Table Of Content

Springer Texts in Business and Economics Sibabrata Das Alex Mourmouras Peter Rangazas Economic Growth and Development A Dynamic Dual Economy Approach Second Edition Springer Texts in Business and Economics Springer Texts in Business and Economics (STBE) delivers high-quality instruc- tionalcontentforundergraduatesandgraduatesinallareasofBusiness/Management Science and Economics. The series is comprised of self-contained books with a broadandcomprehensivecoveragethataresuitableforclassaswellasforindividual self-study. All texts are authored by established experts in their fields and offer a solidmethodologicalbackground,oftenaccompaniedbyproblemsandexercises. Moreinformationaboutthisseriesathttp://www.springer.com/series/10099 (cid:129) Sibabrata Das Alex Mourmouras Peter Rangazas Economic Growth and Development A Dynamic Dual Economy Approach Second Edition SibabrataDas AlexMourmouras Strategy,Policy&ReviewDepartment InternationalMonetaryFund InternationalMonetaryFund Washington,DC,USA Washington,DC,USA PeterRangazas DepartmentofEconomics IndianaUniversity-PurdueUniversity Indianapolis,IN,USA ISSN2192-4333 ISSN2192-4341 (electronic) SpringerTextsinBusinessandEconomics ISBN978-3-319-89754-7 ISBN978-3-319-89755-4 (eBook) https://doi.org/10.1007/978-3-319-89755-4 LibraryofCongressControlNumber:2018944452 #SpringerInternationalPublishingAG,partofSpringerNature2015,2018 Thisworkissubjecttocopyright.AllrightsarereservedbythePublisher,whetherthewholeorpart of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation,broadcasting,reproductiononmicrofilmsorinanyotherphysicalway,andtransmissionor informationstorageandretrieval,electronicadaptation,computersoftware,orbysimilarordissimilar methodologynowknownorhereafterdeveloped. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt fromtherelevantprotectivelawsandregulationsandthereforefreeforgeneraluse. Thepublisher,theauthorsandtheeditorsaresafetoassumethattheadviceandinformationinthisbook arebelievedtobetrueandaccurateatthedateofpublication.Neitherthepublishernortheauthorsorthe editorsgiveawarranty,expressorimplied,withrespecttothematerialcontainedhereinorforanyerrors oromissionsthatmayhavebeenmade.Thepublisherremainsneutralwithregardtojurisdictionalclaims inpublishedmapsandinstitutionalaffiliations. Printedonacid-freepaper ThisSpringerimprintispublishedbytheregisteredcompanySpringerInternationalPublishingAGpartof SpringerNature. Theregisteredcompanyaddressis:Gewerbestrasse11,6330Cham,Switzerland Preface Thesecondeditionimprovesonthefirsteditionintheusualways:correctingerrors, making the notation more consistent, updating studies, and rewriting the rough passages.Largerchangeswerealsomadetoallowstudentswithonlyanelementary background in economics and mathematics to join in. There are two entirely new chapters that unpack the material and slow down the exposition of the extended one-sectorgrowthmodel.Chapter3detailstheroleoffiscalpolicyindevelopment. Chapter 4 focuses exclusively on schooling and fertility. Over 90 additional exercises are included throughout the book to help build understanding. There is now a technical appendix with examples of how math is used in constructing the economicmodels.Boththetextandthesolutionmanualincludemorediagramsto illustrateimportantpoints. Wehadlotsofhelpinmakingabetterbook.Undergraduateandgraduatestudents inourdevelopmentandmacroeconomicsclassesprovidedmanyhelpfulcomments. StephenRangazaspreparedallthenewdiagrams.Oureditor,LorraineKlimowich, madeaconvincingcasethatthesecondeditionwasworthwhile.Thankstoall. Washington,DC,USA SibabrataDas Washington,DC,USA AlexMourmouras Indianapolis,IN,USA PeterRangazas v Contents 1 Overview. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.1 BeyondtheSolowModel. . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 1.2 ForeignAid. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 1.3 WhyaTwo-SectorApproach?. . . . . . . . . . . . . . . . . . . . . . . . . 4 1.4 TheDualEconomy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 1.5 GrowthFacts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 1.6 Outline. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 PartI One-SectorGrowthModels 2 Overlapping-GenerationsModelofEconomicGrowth. . . . . . . . . . 15 2.1 Firms,Production,andtheDemandforCapital. . . . . . . . . . . . . 16 2.2 HouseholdSavingandtheSupplyofCapital. . . . . . . . . . . . . . 20 2.3 CompetitiveEquilibriuminaGrowingEconomy. . . . . . . . . . . 23 2.4 QuantitativeTheory. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 2.5 HumanCapital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 2.6 IntergenerationalTransfers. .. . . . .. . . . .. . . . .. . . . .. . . . .. 36 2.7 RelatedLiterature. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 2.8 Exercises. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 Appendix. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 3 FiscalPolicy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 3.1 IntroducingtheGovernment. . . . . . . . . . . . . . . . . . . . . . . . . . 59 3.2 GovernmentPurchases. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 3.3 PublicCapitalandProductivity. . . . . . . . . . . . . . . . . . . . . . . . 66 3.4 PureandImpurePublicCapital. . . . . . . . . . . . . . . . . . . . . . . . 67 3.5 CapitalAccumulationinanOpenEconomy. . . . . . . . . . . . . . . 68 3.6 Government:BenevolentDictatororKleptocrat?. . . . . . . . . .. . 70 3.7 SlowingLong-RunEconomicGrowth. . . . . . . . . . . . . . . . . . . 77 3.8 Convergence. .. . . . .. . . . .. . . . .. . . . .. . . . .. . . . .. . . . .. 84 3.9 Exercises. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85 vii viii Contents Appendix. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89 References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90 4 SchoolingandFertility. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93 4.1 TheQuantityandQualityofChildren. . . . . . . . . . . . . . . . . . . . 95 4.2 TheNatureoftheFertility-SchoolingInteraction. . . . . . . . . . . . 98 4.3 TheSchoolingPovertyTrapandSchoolingDynamics. . . . . . . . 101 4.4 NumericalExample. . . . . . .. . . . . . . . . . . .. . . . . . . . . . .. . . 