Economic Growth and Structural Change: A Global Perspective

Posted on Oct 29, 2024 in Economy

ECONOMIC GROWTH AND STRUCTURAL CHANGE

Lessons for the World Economy

José Antonio Alonso
Carlos Garcimartín
Carmen Fillat

1. THE IMPORTANCE OF ECONOMIC DYNAMICS

Economic and social development is one of the main objectives which are directed towards the tasks of any government. Achieving such a goal is not, however, a simple task, especially for the poorest and most vulnerable. The difficulties are amplified by the adverse conditions that the international environment imposes on these countries as agricultural protectionism in industrial markets, restrictions to access to technological innovation or hard to enter a stable capital markets. But that constitutes a complex task that does not mean impossible. Recent history can provide some illustrative.

According to data from Maddison, _ two countries, Spain and Peru in 1960 had similar per capita GDP, at around $ 3,000 approximately, at 1990 prices. Since then, the two countries embarked on economic dynamics disparate per capita GDP to grow their respective cumulative annual rates, average values, from 4.0 per 100 and 0.9 100, respectively. These differences accumulated over time have resulted in markedly unequal situations, making the 2006 GDP per capita of Spain ($ 18,872 in 1990) multiplied by more than four himself in Peru ($ 4,505).

Finally, check a case of reversal in the relative level of development of countries. In 1960, GDP per capita in Mexico was more than double that of South Korea and Argentina four times the of that Asian country.
In 2006, however, GDP per capita in South Korea twice that of the two Latin American countries (Figure 1 c). The change described is a result of South Korea in the period grew at an annual average of 6 100, while Mexico and Argentina did the 1.9 and 1.2 per 100, respectively.

The above examples are sufficient to prove, first, the underdevelopment is not an insurmountable stage: there are countries which, starting from situations of economic backwardness have managed their economies print a growth rate sufficient to approximate conditions developed countries, while others, however, have moved away from such a goal. As seen, based on similar situations some countries have managed their environment trend away comparison, through a sustained growth dynamics. Not all the factors that drive economic success under the control of the affected countries themselves, but some of them they are.

• The institutional framework that gives a country
• The options for economic and social policy which takes a certain shape can influence its course of growth over the medium and long term.

Therefore, is the second teaching of the review, it is important to understand what factors promote the growth dynamics and how to influence it ..

The Harrod-Domar model

Although there are notable history in explaining the dynamic economic development of the modern theory of the growth occurred from the mid twentieth century. Then, two economists, the British Roy Harrod and the American of Ukrainian origin, raised separately TAMING Evsey a similar model, which contained a highly simplified version of synthetic relations and basic dynamics of an economy. The Harrod-Domar model rests on two relatively simple assumptions.

• The first is that households save a certain proportion of income they receive: they grow their income increases, so does the amount they save, the proportion remained relatively invariant.
• In turn, it is considered that the capital stock is proportional to the output you get with him: if you have more capital, you get more output. This ratio can vary between countries, but is essentially constant over time. The reasons for such a course were never convincingly argued, although it appeared a course consistent with empirical experience.
• Additionally, it is considered that investment is directed rather to increase the capital stock, or to replace depreciated capital. Namely

I = DK + K ∂

where ∂ is the rate of depreciation.

According to Harrod and Domar, the income growth depends on three factors:

A) the savings rate, which is determined by the spending habits of households;

b) capital output ratio, which reflects how firms determine the capital required for a desired production volume, and

C)-depreciation rate of capital

Thus, the equilibrium growth of an economy depends on the propensity to save and the aggregate efficiency of its capital stock, a result that seems consistent with economic intuition.

The neoclassical model: Basic Foundations

While Harrod opened the new growth theory, the most influential model was developed by Robert Solow, Nobel Laureate in Economics, and Trevor Swan, who became known as the standard neoclassical approach. The model is deliberately close to assumptions about the Harrod-Domar, with one important exception: replace the assumption of a fixed capital-output ratio for the possibility of freely combining the factors in the production function. Capital and labor are substitutable, so that one output can be obtained with different combinations of factors.

The Solow model to explain how increasing the domestic production of goods and services through a quantitative model. The model basically involves domestic production (Y), the savings rate (s) and the provision of capital assets of the economy (K). The model assumes that GDP is equal to national income (ie, we assume a closed economy and therefore there are no imports).

