0.5 Perspectives on the role of capital in development: physical  (Page 5/10)

Finally an average year of schooling in emerging nations has tripled from two to seven years over the period 1950-2010.

Economic growth has yielded very substantial increases in income per person especially in the period 2000-2009, when growth per capita income was 4.5 percentage points above that of rich nations. See Human Morality Database, 2014 As noted in Chapter 3, continuation of this high rate of growth would allow per capita income per person in emerging nations to equal average U.S. income per capita by 2045.

However, as we saw in Chapter3, these high growth rates fell sharply after the onset of the world recession beginning in late 2008: average GDP per capita in emerging nations ( excluding China ) grew at 1.1% faster than in the U.S. Including rapidly growing China would mean that emerging nations could reach rich-world levels by about 2064 ( Economist , September 13, 2014, p.29). At that rate, income per capita in emerging economies would not catch up to rich-world levels until the year 2170. And if 2014 growth projections from the IMF are to be believed, continued low growth at this rate in emerging nations (excluding China) would be only 0.39 percentage points greater than in the U.S. The implications are dire: this would mean that 3 more centuries would be required for per capita income to catch up to the West.

Economic models

The quest for economic growth has given rise, over the past 50 years, to a quest for models of economic growth that might reveal pathways for pursuing policies for increasing capita income over time in emerging nations.

We first review classical approaches, then later theories and models of growth.

Productivity curves and growth

Understanding of economic growth has evolved considerably since over the past 300 years. From 1800 to about 1960 discussions were dominated by the Classical theory of growth. (Smith, Ricardo and Malthus).

Classical Growth Theory : the notion that any real GDP growth is bound to be temporary: human living standards will never improve.

What reasons lie behind such a profoundly pessimistic view? To begin with, we need to understand the concept of subsistence per capita GDP. This is income just enough to live on. In the early classical theories there was a supposed iron law linking population growth to increases and decreases in per capita GDP. Whenever something happens to make per-capita GDP rise above subsistence, nutrition and health improves, then births rise and population grows. Population growth brings GDP/capital back to subsistence. In fact this was the historical experience 500 AD-1700s as we have seen. A temporary rise in per capita GDP (living standard) was seen as truly temporary.

So, classical “growth” theory was the no-exit story. i.e. things will never get better. An example.

First consider subsistence GDP per capita: the minimum required for people to live out their life expectancy. Assume subsistence GDP = $20 per hour of labor work consider Figure 5-1. The vertical axis shows real GDP per hour of labor (in dollars of year 2000). The horizontal axis shows the amount of capital used per hour of labor.