Journal of Economic Behavior & Organization Vol. 42 (2000) 141–143
New Theories in Growth and Development
Fabrizio Coricelli, Massimo di Mateo, and Frank Hahn, Macmillan and St. Martin’s, London and New York, 1998
Starting in the 1980s, New Growth Theory (NGT), especially in the form of endogenous growth, has become a sunrise cottage industry. Yet another contribution on that topic could have been unremarkable. This volume, instead, deals with the predecessors of NGT, and most importantly, with the feedbacks between growth theory and economic development — a field that, also starting in the 1980s, has turned into a sunset industry. The merit of this volume, as a result, transcends the formalistic and ahistorical context of NGT and lies in its broad reach into economic development and into the institutions, policies and economic structure that make growth happen. The volume is the outcome of the International Summer School of the Department of Economics of the University of Siena, which in one of its annual meetings, in July 1994, brought scholars together to examine the fruitful communication between development and growth theories. The result is 10 stimulating essays plus the introductory chapter by the editors of the volume.
One of the primary objectives of NGT is to build models that can generate sustained long-run growth in per capita income. The second objective is to endogenize that growth rate. A number of authors dig into the history of economic thought to suggest that such characteristics of growth had featured prominently in the earlier literature of development. Heinz Kurtz and Neri Salvadori classify the extant NGT models (linear models, models of accumulation of human capital, and endogenous technological change models) into two categories: those that generate sustainable and endogenous growth by setting aside all non-accumulable factors of production, and those that recognize non-accumulable factors but postulate their efficiency is increased within the economic system so that the tendency of diminishing returns to the accumulation of capital is offset exactly. They make the astute observation that the first variant is featured in Frank Knight’s ‘Crusonia plant model,’ while the second is Ricardo’s ‘corn model’ where the system ends up in a stationary state, not because of diminishing returns to capital, but because land is the postulated non-accumulable factor of production so that no additions to cultivable land can offset the effects of capital. T.N. Srinivasan expands on this topic by pointing out other precursors of the same trends, among whom are Fel’dman, Mahalanobis, Kaldor and Mirrlees, not to mention Arrow, Uzawa, or Boserup. He also makes the observation that even in traditional growth models per capita output can grow indefinitely if the marginal product of capital is bounded away from zero and the capital labor ratio grows indefinitely (thus going back to Ricardo’s corn
142 Book review / J. of Economic Behavior & Org. 42 (2000) 141–143
model) and that with some more algebraic manipulation growth can become endogenous. William Easterly also visits the feature of NGT that associates capital abundance with high returns to capital (because of externalities and the general rules covered earlier by Kurz and Salvadori). A simple algebraic manipulation of an elementary growth model suggests that there is also a threshold level of capital below which high returns and growth do not occur. Random shocks, say an improvement in the terms of trade or a civil war, can be defining as to whether a country slips into or springs out of a poverty trap. Growth being ‘a surprise’ associated with the unique event is discussed with a number of entertaining (and some disdainful) references, since ‘surprise’ means that economists are doing a terrible job of predicting (and therefore also promoting?) growth. But the balance of the chapter, intending to show that growth can also be the outcome of opportune policy decisions, slips into sterile, albeit empirical dogmatism. (Of the kind: reducing the central bank’s share of credit by 28 percentage points will raise growth by one percentage point; so will the unification of the foreign exchange market that eliminates a black market premium of 36 percentage points). Which means that, undaunted by their poor prediction record, some growth economists are still taking themselves a trifle too seriously!
