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St Edmund Hall
Do growth models illuminate the determinants of growth and of the levels of
GDP per capita found in developing countries?
The Reagan/Thatcher era brought the issue of growth of GDP per capita into the
limelight, and has re-sparked debate worldwide surrounding the accuracy and
appropriateness of various economic models and how they explain the mechanics of
growth
...
However often models are unsupported by empirical
evidence, failing to incorporate social and institutional factors
...
This
is why I think empirical evidence does not fit the theory, but such models are
nonetheless useful tools for analysis, and in this essay I am going to explore some of
those models which have been most influential over the past century
...
A high savings rate therefore generates high capital accumulation, and as
there are no diminishing returns to capital, the higher the ratio of the savings rate to
the capital-output ratio the higher the rate of economic growth per capita
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An extension therefore of the Harrod-Domar model is the Solow-Swan, an exogenous
growth model set within the framework of neoclassical economics
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An increase in the savings rate can lead to a rise in growth rates in
GDP per capita, but only temporarily – the rise in capital intensity is not matched by a
proportionate increase in output per worker due to diminishing returns to capital
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These temporary
increases in growth, which can also occur due to a fall in population growth, fade
away and capital, labour, and output grow at the same rate in the long run
...
The main
prediction of the model is that of unconditional convergence – that is, if all countries
have the same savings rate, same population growth rate, same rate of capital
depreciation and same rate of technological progress, they should all converge to the
same level of GDP per capita
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Unfortunately there is a severe lack of empirical evidence for this prediction
...
Equally, Pritchett (1997) found that over the 1960-1966 period covered
by the Penn World Tables, a quarter of the 60 countries with initial GDP per capita of

St Edmund Hall
under $1000 experienced growth rates of less than zero, and a third had growth rates
of less than 0
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It is easy to see
the gaps even in the theory, as why would all countries have the same rates of
savings, population growth, capital depreciation and technological progress? What
seems far more plausible is that all countries converge to their own steady state,
which will not necessarily match that of other countries
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Issues like these found across exogenous growth models led to increasing popularity
of endogenous models including human capital, like the AK model
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There
are no diminishing returns to capital, so an increase in investment might result in a
sustained increase in growth
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While this makes perfect sense, it is similarly unsupported by data – Lau et al (1991(
found that primary education has an estimated negative effect in North East Africa,
insignificant effects in South Asia and Latin America, and only in East Asia does it
have a positive, significant effect
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It is easily concluded
that education is merely a contribution to economic growth, but is not enough on its
own to be a determinant
...
North defines institutions as a ‘set of rules, compliance
procedures, and moral and ethical norms designed to constrain the behaviour of
individuals in the interests of maximizing the wealth or utility of principals’
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Equally the type of economic
organization is not a clear divider, as a number of poor countries in sub-Saharan
Africa are capitalist, while many centralised economies like the Soviet Union and
East Germany have relatively high output per worker
...
Similarly, Hall and Jones (1997) write
that the ways in which a country deals with knowledge and technology spillovers can
make a huge difference to growth, Singapore is effective at taking advatange of
technologies invented elsewhere, rather than growing because of the innovations of its
own citizens, and East Asia may have benefitted so much more from education due to
its institutions
...
Acemoglu (2005) writes that the
effects of instututions should not be underestimated – they ‘determine the incentives

St Edmund Hall
of, and the constraints on, economic actors, and shape economic outcomes, in
particular influencing investments in physical and human capital and technology, and
the organization of production’
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For
one, coastal countries which are able to build ports are open to international trade, and
those landlocked countries that are further from transport centres are disadvantaged
due to their location, which no amount of money can change
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5%
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Geographical distance from the equator has also been proposed by Hall and Jones
(1997) as an influencer on growth rates
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5
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In conclusion, the differences between the Solow-Swan model and endogenous
models are less pronounced than they seem at first glance
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What remains to be illuminated, for which we turn to such
models, is what influences technological growth? What explains why some countries
invest in technology and others do not? I believe the most useful stance to take is
Rodrik’s, a complementary view where geography, international trade, and
institutions all influence growth, but with the emphasis on the latter; infrastructure
heavily influences how countries deal with their natural resources, location,
education, technological and knowledge spillovers and trade
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References
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Pritchett, L
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Easterly and Levine (2001), It’s not Factor Accumulation: Stylized Facts and
Growth Models, The World Bank Economic Review, 15(2): 177-‐219

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Acemoglu, D
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and Robinson J
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1369-‐1401
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Glaeser, La Porta, Lopez-‐de-‐Silanes and Shleifer (2004), Do Institutions
Cause Growth? NBER working paper no
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(1999), Where did all the growth go? External shocks, social
conflict, Journal of Economic Growth, 4 (4), December

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Pritchett, L
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Collier and Gunning, Why has Africa Grown so Slowly?, Journal of Economic
Perspectives, 13(3), Summer 1999, 3-‐22
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OUP
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(1998), Development
Economics



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