The production on the other hand depend on the amount of labor employed (L) and the amount of fixed capital (machinery, facilities, etc.) Used in production (K) and the available technology (whether the technology will improve with the same amount of labor and capital could occur again, although the model is usually assumed that the level of technology remains constant). The model assumes that the way to increase GDP by improving the allocation of capital (K). That is, what is produced in a year a part is saved and invested in accumulating more capital goods or fixed capital (plant, machinery), so that next year may produce a slightly more real, and there will be more machinery available for production.

In this model economic growth is mainly due to the steady accumulation of capital, increases each year if the machinery and facilities available (fixed capital) to produce progressively higher yields are obtained, whose long-term cumulative effect will have a noticeable increase in production and, therefore, a remarkable economic growth.

Among the qualitative predictions of the growth model is based purely on capital accumulation, without altering the amount of labor or alter the saving rate is progressively smaller, reaching a steady state in which there is no more growth and exactly offset investments associated wear depreciation of fixed capital.

If we introduce technical progress, differences in income per capita of the countries due to the existence of different levels of savings (and investment), population growth, capital depreciation and rate of technical progress. While the reasons for growth are linked to the dynamics of capital accumulation (if the country is far from its steady state) and technical progress (which in this case, it is considered exogenous).

2. GROWTH ACCOUNTING

In addition to its microeconomic foundation more complete, the Solow model provides a significant practical advantage of utility: from its formulation, it is possible to derive a growth accounting, able to inspire empirical work on the promoting factors of economic dynamics (Box 3). The condition of technical progress that grows over time at a constant rate equal to λ can be formalized as and ^λt

In which case, becomes:

Using logarithms, we obtain

The derivation with respect to time of expression (21) leads to:

=

lowercase and expressing a point above the rate of growth variables. So the output growth can be understood as the result of the aggregation of three factors: growth in hours worked, increasing the stock of productive capital and the rate of technical progress (or increase total factor productivity) , λ.

The application of this procedure developed countries reveals the important contribution that technological progress has had on the dynamics of economic growth throughout this century. Between one third and half the economic growth is explained by this factor. It is the period of the “golden age” between 1950 and 1973, when quotas for this factor are higher. In the case of developing regions, however, much of the growth rests on the dynamic expansion of productive factors, leaving a smaller margin of contribution to productivity increases. In fact, in some regions (Africa and Middle East), the contribution of this factor is negative.

3. ENDOGENOUS GROWTH

Despite their considerable advantages, the Solow model leads to a paradoxical result. According to the development made, growth of income per capita depends on the level of capitalization of the economy (capital-labor ratio) and the rate of technical progress. The first factor (capitalization) is subject to diminishing marginal returns, so that in the limit leads to a steady state with zero growth, the second (technical progress) corrects this result, but the theory does not explain (because it considered exogenous). Might say, therefore, that the model avoids explaining that reveals crucial variable to justify the growth.

To overcome this limitation, occurred throughout the eighties renovating various contributions to the theory of growth. In essence, these new approaches are proposed to explain the growth from internal factors (ie, factors stemming from the economic dynamics and the cause of this dynamic). To put it in summary form, these theories seek to find a factor:

I) is generated by the growth process itself

ii) is capable of driving economic dynamics

iii) not subject to diminishing marginal returns.

Many of the contributions identified knowledge as the actor sought, whether embodied in goods and processes (innovation), and in people (human capital): in both cases, the above factors together this double condition of being, while , fruit and cause of progress, must not be subject to diminishing returns.

In principle, classification would group the effects of endogenous growth models based on three major lines of work.

1. The first believes that technological progress is a simple consequence of the existence of externalities associated with the production process. It is thought that the mere fact of making use of capital allows workers to increase their levels of training (this process is known for its British expression learning by doing). In this case, technical progress occurs spontaneously, without incur to be taken into account. Models of this type are able to justify positive economic growth rates over time without the need to go to the exogenous increase in some variable and without abandoning the assumptions of perfect competition.

2. A second line of work has sought to integrate the modeling of growth an additional input to physical capital, which is human capital, which houses the set of skills and knowledge of people. So, people save for two purposes: to increase its physical capital and expand their education: through both investment efforts is to improve the ability of future income of the people. This research leads to two important conclusions:

• First, the effort made in investing in human capital not only affects the level of equilibrium income in the country (as in the Solow model), but their growth dynamics;
• Second, although the physical capital shows diminishing returns, the physical and human capital taken together exceed that limitation, can encourage a process of continued growth over time.

3. Finally, a third line of work seeks to address the direct inclusion of the innovative effort in the aggregate production function as an input. It is assumed that innovative effort is rewarded by the monopoly advantage in the market that gets the holder of new products (or new productive input) than its competitors lack. In this case it is assumed that market conditions prevail than those of perfect competition, allowing the generation of revenues associated with providing innovation advantage. An innovation, which in turn fuels the process of economic growth.

