Información Obtenida por pregunta

Endogenous growth models

The capital accumulation models reviewed so far treated the main factors that generate economic growth to be exogenous, i.e. in both cases savings is an exogenously determined constant fraction of household incomes. Additionally, in the Solow model technology is also treated as an exogenous factor. Hence these models are often referred to as exogenous growth models.

In the mid-1980s, scholars became dissatisfied with the accounts of exogenous growth frameworks in determining growth, largely upon the realization that empirical evidence did not support the conditional convergence prediction from Solow growth model i.e. that countries with low per capita incomes grow faster than those with higher incomes. It be- came apparent that poor countries were on average not converging, and in many cases they were becoming worse off. Furthermore, the assumption of constant saving rate is also at odds with reality; otherwise, for instance, a prior announcement of a looming huge increase in income taxes would have no impact on households savings decisions. Schol- ars recognised that systematic analysis of cross-country differences in incomes and world economic growth process required models in which the factors that are seen to gener- ate growth, such as technology, are endogenised and that theory can provide analytical explanations for the differences and rationale behind choices in these factors.

A new school of growth models had emerged, the endogenous growth theory; the basis of this school of thought lies in the earlier works of Arrow (1962) and Uzawa (1965). Endogenous growth was re-ignited in the 1980s by the works of Romer (see Romer (1986)), which considered a model with increasing returns to scale and the most commonly used

endogenous growth model in the literature, Rebelo’s AK model (see Rebelo (1991)).

Rebelo’s growth model explained cross-country heterogeneity in growth experiences as a result of cross-country differences in government policy. Growth is endogenous due to other capital goods that can be produced without the effect of factors that cannot be accumulated.

The major outcome of the new wave of growth models was that they emphasized that ex- ternalities from physical and human capital accumulation could induce sustained steady- state growth (Romer (1986) and Lucas (1988)) and the endogenisation of steady state growth (Romer (1990) and Grossman and Helpman (1991)). The technical mechanism

of the endogenous growth models will not be reviewed in detail here,6 _{however, they also}

furthered the inclination that steady state growth is less related to physical capital accu- mulation and show that the growth process involves a more complex set of interdependent factors including human capital and information.

6_{In Chapter 5 of the thesis, we discuss a version of the endogenous growth model in more detail and} show how foreign aid can play a key role in economic growth in such a framework

Fundamental determinants of growth

In the proximate growth models (both endogenous and exogenous models) differences in income per capita are explained by different paths of capital accumulation: in the Solow model they are explained by differences in saving rates; in Ramsey-Koopmans model (not reviewed in this section but covered in greater detail in Chapter 5) variation in output growth is explained by differences in preferences or properties of technology (Acemoglu et al. (2005).

From the mid-1990s however, fundamental determinants models began to gain promi- nence. These models argued that differences in incomes across countries can be explained by variation in some fundamental factors such as breakup of nations, origins and rate of change of institutions (political, legal and economic) etc. These factors influence the direction of public choices, investment in physical and human capital, technology and

production by shaping incentives of key economic actors in the economy.7 _{In part, the}

new growth models were aided by new cross-national data sets that allow empirical tests of hypotheses on comparative economic systems and institutions and their relation to economic growth and development.

This wave of growth theories and empirics emphasizes deeper or fundamental determinants that generate variation in growth, such as the influence of history (path dependency), ethno-linguistic fractionalisation, and the numerous political and economic barriers to reform; factors that were necessarily ignored in proximate economic growth models. The new ‘political economy’ growth models focus on the role of such factors as the quality of governance, the origins of the legal system, ethnic diversity, social cohesion, democracy, corruption, political barriers, and institutions in general and their interaction with other variables such as foreign aid in influencing the economic growth process.

Correspondingly, the literature on aid effectiveness embraced the new developments in economic growth accounting; firstly in the early 1990s many scholars started to explicitly treat aid as an endogenous factor for developing countries. Endogeneity of aid stems from a number of factors including reverse causation between foreign aid and economic growth; for instance more aid is by construction given to poor (low income) countries

7_{Extensive work on the effect of institutions on growth has been done by Daron Acemoglu, see for} example Acemoglu and Johnson (2003), Acemoglu et al. (2005), Acemoglu (2009b) and Acemoglu (2009a).

or countries undergoing economic crisis, creating a spurious negative correlation between aid and growth. Conversely, more aid may be given to countries that have successfully carried out institutional reforms, thus one would expect a positive correlation between aid and growth.

The focus of aid effectiveness literature has therefore shifted towards understanding the interaction between aid and these fundamental factors, investigating how the interaction affects aid allocation policies and consequently growth. Theoretical as well as empirical aid effectiveness literature has burgeoned in the last two decades that offer detailed insight into the interaction of aid with institutions in general, ethnicity, corruption and political factors and how these influence a country’s growth path.