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This text is an introduction to the newer features of growth theory that are particularly useful in examining the issues of economic development. Growth theory provides a rich and versatile analytical framework through which fundamental questions about economic development can be examined. Structural transformation, in which developing countries transition from traditional production in largely rural areas to modern production in largely urban areas, is an important causal force in creating early economic growth, and as such, is made central in this approach. Towards this end, the authors augment the Solow model to include endogenous theories of saving, fertility, human capital, institutional arrangements, and policy formation, creating a single two-sector model of structural transformation. Based on applied research and practical experiences in macroeconomic development, the model in this book presents a more rigorous, quantifiable, and explicitly dynamic dual economy approach to development. Common microeconomic foundations and notation are used throughout, with each chapter building on the previous material in a continuous flow. Revised and updated to include more exercises for guided self study, as well as a technical appendix covering required mathematical topics beyond calculus, the second edition is appropriate for both upper undergraduate and graduate students studying development economics and macroeconomics.

Inhaltsverzeichnis

Frontmatter

1. Overview

Abstract
We begin with a single, relatively simple, theoretical framework that augments the Solow model to include endogenous theories of saving, fertility, human capital, and policy formation. The analysis is then extended to include two sectors of production. We study the structural transformation of developing economies as they shift from traditional production in largely rural areas to modern production in largely urban areas during the early take-off period of modern growth. The two-sector growth model is used to explain the commonly observed differences in saving, worker productivity, and fertility across rural and urban sectors. We examine the effects of policies that reallocate resources across these sectors, such as taxation, migration restrictions, international trade, and an urban bias in the provision of public services. How policies affect the pace of the structural transformation is a critical feature of development as it plays an important causal role in determining an economy’s aggregate growth rate.
Sibabrata Das, Alex Mourmouras, Peter Rangazas

Correction to: Economic Growth and Development: A Dynamic Dual Economy Approach Sibabrata

Sibabrata Das, Alex Mourmouras, Peter Rangazas

One-Sector Growth Models

Frontmatter

2. Overlapping-Generations Model of Economic Growth

Abstract
This chapter introduces the one-sector neoclassical growth model with overlapping generations. The primary focus of the chapter is growth via private physical capital accumulation. We think of private physical capital as manmade durable inputs to the production process. For our purposes, private capital can be primarily thought of as plant and equipment that is produced in one period and then used in production in the following period. To model production, we introduce firms, economic institutions that combine physical capital and labor to produce goods and services. Later in the chapter, we introduce human capital, the knowledge and skills embodied in workers. Chapter 3 adds public capital, the economy’s infrastructure created by the government, such as roads, laws, and utilities.
Sibabrata Das, Alex Mourmouras, Peter Rangazas

3. Fiscal Policy

Abstract
This chapter highlights the important role played by the government in jump starting and sustaining economic growth. The government provides the country’s infrastructure or public capital—laws, roads, education, public health, and utilities—that secure property rights and raise the productivity of private capital. Growth in public capital keeps the marginal return to private capital from falling dramatically during industrialization, helping to explain G1. The need for government to lay the foundation for growth helps explain the vast differences in experiences of developing countries after WWII, summarized in G6. Growth Miracles and Growth Disasters are largely driven by especially good and especially bad government policy.
Sibabrata Das, Alex Mourmouras, Peter Rangazas

4. Schooling and Fertility

Abstract
This chapter is motivated by two of the growth facts stated in Chap. 1.
  • G2—Children spend more time in school, within and across years, and less time working as an economy develops
  • G3—Population growth rates may first rise but eventually experience a steady decline as economies develop
Sibabrata Das, Alex Mourmouras, Peter Rangazas

5. A Complete One-Sector Neoclassical Growth Model

Abstract
In this chapter we put all the elements discussed in previous chapters together. The model includes private capital from Chap. 2, government capital and taxation from Chap. 3, and fertility and schooling from Chap. 4. The features are combined to study large income differences across rich and poor countries, what is known as development economics. At the dawn of the Industrial Revolution, the differences in per capita income across countries were relatively modest. Per capita income in the richest countries was only 2–4 times greater than per capita income in the poorest countries. Over the course of the last two centuries, per capita income of the rich countries has diverged from that of the poor countries. By the end of the twentieth century, rich countries were 20–40 times richer than poor countries. What could explain stylized growth fact G4, dramatically large gaps in living standards?
Sibabrata Das, Alex Mourmouras, Peter Rangazas

Two-Sector and Dual Economies

Frontmatter

6. Two Sector Growth Models

Abstract
This section provides an introduction to two sector growth models. We begin with a model where a single good is produced using traditional means of production. In the traditional sector, production is carried out by households using land (natural resources) and labor. There are no firms or factories that rely on heavy plant and equipment and modern production methods to produce goods. This setting can be used to identify the conditions necessary for a modern sector to appear that would begin an “industrial revolution,” as in Hansen and Prescott (2002), helping to explain G8 and G9.
Sibabrata Das, Alex Mourmouras, Peter Rangazas

7. Wage and Fertility Gaps in Dual Economies

Abstract
This chapter begins our analysis of two sector models where markets may be missing. Here we focus on the fact that wages are lower and fertility is higher in the traditional sector than in the modern sector of economies. This has important consequences for economic growth for two reasons. First, as suggested by growth fact G11, the wage gap indicates the allocation of labor may be inefficient—the movement of labor from the traditional sector to the modern sector should raise average labor productivity. Second, if fertility falls as households move from the traditional sector to the modern sector, then population growth will decline making it easier to increase physical capital per worker.
Sibabrata Das, Alex Mourmouras, Peter Rangazas

8. Physical Capital in Dual Economies

Abstract
In this chapter we shift attention to industrialization and economic growth in dual economies. We focus again on the consequence of missing land markets, a common characteristic of developing economies that was documented in the previous chapter. Here we examine the connections between land ownership, saving, and physical capital formation.
Sibabrata Das, Alex Mourmouras, Peter Rangazas

9. A Complete Dual Economy

Abstract
In this chapter we combine the main features from previous chapters into a complete dual economy model. The model includes physical and human capital, fertility, wage gaps, and technological change. We then examine the ability of the model to replicate key features of the economic growth observed in real world economies.
Sibabrata Das, Alex Mourmouras, Peter Rangazas

10. Urbanization

Abstract
In this chapter we study migration to the city and its effects on urbanization. In previous chapters we studied how the structural transformation affects economic growth and, in particular, how migration to the modern sector may alter private sector behavior. Here, we focus on the question of the best pace of urbanization as it relates to the allocation of rural and urban government services. Our motivation comes from the fact that the vast majority of governments around the developing world are concerned about the adequacy of public goods provision and the crowding associated with rapid urbanization (Bloom and Khanna (2007)). In this sense, the structural transformation, which generally raises economic growth, can occur too quickly. A second important issue we address is the role politics plays in exacerbating rural-urban inequalities. As first stressed by Lipton (1977), the disproportionate political power of urban interests (the “urban elite”) in some developing countries’ economic policies may distort the allocation of government services, exacerbate rural-urban inequalities, and intensify migration beyond efficient levels.
Sibabrata Das, Alex Mourmouras, Peter Rangazas

11. Conclusion

Abstract
In this chapter we summarize some of the main points we have learned about development and their related policy implications. The points are organized into those related to the onset of growth and those related to the nature of growth once it begins. We also discuss policy implications and topics for future research.
Sibabrata Das, Alex Mourmouras, Peter Rangazas

Backmatter

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