Globalization and the Human Development Trap

The feeble results of liberalization policies in Latin America are explained in terms of a multiple steady state model including a dynamic human development trap, endogenous technological change, technology transfer and trade. Divergent and convergent steady states, with and without a human development trap, exist under both autarchy and free trade. The model explains why import substitution is inferior to export promotion. While globalization is a necessary condition for convergence to development, it is not sufficient. Both trade and foreign direct investment create innovation assymetries hindering lagging countries that need to be balanced with export promotion and technological transfer for their successful integration with the global economy. In addition, so long as the human development trap persists, unskilled and skilled workers will have a conflict of interest between supporting human capital investment and innovation. If only innovation is supported, the human capital trap will persist. If mainly human capital investment is pursued, technology levels will fall behind; switching to innovation will be necessary eventually. The world growth rate is maximized by regulating globalization so as to attain development in all countries.trade, investment, technology

Institutions and Long-Term Development Policy

Market failures in human capital investment and innovation explain the main features of human development and economic growth. This is shown in a Schumpeterian multi-country model with technology transfer and trade. Thus, only institutions expanding investments in nutrition, education, health, skills, know-how and research in LDC’s, beyond what markets can supply, will succeed in promoting long-term development. It is in the interest of leading countries to supplement home investments with concerted transfers, since the long-term world growth rate increases with world-wide knowledge levels and living standards. Underdevelopment consists of a series of policy-dependent lower steady states, with parallel or divergent growth rates, and with or without a human development trap. Free commerce raises the growth rate of countries able to support production at the global scale. Smaller or more backward countries grow slower and require aid to emerge. Skilled and unskilled workers in LDC’s have a conflict of interest between supporting innovation or human capital investment. If innovation is favored, the human capital trap can persist, provoking opposition to globalization. If human capital investment is prioritized, a switch to innovation will eventually be necessary, requiring institutional change.Human Capital Investment, Schumpeterian, Market Failures, Development Policy

R&D, Implementation and Stagnation: A Schumpeterian Theory of Convergence Clubs

We construct a Schumpeterian growth theory consistent with the divergence in per-capita income that has occurred between countries since the mid 19th Century, and with the convergence that occurred between the richest countries during the second half of the 20th Century. The theory assumes that technological change underwent a transformation late in the 19th Century, associated with modern R&D labs. Countries sort themselves into three groups. Those in the highest group converge to a steady state where they do leading edge R&D, while those in the intermediate group converge to a steady state where they implement technologies developed elsewhere. Countries in both of these groups grow at the same rate in the long run, as a result of technology transfer, but inequality between them increases during the transition. Countries in the lowest group grow at a slower rate, with relative incomes that fall asymptotically to zero. Once modern R&D has been introduced, a country may have only a finite window of opportunity in which to introduce the institutions that support it.

Food for Thought: Basic Needs and Persistent Educational Inequality

This research demonstrates that human capital accumulation by the poor is only possible if a minimum level of health and well-being has been attained. When families do not have enough resources to invest in the satisfaction of basic needs and health care, and finance is not available for this purpose, a poverty trap exists with low health, education and income. These poverty traps may persist if policies financing education are applied which do not also address deficiencies in nutrition and health impairing human potential, and in particular early child development. This link between health and education contributes to explain the important, long-term effects of nutrition and health on economic growth and implies that nutrition and health play a causal role in the persistence of inequality and in the effects of inequality on growth.Health, Human Capital, Growth, Credit constraints

Subdesarrollo y globalización.

Se presenta una teoría del desarrollo y el subdesarrollo en el mediano y largo plazo, basado en la teoría del cambio tecnológico endógeno. El contexto económico es el de la economía global abierta, en la que existen transferencia tecnológica, innovación, comercio e inversión extranjera directa. Ceteris paribus, bajo el libre comercio, la asignación agregada de sectores innovadores entre países es proporcional a su capacidad productiva, una vez tomadas en cuenta la transferencia tecnológica y la innovación. Esto significa que economías pequeñas o atrasadas divergirán, ya sea experimentando tasas de crecimiento menores a las de los líderes tecnológicos, o manteniendo rezagos de equilibrio en su capacidad productiva e ingreso. Por su parte, la inversión extranjera directa obtiene ganancias extraordinarias que le generan mayores incentivos a la innovación, y además desplaza la innovación local. Esto es, también resulta en incentivos asimétricos a la innovación que favorecen a los países líderes. Se desprende que las hipótesis usuales de la teoría del cambio tecnológico endógeno tienen como consecuencia, bajo las condiciones de la globalización, que las fuerzas de mercado inducen el desarrollo o el subdesarrollo: las economías pueden converger a estados estacionarios persistentemente desiguales y divergentes. Aún así, políticas económicas suficientemente fuertes en transferencia tecnológica, que compensen los desbalances en los incentives a la innovación, pueden conducir a una transición al desarrollo con altas tasas de crecimiento.

