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Industrialization and the role of government

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  • Takeuchi, Nobuyuki
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    Abstract

    We construct a two-sector endogenous growth model to examine the role of government in industrialization. Three main features of this model are (a) household preference is non-homothetic; (b) government’s sector-specific spending is introduced as a production factor and (c) technological progress occurs only in the manufacturing sector through learning-by-doing. By using the model with these features, we derive the optimal policy for government resource allocation, optimal tax rate and share of government spending for each sector, to maximize the household’s utility. In addition, we examine the dynamics of the model. The model reveals that (a) increments in both agricultural productivity and manufacturing productivity cause labour to move from the agricultural sector to the manufacturing sector; (b) depending on the relative elasticity of production with respect to government’s spending between the two sectors, the optimal tax rate will shrink or expand with the passage of time and will stay at a level of balanced growth path in the long run and (c) as the industrialization progresses, the optimal share of government spending for the agricultural sector will decline.

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    Bibliographic Info

    Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 26822.

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    Date of creation: Nov 2010
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    Handle: RePEc:pra:mprapa:26822

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    Keywords: industrialization; productive government spending; learning-by-doing; economic growth;

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    1. Jonathan Temple, 2005. "Dual economy models: a primer for growth economists," Bristol Economics Discussion Papers 05/574, Department of Economics, University of Bristol, UK.
    2. Paul M Romer, 1999. "Increasing Returns and Long-Run Growth," Levine's Working Paper Archive 2232, David K. Levine.
    3. Barro, R.J., 1988. "Government Spending In A Simple Model Of Endogenous Growth," RCER Working Papers 130, University of Rochester - Center for Economic Research (RCER).
    4. Echevarria, Cristina, 1997. "Changes in Sectoral Composition Associated with Economic Growth," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 38(2), pages 431-52, May.
    5. Futagami, Koichi & Morita, Yuichi & Shibata, Akihisa, 1993. " Dynamic Analysis of an Endogenous Growth Model with Public Capital," Scandinavian Journal of Economics, Wiley Blackwell, vol. 95(4), pages 607-25, December.
    6. Robert J. Barro & Xavier Sala-i-Martin, 1990. "Public Finance in Models of Economic Growth," NBER Working Papers 3362, National Bureau of Economic Research, Inc.
    7. Eswaran, Mukesh & Kotwal, Ashok, 1993. "A theory of real wage growth in LDCs," Journal of Development Economics, Elsevier, vol. 42(2), pages 243-269, December.
    8. Sergio Rebelo & Piyabha Kongsamut & Danyang Xie, 2001. "Beyond Balanced Growth," IMF Working Papers 01/85, International Monetary Fund.
    9. Douglas Gollin & Stephen Parente & Richard Rogerson, 2002. "The Role of Agriculture in Development," Department of Economics Working Papers 2002-09, Department of Economics, Williams College.
    10. Kanbur, S M Ravi & McIntosh, James P, 1988. "Dual Economy Models: Retrospect and Prospect," Bulletin of Economic Research, Wiley Blackwell, vol. 40(2), pages 83-113, April.
    11. Jing Jun Chang & Been-Lon Chen & Mei Hsu, 2006. "Agricultural Productivity and Economic Growth: Role of Tax Revenues and Infrastructures," Southern Economic Journal, Southern Economic Association, vol. 72(4), pages 891–914, April.
    12. Turnovsky, Stephen J., 1997. "Fiscal Policy In A Growing Economy With Public Capital," Macroeconomic Dynamics, Cambridge University Press, vol. 1(03), pages 615-639, September.
    13. Sato, Ryuzo & Niho, Yoshio, 1971. "Population Growth and the Development of a Dual Economy," Oxford Economic Papers, Oxford University Press, vol. 23(3), pages 418-36, November.
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