4. GROWTH AND STRUCTURAL CHANGE

Growth must be analyzed as a process of global transformation of economic structure, both from the perspective of supply and demand.

PERSPECTIVE OF THE OFFER

Based on the product composition of an economy, it can be seen in its simplest sectoral disaggregation as the sum of the outputs of the three basic sectors: agriculture, industry and services. Thus, overall economic growth is expressed as the weighted sum of sectoral growth, the weight being the weight of each sector in the set. If they all grow at the same rate, so would the aggregate output and does not alter the sectoral structure. However, empirical evidence reveals that there are statistical regularities that relate the levels of development with the product composition.

Thus, using the classification of countries by income per capita used by the World Bank, it was found important differences in production structure (Table 3). In particular, we observe that the share of agriculture decreases continuously with increasing the level of per capita income countries, losing 25 percentage points between the lowest and highest development. Meanwhile, industrial participation shows an inverted U-shaped, with similar figures among the poorest and richest and highest values ​​in intermediate countries. Finally, the service sector is clearly the most favored by the growth of income, since their weight in the total rise 27 percentage points between the lowest and highest income per capita. All this shows the path that the economy continues its growth process, first through a phase of industrialization as it reaches the early stages of development-and outsourcing to reach the stage of maturity.

TABLE 3. Product distribution by level of development

Source: World Bank

Once identified these basic guidelines, the question arises explanatory causes. In a closed economy the demand for a particular sector depends on:

• their relative prices (compared to the other sectors)
• national income (which determines the purchasing power of consumers)
• the corresponding price and income elasticities.

Thus, it is expected that a fall in the relative prices of sector i resulting in increased sales and therefore its weight in total production, the opposite happens in the alternative sector j. In turn, the evolution of prices will be negatively related to relative earnings productivity: the higher they are, the lower the relative prices and thus higher demand and the weight of that sector in total output. For example, in the case of industrial sector, its biggest gains in productivity may help explain the increase of its share in total production during the development process.

On the other hand, the income also determines changes in the composition of the product, because when it increases so does the demand for each sector. Specifically, assuming constant prices, an industry will grow more than the entire production and, consequently, gain weight in the overall product, provided that their income elasticity exceeds unity. This serves to point out that the composition of demand changes with income level: a low-income consumers have greater preference for basic necessities (mainly food-related), while, as this income grows, and will cover immediate needs, their demand is addressed to industrial goods and services.

Incorporating the above analysis of international economic relations adds an additional explanation to the changes taking place in the production structure, trade specialization intensify the relevance of certain branches of production, compared to other (Table 4). As you increase the level of development is a clear reduction in the weight of the food trade on total trade and manufacturing increased, enhancing thus the weight gain and analyzed the industrial and agricultural decline.

TABLE 4.-Composition of trade in 2006

Source: World Bank.

DEMAND OUTLOOK

Using a basic breakdown of demand, the total growth of an economy is the weighted sum of private consumption growth, investment, government spending and foreign sales and purchases (the latter with a negative sign), with the weight the weight of each of these components in the set.As in the case of the offer, if they all grow at the same rate, the total production would also at that rate and, therefore, not be changes in the structure of demand. However, in reality there are certain statistical regularities that indicate the existence of a relationship between the level of development and the components of demand, ie structural change.
Thus, with increasing income level is a reduction in private consumption, so that while in countries with lower level of development it reaches 78 per 100 of total income in most developed countries this figure is to 55 100 (Table 5). One might say that the poorer the country concerned, the greater the proportion of income to be spent on basic consumption to meet the vital needs, leaving less room for investment or spending. By contrast, a higher level of development leads to an increase in public consumption, reflecting the growing importance of collective action in the economy with increasing income level: development of the welfare state and increased relevance of public goods, among others.

Meanwhile, expenditure on investment do not show such a clear relationship with income level. The figures are highest in middle income, although the variations between different groups are very small. By contrast, in the case of savings, the poorer countries show much lower figures the rest. However, it should be noted about the theories based on the life-cycle hypothesis warn that, in reality, the savings rate is not so much the level of income and their growth as individuals choose their consumption and therefore their savings in response to the prospect of the revenue stream that will over your life. Therefore, the life-cycle hypothesis indicates that the relationship between savings rate and the level of development between countries should be analyzed with similar growth rates. That is the idea that collects Table 6, which shows that for all levels of development there is a direct relationship between growth rate and the savings rate: increasing the first so does the second. At the same time, once we compare countries with similar growth rates, the positive relationship between developmental level and saving rate is more evident. Finally, with regard to foreign trade, two facts stand out significantly. First, in lower income countries a significant gap between the weights of exports and imports, tending to equalize both with increasing the level of development. Second, the weight of the total external trade is significantly lower in poorer countries.