The Effects of Financial Development on Convergence: Theory and Evidence

We introduce imperfect creditor protection in a multi-country version of Schumpeterian growth theory with technology transfer. The theory predicts that the growth rate of any country with more than some critical level of financial development will converge to the growth rate of the world technology frontier, and that all other countries will have a strictly lower long-run growth rate. The theory also predicts that in a country that converges to the frontier growth rate, financial development has a positive but eventually vanishing effect on steady-state per-capita GDP relative to the frontier. We present cross-country evidence supporting these two implications. In particular, we find a significant and sizeable effect of an interaction term between the log of initial per-capita GDP (relative to the United States) and a financial intermediation measure, in an otherwise standard growth regression, implying that the likelihood of converging to the U.S. growth rate increases with financial development. We also find that, as predicted by the theory, the direct effect of financial intermediation in this regression is not significantly different from zero. In addition, we find that other variables representing schooling, geography, health, policy, politics and institutions do not affect the significance of the interaction between financial intermediation and initial per capita GDP, and do not show any independent effect on convergence in our cross-country regressions. Our findings are robust to removal of outliers and to alternative conditioning sets, estimation procedures and measures of financial development.

Development and Underdevelopment in the Globalizing Economy

A development and underdevelopment is presented using a Schumpeterian model for an open global economy with technology transfer and trade. When in the context of free commerce there exist strong enough mechanisms allowing technological asymmetries between countries to generate higher innovation incentives for the leaders, persistent inequality and divergence will result. Identical countries will reach different steady states. Such mechanisms include labor- and market- seeking foreign direct investment (FDI), which originated at the end of the 19th Century and has increased rapidly since the 1980’s. They also include the typical “colonial diktat” imposed by Great Britain in the 19th and early 20th Centuries. In the presence of labor-seeking FDI, the advantage a leading country’s innovators obtains by producing with the follower’s wages results in higher incentives to innovation for which FDI spillovers may not compensate the follower. It also crowds out the follower’s innovation. In the case of a small following country all of whose labor is demanded by leading country innovators, all innovation will be crowded out (the banana republic). Market-seeking FDI, providing goods that can only be sold where they are produced, also results in unequal incentives to innovation. Finally, when colonies’ markets and transportation options are limited by their colonial masters, or competitive industries are directly outruled, as in the typical colonial diktat of the 19th Century, persistent inequality and divergence arise. In contrast, in the case of autarchy, or in the case of free commerce without any asymmetric mechanisms, multiple steady states will only arise when country parameters differ. In all cases considered, marginal changes in the steady state determinants, such as population size, productivity fixed effects and institutions (represented by the degree of financial development and by the efficiency of a public input for producing innovated goods) result in growth effects for diverging countries and level effects for countries following the leader in parallel trajectories.

The Effect of Financial Development on Convergence: Theory and Evidence

We introduce imperfect creditor protection in a multi-country version of Schumpeterian growth theory with technology transfer. The theory predicts that the growth rate of any country with more than some critical level of financial development will converge to the growth rate of the world technology frontier, and that all other countries will have a strictly lower long-run growth rate. The theory also predicts that in a country that converges to the frontier growth rate, financial development has a positive but eventually vanishing effect on steady-state per-capita GDP relative to the frontier. We present cross-country evidence supporting these two implications. In particular, we find a significant and sizeable effect of an interaction term between initial per-capita GDP (relative to the United States) and a financial intermediation measure in an otherwise standard growth regression, implying that the likelihood of converging to the U.S. growth rate increases with financial development. We also find that, as predicted by the theory, the direct effect of financial intermediation in this regression is not significantly different from zero. These findings are robust to alternative conditioning sets, estimation procedures and measures of financial development.

Divergences and Convergences in Human Development

I conduct a cross-country analysis of the human development index (HDI) components, income, life expectancy, literacy and gross enrolment ratios, using Gray and PurserÕs 1970-2005 quinquennial database for 111 countries. 1) A descriptive analysis uncovers a complex pattern of divergence and convergence for these componentsÕ evolution. Development is not a smooth process but consists of a series of superposed transitions each taking off with increasing divergence and then converging. 2) Absolute divergence/convergence for the HDI components is decomposed using simultaneous growth regressions including a full set of quadratic interactions between the HDI components, and indicators of urbanization, trade, institutions, foreign direct investment and physical geography. These are implemented, first, using three stage least squares, all of the non-exogenous independent variables fully instrumented, and second, as independent regressions with errors clustered by countries, again all non-exogenous variables instrumented. 3) A set of quantile regressions is run for the HDI component levels on the same variables (just the linear terms), again fully instrumented. Urbanization is a leading significant variable for human development indicators in both sets of estimates, stronger than trade, FDI and institutional indicators. These indicators act with ambiguous signs that may result from their distributive impacts, reducing their effectiveness. The results indicate that improving markets will have smaller returns than complementing them with institutions that can coordinate urbanization as well as investment in human capital. Urbanization itself can provide a concrete agenda for development involving all aspects of economic, political and social life as well as human development.human development, growth, convergence, divergence, urbanization