Balanced growth

Source:

Is there evidence of balanced growth?

Balanced growth in theory

 

The main organizing principle in growth economics over the last sixty years :
“balanced growth path”

“Kaldor Facts” [1]

  1. The growth rate of output per worker is constant over time
  2. The rate of return on capital is constant over time
  3. The share of output paid to capital is constant over time

Empirical Check

A.

cbo_fit_postallFor the US, it seems there is very powerful evidence for constant growth of output per worker.

figure_3_3

But not every country has such a consistent trend line.

  • a BGP is really a statement about what happens in the long run. Like Germany or Japan, you could be off of the BGP, but will eventually settle into a situation of constant growth rates.

france

France shows a further departure, not only a shift in the level of the BGP, like Japan, but also a change in the slope,meaning the growth rate was permanently higher.

paper recently checks 26 countries whether their path of GDP per capita follows a strict BGP:

  1. a strict BGP is only for the US and Canada
  2. no for the rest of the OECD and the other Asian countries

B.

If return to capital is measured by take total payments to capital ratio (dividends, rents, or interest)

fig_mpk_1960There was a distinct decline in the return to capital over the post-war period

If measured by bond yields

fig_corp_baa_yield

40-year deviation from 5% between about 1970 and 2010 seems like an abuse of the word “tendency”

Or stock earnings yield.

fig_yield

It looks like a tendency to be around 6-8% over the long run, with a distinct dip in the recent few years.

piketty_rpiketty_r_france

But for UK and France, return to capital shows some stability over long periods of time.

C.

piketty_shareUS

fig_cap_share

This looks as if the capital share is rising over the last 40 years for all these countries

kn_labor

The inverse of this is the decline in labor shares. A paper  has investigated both if and why this is occurring.

Theoretical Issues

Uzawa’s theorem: 

If an economy has a BGP, then what Uzawa indicates is that it either has a very specific production function (Cobb-Douglas) or a very specific rate of progress in capital-augmenting technology (zero)

It feels implausible that the real world actually would have the exact right conditions

Relaxing Uzawa:

GHOS suggest is that human capital growth may be sufficient to break the strict nature of Uzawa’s conditions.
a model of economic growth that doesn’t require Cobb-Douglas production, has a positive growth rate of capital-augmenting technological change, and yet still has a BGP.

A different approach establishes conditions by which the aggregate production function may be Cobb-Douglas, even though the underlying technical production functions of firms are not.

Structural Change

There has been significant shifts of labor between sectors (generally, ag to manufacturing to services) over time in most economies.

Acemoglu and Guerrieri, Kongsamut, Rebelo, and Xie, Ngai and Pissarides, among others, are new versions of Uzawa that also allow them to account for structural change. [2]

However,

For those countries appeared to go from one BGP to another, the existing models are good at capturing the dynamics within each BGP,
but they have no way of explaining why it was that South Korea took off for a different BGP in about 1960, or why France’s growth rate shot up after World War II. These shifts are completely exogenous in these models.

 

 

 

[1]

These three conditions are part of the the “Kaldor Facts” established in by Nicolas Kaldor in 1957. These facts were supported by relatively sparse information gleaned from the period running from the late 19th century up to the 1920’s, and for most of them Kaldor ignored major changes that occurred in the Great Depression.

[2]

They establish conditions for preferences or production functions that allow for economic activity to wax and wane in different sectors, but in aggregate continues to be consistent with Kaldor’s facts.

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