TABLE 5.Distribución demand according to the 2006 level of development

(% Of total demand)

Source: World Bank

TABLE 6.Crecimiento, development and savings rate 2006

Source: World Bank

As was the case with changes in production supply, structural change in demand is one of the main determinants in the composition of social preferences.Such is the growth in public consumption, whose income elasticity appears to be greater than unity, since a higher level of development is often accompanied by greater state presence in the economy, both for reasons of efficiency and equity. In the case of foreign trade, its biggest presence seems to be due to both demand factors-greater preference for variety by consumers-and supply-intensifies the process of specialization.

STRUCTURAL CHANGE AS DETERMINANT OF GROWTH

In the previous sections have referred to the structural change as a consequence of self-development of an economy. However, structural change can also be a determinant of growth. To explore this second relationship, just remember that economic growth can be measured as the weighted sum of the growth of individual sectors, the weighting factor being the weight of each in the set. Therefore, the contribution of a given sector to overall growth depends on two factors: the growth of the sector itself and the weight that holds in the total production. In turn, sectoral dynamics is conditioned by the accumulation of productive factors in the industry and the evolution of productivity. Whenever you transfer factors from smallest to largest sectors of progress in productivity will have an effect on aggregate growth of the economy.

According to this view, the increased weight of the industrial and service sectors as well as being an effect of the growth factor has also been a promoter himself, when productivity in these sectors than the corresponding primary sector. By contrast, after reaching a high level of development, the effect of structural change on the total growth is much lower, since it is the services sector gaining prominence in this sector and the productivity gains are usually lower than in industry.

For example, Table 7 shows the measurements of the effect of structural change for a group of six countries offered by Maddison (1997) in a growth accounting exercise. As can be seen in countries where structural change has operated primarily against agriculture and industry and towards services, the contribution to growth has been negligible. By contrast, in cases where structural change is aimed primarily from agriculture to services, but not penalizing the industry, or even encouraging, as is the case of Japan’s contribution to the growth of structural change has been positive, arriving in that country to assume an average annual increase of 1.2 percentage points, representing more than 15 100 of total growth.

TABLE 7. Contribution of structural change to growth

(*) Contribution to average annual growth. In percentage points Source: Maddison (1997)

Structural change can also influence the growth from a demand perspective, at least in two ways.

• First, if the structural change implies an increase in savings rate as income level grows, the very development will enter a virtuous circle, because with increasing income will increase savings and investment, which in in turn, promote an increase in income.
• The second channel through which structural change may impact on growth is related to foreign trade. The specialization of the leading international trade promotes higher levels of income per capita, since moving resources into sectors where its relative efficiency is higher. However, the effect is positive but time is running out once the new specialization has occurred. Now if, moreover, believes that international trade is an avenue for international dissemination of technology, then openness to international trade can be a source of permanent growth.

5. INNOVATION AND GROWTH

Throughout the preceding sections have highlighted the crucial role that innovation and technological change has in explaining economic growth. Innovation can affect the products or production processes. Product innovation involves the development of a new good or variety, expands the range of goods available and improves the quality of existing innovation process involves changes in the way of producing a good, modifying equipment, work procedures or modes of organizing production, and often pass on cost reductions. Depending on the type of activity involved is distinguished, in turn, between research, development and innovation (R + D + i).

• The research involves the generation of new knowledge, and can be basic – whether theoretical or experimental knowledge is not the purpose of direct application – or applied if you have a practical purpose.
• The development uses existing knowledge to produce new materials, devices, products, services, process design, production systems and improvements in them.
• Innovation refers to obtaining results substantially different from existing ones.

Developed countries tend to gain productivity through technological change, while developing countries increase, to a greater extent, through the appropriation and adaptation of existing technologies.

Traditional growth theories believe that technology is exogenous, acquired through learning (learning by doing) or by spontaneous processes that do not generate costs, this view of technological progress is compatible with the existence of perfect competition in the markets. Technical progress, even if it is exogenous, may have an effect on the intensity with which factors are used in production, and often makes a distinction between labor-saving innovations, saving capital and neutral.

