ideas 576

3.2. Cross-country growth regressions 578

3.3. Interpreting errors in growth regressions 581

4. The convergence hypothesis 582

4.1. Convergence and initial conditions 582

4.2. ^-convergence 585

4.3. Distributional approaches to convergence 592

4.4.

4.5. Sources of convergence or divergence 604

5. Statistical models of the growth process 607

5.1. Specifying explanatory variables in growth regressions 608

5.2. Parameter heterogeneity 616

5.3. Nonlinearity and multiple regimes 619

6. Econometric issues I: Alternative data structures 624

6.1. Time series approaches 624

6.2. Panel data 627

6.3. Event study approaches 636

6.4. Endogeneity and instrumental variables 637

7. Econometric issues II: Data and error properties 640

7.1. Outliers 641

7.2. Measurement error 641

7.3. Missing data 642

7.4. Heteroskedasticity 643

7.5. Cross-section error correlation 643

8. Conclusions: The future of growth econometrics 645

Acknowledgements 651

Appendix A: Data 651

Key to the 102 countries 651

Extrapolation 652

Appendix B: Variables in cross-country growth regressions 652

Appendix C: Instrumental variables for Solow growth determinants 660

Appendix D: Instrumental variables for non-Solow growth determinants 661

References 663

Chapter 9

Accounting for Cross-Country Income Differences

FRANCESCO CASELLI 679

Abstract 680

1. Introduction 681

2. The measure of our ignorance 683

2.1. Basic data 685

2.2. Basic measures of success 686

2.3. Alternative measures used in the literature 688

2.4. Sub-samples 689

3. Robustness: basic stuff 690

3.1. Depreciation rate 690

3.2. Initialcapitalstock 691

3.3. Education-wage profile 693

3.4. Years of education 1 694

3.5. Years of education 2 694

3.6. Hours worked 695

3.7. Capital share 696

4. Qualityofhumancapital 698

4.1. Quality of schooling: Inputs 698

4.2. Quality of schooling: test scores 703

4.3. Experience 706

4.4. Health 708

4.5. Social vs. private returns to schooling and health 710

5. Qualityofphysicalcapital 711

5.1. Composition 711

5.2. Vintage effects 715

5.3. Furtherproblemswith K 716

6. Sectorial differences in TFP 717

6.1. Industry studies 718

6.2. The role of agriculture 719

6.3. Sectorial composition and development accounting 724

7. Non-neutral differences in technology 727

7.1. Basic concepts and qualitative results 727

7.2. Developmentaccountingwithnon-Heutraldifferences 734

8. Conclusions 737

Acknowledgements 738

References 738

Chapter 10

Accounting for Growth in the Information Age

DALE W. JORGENSON 743

Abstract 744

Keywords 745

1. Theinformationage 746

1.1. Introduction 746

1.2. Faster, better, cheaper 747

1.3. Impact of information technology 755

2. Aggregate growth accounting 756

2.1. The role of information technology 756

2.2. The American growth resurgence 765

2.3. Demiseoftraditionalgrowthaccounting 779

3. International comparisons 784

3.1. Introduction 784

3.2. Investment and total factor productivity 787

3.3. Investment in information technology 796

3.4. Alternative approaches 803

3.5. Conclusions 805

4. Economics on internet time 806

Acknowledgements 807

References 808

Further reading 815

Chapter 11

Externalities and Growth

PETER J. KLENOW AND ANDRES RODRIGUEZ-CLARE 817

Abstract 818

Keywords 818

1. Introduction 819

2. A brief guide to externalities in growth models 819

2.1. Modelswithknowledgeexternalities 820

2.2. Models with knowledge externalities and new-good externalities 821

2.3. Models with new-good externalities 822

2.4. Models with no externalities 823

3. Cross-country evidence 825

3.1. Theworld-widegrowthslowdown 825

3.2. BetaconvergenceintheOECD 827

3.3. Lowpersistenceofgrowthratedifferences 829

3.4. Investment rates and growth vs. levels 831

3.5. R&Dand TFP 833

4. Models with common growth driven by international knowledge spillovers 835

4.1. R&D investment and relative productivity 836

4.2. Modeling growth in the world technology frontier 839

4.3. Determinants of R&D investment 843

4.4. Calibration 845

4.5. Thebenefitsofengagement 854

4.6. Discussion of main results 856

5. Conclusion 856

Acknowledgements 857

Appendix A: 857

Comparative statics 858

References 859

PART III: GROWTH POLICIES AND MECHANISMS

Chapter 12

Finance and Growth: Theory and Evidence

ROSS LEVINE 865

Abstract 866

Keywords 866

1. Introduction 867

2. Financial development and economic growth: Theory 869

2.1. What is financial development? 869

2.2. Producing information and allocating capital 870

2.3. Monitoring firms and exerting corporate governance 872

2.4. Risk amelioration 875

2.5. Pooling of savings 879

2.6. Easing exchange 880

2.7. The theoretical case for a bank-based system 881

2.8. The theoretical case for a market-based system 883

2.9. Countervailing views to bank-based vs. market-based debate 886

2.10. Finance, income distribution, and poverty 887

3. Evidence on finance and growth 888

3.1. Cross-country studies of finance and growth 889

3.2. Panel, time-series, and case-studies of finance and growth 899

3.3. Industry and firm level studies of finance and growth 910

3.4. Are bank- or market-based systems better? Evidence 918

3.5. Finance, income distribution, and poverty alleviation: evidence 920

4. Conclusions 921

Acknowledgements 923

References 923

Chapter 13

Human Capital and Technology Diffusion

JESS BENHABIB AND MARK M. SPIEGEL 935

Abstract 936

Keywords 936

1. Introduction 937

2. Variations on the Nelson-Phelps model 940

3. Some microfoundations based on the diffusion model of Barro and Sala-i-

Martin 944

4. A nested specification 946

5. Empirical evidence 948

5.1. Measurementoftotalfactorproductivity 948

5.2. Model specification 953

5.3. Results 954

6. Model prediction 959

6.1. Model forecasting 959

6.2. Negative catch-up countries 960

7. Conclusion 964

References 965

Chapter 14

Growth Strategies

DANI RODRIK 967

Abstract 968

Keywords 968

1. Introduction 969

2. What we know that (possibly) ain’t so 973

3. The indeterminate mapping from economic principles to institutional arrange­

ments 978

4. Back to the real world 989

4.1. In practice, growth spurts are associated with a narrow range of policy reforms 989

4.2. The policy reforms that are associated with these growth transitions typically combine ele­

ments of orthodoxy with unorthodox institutional practices 993

4.3. Institutional innovations do not travel well 994

4.4. Sustaining growth is more difficult than igniting it, and requires more extensive institutional

reform 996

5. A two-pronged growth strategy 997

5.1. An investment strategy to kick-start growth 998

5.2. An institution building strategy to sustain growth 1005

6. Concluding remarks 1009

Acknowledgements 1010

References 1010

Chapter 15

National Policies and Economic Growth: A Reappraisal

WILLIAM EASTERLY 1015

Abstract 1016

Keywords 1016

1. Theoretical models that predict strong policy effects 1017

2. Models that predict small policy effects on growth 1026

3. Empirics 1032

4. Some empirical caveats 1033

5. Newempiricalwork 1036

6. Policy episodes and transition paths 1050

7. Institutions versus policies 1054

8. Conclusions 1056

References 1056

Author Index I-1

Subject Index I-37