The neoclassical or the AK model? - Uniwersytet...
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Convergence and inequality in the world. The neoclassical or the AK model?
Advanced macroeconomics
Dr hab. Joanna Siwińska-Gorzelak
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During the last lectures…
• ... we derived a model that has the „AK” structure, which highlights the importance of government spending & taxes
• This model (or rather – this structure of the model) is not unusual – the Ak models are quite simple to "create" – one needs to introduce in to the Cobb-Douglas function a factor of production, that is a function of capital… For example, Romer (1986), in his famous „learning -by-doing „model, suggested (following Arrow) that: A = g (K), which if used together with Y = Kα (AN) 1-α… ... .results in AK model
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Ak models
• Ak models constitute quite a large group
• The conclusions arising from them are interesting.
• They stress the importance of economic policy, savings, and a whole range of other determinants for long-term growth In its simplest form they provide for convergence
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Ak models & neoclassical modes
• The existing growth models can be divided into several broad groups.
• Among them are :
– Models of neoclassical (Solow model for example)
– Ak models (models endogenous older generation)
• Both of these approaches are interesting. The question is:
• Which is closer to the truth?
• One of the tests may be the phenomenon of convergence
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Convergence
• "The convergence hypothesis or the catch-up effect - poorer countries’ income per capita (measured by GDP / person) will grow faster than GDP per capita of the rich countries. According to this hypothesis, the relative backwardness can facilitate the economic development of the country; hence – can be an advantage .
• Such a situation is called a catch-up effect”
• https://www.nbportal.pl/slownik/pozycje-slownika/konwergencja
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Convergence
• Note however, that the Solow model predicts CONDITIONAL convergence- poorer countries’ income per capita (measured by GDP / person) will grow faster than GDP per capita of the rich countries, provided that both the rich and poor countries have the same steady-state.
• There is no reason the expect ABSOLUTE convergence (i.e. that poor countries will grow faster than the rich countries); but – if the Solow model is correct – we should observe conditional convergence
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Convergence
• In the literature on economic growth, there are two ways to measure convergence.
• The first (sometimes called "sigma-convergence") refers to a decrease in the dispersion in the GDP per capita (standard of living) between different societies.
• The second - called "beta-convergence„ occurs when poor countries grow faster than rich ones.
• Economists talk about "conditional beta-convergence," when the economy is experiencing "beta-convergence," but it depends on other conditions "
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Convergence
• To repeat once more: we expect to observe sigma-convergence among similar countries (or regions) but not among different ones
• We also expect to observe conditional beta-convergence, even in a very large sample of different countries (as this kind of empirical test takes into account the differences across countries)
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Convergence
• Absolute (unconditional) beta convergence (all γ = 0) & conditional beta convergence (full version of the equation below)
• Sigma convergence
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Convergence
• Note that if there is „sigma” convergence, there is also „beta” convergence
• The other way around – no!
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Convergence and divergence
Źródło: Sala-i-Martin,
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Convergence – theoretical foundations
• Convergence stems from the assumption of declining marginal revenue of capital: the same amount of capital invested in a poor country, where capital is scarce, it will bring much greater benefit than in rich country (neoclassical models).
• Another reason: the ability of poor countries to use (low-cost) technologies already developed in the rich countries.
• In rich countries, they are outdated, but at the same time they can technically revolutionize production in poor countries.
• In addition to saving time and money for research in science and technology, these countries minimize the risk of failure of a given technology
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Convergence – states in the USA
Źródło: Sala-i-Martin, 1996
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Convergence – states in the USA
Źródło: Sala-i-Martin, 1996
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Convergence – prefectures in Japan
Źródło: Sala-i-Martin, 1996
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Convergence – regions in Europe
Źródło: Sala-i-Martin, 1996
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Convergence
• Econometric research almost undoubtedly shows that conditional convergence exists
• The econometric research shows that there is a statistically significant relationship between GDP per capita and it’s growth rate, when one controls for the investment rate, the stock of human capital, international trade, financial depth, government spending, etc
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According to IMF (and other researchers)
• Convergence has entered into a new phase…
• Since the 90’s the developing countries are growing much quicker that the rich countries
• This is explained by globalization forces, favorable demographic trends (slowdown in population growth plus the still young society), better quality of institutions (governance), the improvement of macro-economic stability, sectoral transformation, etc Will this trend continue?
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Convergence in recent times
Źródło: Dervis, 2012
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Convergence in recent times
• Rodrik, 2011
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(Conditional) convergence at the country level
Rodrik, 2011
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(Absolute) convergence at the industry level
Rodrik, 2011
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Growth decomposition
Rodrik, 2011
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Summary
• Poor countries do not automatically grow faster than the rich ones - there is no "sigma" convergence or absolute "beta" convergence among all countries of the world
• Conditional „beta” cconvergence is a fact (empirically identified in the overwhelming number of studies) - although the process is quite slow. Rodrik (2011) noted that there is unconditional convergence at the sectoral (industry) level = ("industries") - this means that the change of economic structure to towards highly productive sectors is crucial. This is relatively new & very interesting
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BUT..
• Convergence is a concept related to income (in)equality. If countries are converging, than inequality should decrease
• In some countries the „within” country inequality is growing
• There are still countries which are not developing
• These issues belong to the more imporant contemporary problems
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Poverty traps?
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Poverty traps
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Poverty traps
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Branko Milanovic: 3 ways to think about inequality
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Gini coefficient
• https://en.wikipedia.org/wiki/Gini_coefficient
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Gini coefficient for the 3 concepts of inequality
Milanovic B., 2012
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Inequality – world vs. countries
Milanovic B., 2012
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Who gained, who didin’t - the (famous) Elephant
Milanovic B., 2012
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The class or the country – what predicts your income?
Milanovic B., 2012
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Within and between inequality
Milanovic B., 2012
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Migrations – Branko Milanovic
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Branko Milanovic
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I used the following sources:
• Sala-i-Martin, The classical approach to convergence analysis, The Economic Journal, 1996
https://www.nes.ru/dataupload/files/science/reset/Sala_i_Martin1996ej.pdf
NBP, Portal Edukacji Ekonomicznej; hasło „Konwergencja” https://www.nbportal.pl/slownik/pozycje-slownika/konwergencja Milanovic Branko (2012) „Global Income inequality by the numbers” .
Policy Research WP https://www.gc.cuny.edu/CUNY_GC/media/CUNY-Graduate-
Center/PDF/Centers/LIS/Milanovic/papers/2013/gpol12032.pdf • Dervis, K. (2012) „Convergence, Interdependence, and Divergence”
Finance & Development, September 2012, Vol. 49, No. 3