103 4.5 SchoolingPovertyTraps:ACloserLook. . . . . . . . . . . . . . . . . 106 4.6 TheMalthusianEra. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107 4.7 RisingFertilityinEarlyDevelopment. . . .. . . . . . .. . . . . . . .. 114 4.8 TheBabyBoom. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115 4.9 One-ChildPolicy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116 4.10 HumanCapitalandInequality. . . . . . . . . . . . . . . . . . . . . . . . . 117 4.11 Exercises. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119 Appendices.. . . . .. . . . . .. . . . .. . . . .. . . . .. . . . . .. . . . .. . . . .. 122 References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123 5 ACompleteOne-SectorNeoclassicalGrowthModel. . . . . . . . . . . . 125 5.1 ATheoryofIncomeDifferences. . . . . . . . . . . . . . . . . . . . . . . 126 5.2 Cross-CountryIncomeDifferences. . . . . . . . . . . . . . . . . . . . . . 132 5.3 InternationalFinancialInstitutionsandForeignAid. . . . . . . . . . 136 5.4 ForeignAidandPolicyExperiments. . . . . . . . . . . . . . . . . . . . 139 5.5 TheAidCostofReform. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 148 5.6 AidFailures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149 5.7 HumanitarianAid. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151 5.8 Conclusion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151 5.9 RelatedLiterature. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 152 5.10 Exercises. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153 Appendix. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 154 References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 157 PartII Two-SectorandDualEconomies 6 TwoSectorGrowthModels. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 161 6.1 FromStagnationtoGrowth. . . . . . . . . . . . . . . . . . . . . . . . . . . 161 6.2 TheStructuralTransformationofaTwo-SectorEconomy. . . . . 167 6.3 TwoSectorsandTwoGoods. . . . . . . . . . . . . . . . . . . . . . . . . . 171 6.4 DecliningBudgetSharesSpentonFood. . . . . . . . . . . . . . . . . . 181 6.5 Conclusion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 185 6.6 Exercises. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 187 References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 189 7 WageandFertilityGapsinDualEconomies. . . . . . . . . . . . . . . . . . 191 7.1 WageandFertilityGaps. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 191 7.2 PerfectlyCompetitiveMarketsintheTraditionalSector. . . . . . . 194 Contents ix 7.3 MissingLandMarketsintheTraditionalSector. . . . . . . . . . . . 197 7.4 MissingLaborMarketsintheTraditionalSector. . . . . . . . . . . . 207 7.5 TheForcesThatBindUs:MissingMarkets andLaborMobility. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 210 7.6 AsianGrowthMiracles. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 213 7.7 ProductivityGaps:MeasurementandInterpretation. . . . . . . . . . 217 7.8 Conclusion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 221 7.9 Exercises. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 222 References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 224 8 PhysicalCapitalinDualEconomies. . . . . . . . . . . . . . . . . . . . . . . . 229 8.1 Farmer-OwnedLandI—WagesGapinU.S.History. . . . . . . . . 231 8.2 Farmer-OwnedLandII—De-industrializationinthe OttomanEmpire*. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 242 8.3 OtherTheoriesofTradeandGrowth. . . . . . . . . . . . . . . . . . . . 253 8.4 LargeLandowners—GrowthandEndogenousFiscalPolicy. . . . 256 8.5 Conclusion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 261 8.6 Exercises. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 262 Appendix. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 264 References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 264 9 ACompleteDualEconomy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 267 9.1 TheDualEconomy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 269 9.2 TransitionalGrowthintheLong-Run. . . . . . . . . . . . . . . . . . . . 276 9.3 GreatWavesofGrowth. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 282 9.4 SouthKorea:ADevelopmentSuccessStory. . . . . . . . . . . . . . . 284 9.5 HumanCapitalExtensions. . . . . . . . . . . . . . . . . . . . . . . . . . . . 288 9.6 ConvergenceRevisited. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 289 9.7 PoliticsandGrowth. . . . .. . . . .. . . . . .. . . . .. . . . .. . . . . .. 292 9.8 TheStructuralTransformationinLaterStages ofDevelopment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 294 9.9 Conclusion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 296 9.10 Exercises. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 297 References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 298 10 Urbanization. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 301 10.1 UrbanBias. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 304 10.2 GrowthandUrbanization. . . .. . . .. . . .. . . .. . . .. . . .. . . .. 311 10.3 Extensions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 314 10.4 CitySizeandDevelopment. . . . . . . . . . . . . . . . . . . . . . . . . . . 320 10.5 UrbanizationToday:NewMechanismsandConsequences. . . . 322 10.6 Hukou. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 325 10.7 De-urbanization:PastandPresent. . . . . . . . . . . . . . . . . . . . . . 326 10.8 Conclusion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 327 10.9 Exercises. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 328 References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 330 x Contents 11 Conclusion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 333 11.1 TheOnsetofGrowth. . . .. . .. . . .. . . .. . . .. . . .. . . .. . . .. 333 11.2 TheNatureofModernGrowth. . . . . . . . . . . . . . . . . . . . . . . . . 335 11.3 PolicyImplications. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 336 11.4 IdeasforFutureResearch. . . . . . . . . . . . . . . . . . . . . . . . . . . . 338 TechnicalAppendix. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 339 Index. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 353