Capital deepening and non-balanced economic growth

2006·2.2 MB·English

by  Acemoglu, Daron

Digitized by the Internet Archive
in 2011 with funding from
Boston Library Consortium IVIember Libraries
http://www.archive.org/details/capitaldeepeningOOacem

DEWEY
HB31
.M415
Massachusetts Institute of Technology
Department of Economics
Working Paper Series
CAPITAL DEEPENING AND
NON-BALANCED ECONOMIC GROWTH
Daron Acemoglu
Veronica Guerrieri
Working Paper 06-24
August 2006
15,
Room
E52-251
50 Memorial Drive
MA
Cambridge, 021 42
This paper can be downloaded without charge from the
Social Science Research Network Paper Collection at
http://ssrn.com/abstract=924498
MASSACHUSETTS INSTITUTE
OFTECHNOLOGY
SEP 5 2005
LIBRARIES
Capital Deepening and Non-Balanced Economic Growth'*
Daron Acemoglu Veronica Guerrieri
MIT University of Chicago
First Version: May 2004.
This Version: August 2006.
Abstract
This paper constructs a model of non-balanced economic growth. The main economic
force is the combination ofdifferences in factor proportions and capital deepening. Capital
deepening tends to increase the relative output of the sector with a greater capital share,
but simultaneously induces a reallocation of capital and labor away from that sector. We
first illustrate this force using a general two-sector model. We then investigate it further
using a class of models with constant elasticity of substitution between two sectors and
Cobb-Douglas production functions in each sector. In this class of models, non-balanced
growth is shown to be consistent with an asymptotic equilibrium with constant interest
rate and capital share in national income. We also show that for realistic parameter values,
the model generates dynamics that are broadly consistent with US data. In particular,
the model generates more rapid growth of employment in less capital-intensive sectors,
more rapid growth of real output in more capital-intensive sectors sectors and aggregate
behavior in line with the Kaldor facts. Finally, we construct and analyze a model of "non-
balanced endogenous growth," which extends the main results ofthe paper to an economy
with endogenous and directed technical change. This model shows that equilibrium will
typically involve endogenous non-balanced technological progress.
Keywords: capital deepening, endogenous growth, multi-sector growth, non-balanced
economic growth.
JEL Classification: O40, 041, O30.
'We thank John Laitner, Guido Lorenzoni, Ivan Werning and seminar participants at Chicago, Federal
Reserve Bank ofRichmond, IZA, MIT, NBER Economic Growth Group, 2005, Society ofEconomic Dynamics,
Florence 2004 and Vancouver 2006, and Universitat of Pompeu Fabra for useful comments and Ariel Burstein
for help with the simulations. Acemoglu acknowledges financial support from the Russell Sage Foundation and
the NSF. An early version ofthis paper was circulated under tlie title "Non-Balanced Endogenous Growth".

1 Introduction
Most models of economic growth strive to be consistent with the "Kaldor facts", i.e., the
relative constancy of the growth rate, the capital-output ratio, the share of capital income
in GDP and the real interest rate (see Kaldor, 1963, and also Denison, 1974, Homer and
Sylla, 1991, Barro and Sala-i-Martin, 2004). Beneath this balanced picture, however, are the
patterns that Kongsamut, Rebelo and Xie (2001) refer to as the "Kuznets facts" which concern
,
the systematic change in the relative importance of various sectors, in particular, agriculture,
manufacturing and services (see Kuznets, 1957, 1973, Chenery, 1960, Kongsamut, Rebelo and
Xie, 2001). While the Kaldor facts emphasize the balanced nature of economic growth, the
Kuznets facts highlight its non-balanced nature. Figure 1 illustrates some aspects of both the
Kaldor and Kuznets facts for postwar US; the capital share of national income is relatively
constant, whereas relative employment and output in services increase significantly.^
The Kuznets facts have motivated a small literature, which typically starts by positing
non-homothetic preferences consistent with Engel's law.^ This literature therefore emphasizes
the demand-side reasons for non-balanced growth; the marginal rate of substitution between
different goods changes as an economy grows, directly leading to a pattern of uneven growth
between sectors. An alternative thesis, first proposed by Baumol (1967), emphasizes the po-
tential non-balanced nature ofeconomic growth resulting from differential productivity growth
across sectors, but has received less attention in the literature.^
This paper has two aims. First, it shows that there is a natural supply-side reason, re-
lated to Baumol's (1967) thesis, for economic growth to be non-balanced. Differences in factor
proportions across sectors (i.e., different shares of capital) combined with capital deepening
'Alldataarefromthe National Incomeand Product Accounts (NIPA). Fordetails anddefinitionsofservices,
manufacturing, employment, real GDP and capital share, see Appendix B.
^See, forexample, Murphy, ShleiferandVishny(1989), Matsuyama(1992), Echevarria(1997), Laitner (2000),
Kongsamut, Rebelo and Xie (2001), Caselli and Coleman (2001), GoUin, Parente and Rogerson (2002). See also
the interesting papers by Stokey (1988), Matsuyama (2002), Foellmi and Zweimuller (2002), and Buera and
Kaboski (2006), which derive non-homothetiticites from the presence of a "hierarchy of needs" or "hierarchy
of qualities". Finally, Hall and Jones (2006) point out that there are natural reasons for health care to be
a superior good (because expected life expectancy multiplies utility) and show how this can account for the
increase in health care spending. Matsuyama (2005) presents an excellent overview ofthis literature.
Two exceptions arethetwo recent independent papers by Ngai and Pissarides (2006) and Zuletaand Young
(2006). Ngai and Pissarides (2006), for example, construct a model of multi-sector economic growth inspired
by Baumol. In Ngai and Pissarides's model, there are exogenous Total Factor Productivity differences across
sectors, but all sectors have identical Cobb-Douglas production functions. While both of these papers eire
potentially consistent with the Kuznets and Kaldor facts, they do not contain the main contribution of our
paper: non-balanced growth resulting from factor proportion differences and capital deepening.
/^^ ^^^^,#,# ^^ ^^ ,#,#/ ^^^-^^"^^'^/ ^"^^^ ^"'^^^^ ^^,c$^^^,#,c# ,<#^^<:.^^c§?
-»-capitalshare -b-laborratioservicesovermanufacturing -*-realoutputratioservicesovermanufacturing
I |
Figure 1: Capital share in national income and employment and real GDP in services relative
to manufacturing in the United States, 1947-2004. Source: NIPA. See text for details.
will lead to non-balanced growth. The reason is simple: an increase in capital-labor ratio will
raise output more in the sector with greater capital intensity. More specifically, we prove that
"balanced technological progress",^ capital deepening and differences in factor proportions al-
ways cause non-balanced growth. This result holds irrespective ofthe exact source ofeconomic
growth or the process of accumulation.
The second objective of the paper is to present and analyze a tractable two-sector growth
model featuring non-balanced growth and investigate under what circumstances non-balanced
growth can be consistent with aggregate Kaldor facts. We do this by constructing a class of
economies with constant elasticity ofsubstitution between two sectors and Cobb-Douglas pro-
duction functions within each sector. We characterize the equilibria in this class ofeconomies
with both exogenous and endogenous technological change. We show that the limiting (asymp-
*"Balanced technological progress" here refers to equal rates of Hicks-ncutra! technical change in the two
sectors. Hicks-neutral technological progress is both a natural benchmark and also the type of technological
progress that the more microfounded models considered in Sections 3 and 5 will generate.