Government and Growth

Government and Growth

Government and Growth

Government and Growth


The sixth volume in the FIEF Studies in Labour Markets and Economic Policy series is a contribution to the empirical literature on endogenous growth theory, which studies the interrelationships of institutions, government policies, distribution, and growth. After an Introductory overview by the editor, the volume contains four main chapters, each of which is followed by review comments: Alesina and Perotti review recent literature on the political economy of growth, and discuss such topics as the relationship between income instability and growth, whether democratic institutions and civil liberties influence growth performance, and whether income inequality hampers growth or not. Hansson and Henrekson study the tendency--predicted by neoclassical growth theory--of per capita income and productivity to converge between countries. They focus on the diffusion of technology and the phenomenon of 'catching up', whereby poor countries copy the production methods and possibily organizational methods in advanced countries. Grier uses a similar neoclassical production-function approach, but brings in some new explanatory factors for the growth process, including union density, the existence of corporatist as opposed to economically liberal governments, and centralized versus decentralized wage formation. Analysing four cases of late, successful industrialization (South Korea, Taiwan, Finland, and Austria) Juhana Vartiainen shows that, under certain conditions, decentralized market solutions of the problems of resource allocation are inferior to state planning and corporatism with or without government involvement.


The neoclassical growth model represented a great step forward from the 'Keynesian' models of Harrod and Domar. By introducing factor prices and substitution of factors of production capital deepening was possible within the model framework and the 'knife edge' instability of the Harrod-Domar scheme was overcome.

In the 1950s and 1960s growth theory was a very active field of research. Interest waned later, probably because most implications of the neoclassical growth model had been revealed. However, interest in growth theory was activated again by the discovery of endogenous growth models. To me it seems astonishing that only a minor technical change in a family of aggregated models--albeit a change with far reaching implications-- was needed to trigger the vast empirical and comparative literature on governments, institutions and policy regimes.

These models abandoned the assumption of diminishing returns to capital. By assuming constant returns to the accumulated factor of production, growth became endogenously determined by the parameters of the model. This was in contrast to the neoclassical growth model, where per capita income growth was completely determined by exogenous technological change. But by the assumption of increasing returns to the accumulated factor an instability is reintroduced in growth theory, similar to the instability of the Harrod-Domar model. Returns to capital must be exactly constant.

All these models are highly aggregated. They relate aggregate output to aggregate capital and labour, an aggregated saving rate determines the aggregated level of investment. Schemes like these can be used to analyse certain broad characteristics of the economic growth process, such as conditions for stability, steady state growth, factor substitution and the functional distribution of income. One should not expect to find specific empirical . . .

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