Pranab Bardhan expands on the same theme by assessing the value added by NGT to what development economics had already on the floor. The observation that the lack of convergence in growth rates of per capita income belies the conventional presumption of similar technological opportunities in all countries is hardly earthshaking to a develop-ment economist. Nor is new the idea that growth can be promoted by taking advantage of the strategic complementarities generated by increasing returns. It was fully developed in Hirshmanian linkages, and it is now repackaged and rebranded as the obverse of ‘coordi-nation failures’. Still, in a moment of extreme generosity, Bardhan credits NGT as being an impact-theory in linking the fields of trade and development. The virtuous relationship between ‘outward orientation’ and economic development is as spurious and ad-hocish as is the latter-day diagnosis that the implosion of growth in the erstwhile economic-miracle countries is due to unique events such as ‘the peculiar nature of East Asian capitalism’. (On ad-hocism, unique events, and the spuriousness of the ‘virtuous relationship’ see William Easterly in another chapter.) Rodrik (1992), quoted in Bardhan, has the right idea that a realistic exchange rate policy and a generous program of export subsidies are the keys to development success, rather than trade liberalization. The same idea, plus the definition of what is ‘a realistic exchange rate policy’ is formalized by Yotopoulos (1996) who finds that free-market, competitive-exchange-rate pricing in soft-currency (i.e. developing) countries leads to endemic currency devaluations (alias known as financial crises) plus to plummet-ing growth rates. This is a more likely link between liberalization, trade (plus international finance), and development — and it is tested within the framework of NGT, to boot.
Book review / J. of Economic Behavior & Org. 42 (2000) 141–143 143 theory are farther off from today’s playing field and they are readily overlooked by main-stream growth theorists, but all the same they are robust in placing growth in a historical context. One streak of that post-war growth theory adopts the Schumpeterian view of the disequilibrium nature of the development process and encompasses economies of scale, planned investment, and various planning tools. It eschews the simplifying Dixit–Stiglitz formulation of homogeneous preferences that makes imperfect competition tractable. It adopts, instead, sophisticated integer or dynamic programming techniques to solve central-ized or firm-level planning models. Its drawbacks, besides analytical complexity, were that it provided little concrete policy advice and that it placed limitless faith in the capacity of governments to intervene appropriately. Yet another variant of growth models emphasize limiting factors such as capital goods, foreign exchange, and the ability of turning nontraded goods into ‘tradeds’ to earn foreign exchange, without deep devaluations that give away the store. Such limiting factors are totally absent from the ahistorical version of mainstream neoclassical analysis. Yet another variant of growth theory, growth accounting, originated from the germination of the work of William Petty into Engel’s law, and was followed in the work of Kuznets, Chenery, Pasinetti, and others. These are much deeper roots than the Solow decomposition of neoclassical growth theory.
Various authors in this volume make the observation that the extreme formalism of NGT has been bought at the expense of disregarding the empirically established stylized facts of the process of development. This stricture is shared by Moshe Syrquin who in a comprehensive chapter details the contributions of structural change analysis to the theory of growth, including the NGT. In relation with the latter, he points out that the works of Chenery, Chenery and Syrquin, Hagen and Hawrylyshyn lay the foundation for the signature growth regressions in the work of Barro and others — only that the early predecessors had a better grounding on the facts of the development process.
This is a valuable volume that helps demystify growth theory. In the process it does NGT the service of the reality check. Economic development was a field of economics that fashioned theories in the caldron of the real world. So far much of NGT consists of deductive theorizing that at best is matched to a particular set of facts that seem to fit the argument and are taken as ‘supporting evidence’. This type of axiomatization without a firm empirical base is one of the definitions of empty formalism in economics (Weintraub, 1998). It helps us all if we remember that ‘have theory will travel’ is not what makes one a development economist.
Rodrik, Dan, 1992. Closing the productivity gap: does trade liberalization really help? In: Helleiner, G. (Ed.), Trade Policy, Industrialization and Development: New Perspectives, Clarendon Press, Oxford.
Weintraub, E. Roy, 1998. Controversy: Axiomatisches Mißverständnis Economic Journal 108, 1837–1847. Yotopoulos, Pan A., 1996. Exchange Rate Parity for Trade and Development: Theory, Tests, and Case Studies.
Cambridge University Press, London and New York.
Pan A. Yotopoulos