The Agenda

This discussion points to the following set of facts and questions that are central to an investigation of the determinants of long-run differences in income levels and growth. The three major questions that have emerged from our brief discussion are:

(1) Why are there such large differences in income per capita and worker productivity across countries?

(2) Why do some countries grow rapidly while other countries stagnate?

(3) What sustains economic growth over long periods of time and why did sustained growth start 200 years or so ago?

• In each case, a satisfactory answer requires a set of well-formulated models that illustrate the mechanics of economic growth and cross-country income differences, together with an investigation of the fundamental causes of the different trajectories which these nations have embarked upon.

• The traditional growth models—in particular, the basic Solow and the neoclassical models—provide a good starting point, and the emphasis they place on investment and human capital seems consistent with the patterns shown in Figures 1.15 and 1.16. However, we will also see that technological differences across countries (either because of their differential access to technological opportunities or because of dif­ferences in the efficiency of production) are equally important. Traditional models treat technology (market structure) as given or at best as evolving exogenously like a blackbox. But if technology is so important, we ought to understand why and how it progresses and why it differs across countries. This motivates our detailed study of models of endogenous technological progress and technology adoption. Specifically, we will try to understand how differences in technology may arise, persist and con­tribute to differences in income per capita.

• Some of the other patterns we encountered in this chapter will inform us about the types of models that have the most promise in explaining economic growth and cross­country differences in income. For example, we have seen that cross-country income differences can only be accounted for by understanding why some countries have grown rapidly over the past 200 years, while others have not. Therefore, we need models that can explain how some countries can go through periods of sustained growth, while others stagnate.

Nevertheless, we have also seen that the postwar world income distribution is relatively stable (at most spreading out slightly from 1960 to 2000). This pattern has suggested to many economists that we should focus on models that generate large “permanent” cross-country differences in income per capita, but not necessarily large “permanent” differences in growth rates (at least not in the recent decades). This is based on the following reasoning: with substantially different long-run growth rates (as in models of endogenous growth, where countries that invest at different rates grow at different rates), we should expect significant divergence. We saw above that despite some widening between the top and the bottom, the cross-country distribution of income across the world is relatively stable.

Combining the post-war patterns with the origins of income differences related to the economic growth over the past two centuries suggests that we should look for models that can account both for long periods of significant growth differences and also for a “stationary” world income distribution, with large differences across countries. The latter is particularly challenging in view of the nature of the global economy today, which allows for free-flow of technologies and large flows of money and commodities across borders.

• And as our discussion in the previous section suggests, all of these questions can be (and perhaps should be) answered at two levels. First, we can use the models we develop in order to provide explanations based on the mechanics of economic growth. Such answers will typically explain differences in income per capita in terms of differences in physical capital, human capital and technology, and these in turn will be related to some other variables such as preferences, technology, market structure, openness to international trade and perhaps some distortions or policy variables. These will be our answers regarding the proximate causes of economic growth.

We will next look at the fundamental causes underlying these proximate factors, and try to understand why some societies are organized differently than others. Why

do they have different market structures? Why do some societies adopt policies that encourage economic growth while others put up barriers against technological change? These questions are central to a study of economic growth, and can only be answered by developing systematic models of the political economy of development and looking at the historical process of economic growth to generate data that can shed light on these fundamental causes.

Our next task is to systematically develop a series of models to understand the me­chanics of economic growth. In this process, we will encounter models that underpin the way economists think about the process of capital accumulation, technological progress, and productivity growth. Only by understanding these mechanics can we have a framework for thinking about the causes of why some countries are growing and some others are not, and why some countries are rich and others are not.

Therefore, the approach of the book will be two-pronged: on the one hand, it will present a detailed exposition of the mathematical structure of a number of dynamic general equilibrium models useful for thinking about economic growth and macroeconomic phenomena; on the other, we will try to uncover what these models imply about which key parameters or key economic processes are different across countries and why. Using this information, we will then attempt to understand the potential fundamental causes of differences in economic growth.

1.9.