The endogenous growth theory, however, believes that innovation is largely the result of a deliberate effort and costly. Such costs are likely to be recovered by the innovator through the advantages provided by its monopoly position in the market, as it is able to add value to the product that is not the access of competitors. In this case, therefore, to the extent that there are advantages monopolistic markets are not perfectly competitive. In addition, technological effort is supposed to improve productivity and drive growth, improving the conditions of the economy to reward the innovative effort, allowing, in turn, that more technological progress. In this case, registered a circular relationship between growth and innovation, which makes technological progress should be considered as an endogenous variable.

The monopolistic advantage in markets that generate innovations is much stronger as difficult the process of technological diffusion. There are several mechanisms by which innovations diffuse from imitation or patents, others such as trade, foreign direct investment licenses and business associations. Not all of these pathways have, however, similar effect. For example, imports of intermediate goods is a passive incorporation advanced technology that enhances productivity, but will not have the technical knowledge to the importing country, but the analysis of the technical characteristics of the products purchased and the imitation and adaptation of these technologies not only reduces costs but provides a learning experience, making it an active incorporation of technology.

The emphasis on technology as a determinant of growth and productivity differences have encouraged countries seek to implement policies supporting R & D These policies are all the more justified if we understand that technology has the character of a quasi-public good, is a non-rival and partially excludable (ie, it is difficult to limit access to technology, because it spreads easily, and the benefits its use by an agent, does not deprive another equally benefit from its use).This makes it harder to capitalize on the innovative effort, which could lead to a disincentive for innovative action, with costs to. The whole society. There are two ways through which we try to correct this trend: the first is through a patent system that guarantees at least temporarily, property rights on the innovative new product or process generated, the second is through certain stimuli and supports innovative action by governments: a support that will be higher, is basic research that supports it.

The empirical evidence reveals that not all countries are under the same conditions to generate and profit from new technologies. Poor countries will not only affect their reduced capacity to generate its own technology (innovation), but also to absorb the technology developed by others. For the latter process to occur it is necessary that countries have trained human resources, a production apparatus according to the technical needs of new goods, a domestic investigation to undertake the processes of adaptation and development of new technology and and of institutions and policies that promote macroeconomic stability and business investment climate. These are all requirements that developing countries meet in very small measure. This is not surprising that maintain and increase the technological gap between countries. Figure 3 gives an account of this phenomenon: it reflects spending on R & D that countries make in relation to their respective GDP. Well, the share of high income countries (2.4 per 100) multiplied by more than three corresponding to low-income countries (0.7 per 100). The relationship would be even more inequitable It refers to the income received by the country like a result of their innovative activity (collection of royalties and licenses) in this case the relationship between high-income countries and middle income is 125 1, still more marginal the figure for low-income countries.

Figure 3.Gastos R & D as a percentage of GDP (2005)

High income Middle income Low income Media Source: UNDP

6. ECONOMIC CONVERGENCE

Simple observation of the statistical data shows that we have a remarkably unequal world. Now, do you notice any rapprochement between the development levels of countries? In the event that this process occurs, would be relatively optimistic about the future: the world is unequal, but walk towards increasing convergence. In case this is not so, the levels of concern will be amplified.

The analysis of the relationship between the Product per capita in developing regions with respect to the leader region can throw that at least one general, there has been, throughout the century, a trend towards convergence (Table 8). Among the various regions, only those related to Asia show at the last stage, a trend process approach to the conditions of the leader. However, this is but a first rough picture of the phenomenon we want to consider.

For there to be convergence is a necessary (though not sufficient) that countries that start from a lower level of development to maintain GDP growth rates higher than those of richer countries.In addition, there must be a gradual reduction in the dispersion between the levels of per capita income for economies leading followers. One of the researchers who worked on this issue, CLAY, popular way to express these conditions: convergence called “α” the relationship that expresses the fastest growing economies on the leader followers, and called convergence “β” to progressive reduction in the levels of dispersion of income per capita between leader and followers.

TABLE 8.Renta per capita relationship with the leader in historical perspective

Source: Compiled from data from Maddison

Solow’s theory suggests that economies must converge to its equilibrium level of growth (or steady state). This steady state depends on certain parameters of the economy as the savings rate, population growth and the rate of technical progress. It is expected therefore that convergence between economies with record, at least in these three areas, similar parameters, but not necessarily among the rest. This assumption agrees with the fact that convergence occurs between economies, such as the OECD, which have homogeneous parameters and that, however, is not observed when the sample is extended by hosting a more heterogeneous group countries. It would, in this case, to limit the effectiveness of the process of approaching the so-called convergence clubs, composed of basic parameters similar economies. This process is often called conditional convergence or relative (as opposed to absolute convergence or without restrictions).