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Economic stagnation, fixed factors, and policy thresholds

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Easterly, William

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Abstract

Analysis of decade-long growth rates in all countries shows a striking regularity: episodes of rapid growth are limited largely to a middle range of initial income; neither very poor nor very rich countries experienced rapid growth. Episodes of negative growth are limited to low and middle-income countries. This paper develops a simple model that sheds light on this experience. The model has two familiar elements from the growth literature: (1) a Stone-Gearly utility function (saving is low at low income), and (2) fixed factors with the marginal product of capital bounded away from zero. The second property is derived by assuming an elasticity of substitution greater than one between an exogenous labor input and a broad concept of capital. The paper extends the model to consider multiple capital goods and public capital. It finds that stagnation is consistent with an array of statistical evidence because of fixed factors. Economic policies - not initial conditions - determine whether countries stagnate. Results confirm that initial income and policy variables have a different effect on whether a country stagnates than they do on the rate of growth once it starts growing, as expected from the distinction between steady-state and transitional effects. These results suggest that cross-section growth regressions may be misspecified because of the nonlinearity inherent in the possibility of steady-state stagnation.

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Paper provided by The World Bank in its series Policy Research Working Paper Series with number 795.

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Date of creation: 31 Oct 1991
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Handle: RePEc:wbk:wbrwps:795

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Keywords: Economic Growth; Economic Theory&Research; Inequality; Achieving Shared Growth; Environmental Economics&Policies;

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References listed on IDEAS
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  1. de Melo, Martha & Denizer, Cevdet & Gelb, Alan & Tenev, Stoyan, 1997. "Circumstance and choice : the role of initial conditions and policies in transition economies," Policy Research Working Paper Series 1866, The World Bank. [Downloadable!]
  2. Larry E. Jones & Rodolfo E. Manuelli, 1995. "A Positive Model of Growth and Pollution Controls," NBER Working Papers 5205, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  3. Ross Levine, 1997. "Napoleón, bolsas y crecimiento en América Latina," RES Working Papers 4107, Inter-American Development Bank, Research Department. [Downloadable!]
  4. Petar D. Vujanovic, 1999. "HABITS AND THE SAVINGS-GROWTH RELATIONSHIP Why US Personal Savings Rates Are At Historic Lows," Macroeconomics 9905002, EconWPA. [Downloadable!]
  5. Yoshiyasu Ono & Akihisa Shibata, 2006. "Capital Income Taxation and Specialization Patterns: Investment Tax vs. Saving Tax," KIER Working Papers 613, Kyoto University, Institute of Economic Research. [Downloadable!]
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  6. Fernando Perera Tallo, 2003. "Missing Markets for Human Capital and Differences in Growth," Centro de Alti­simos Estudios Ri­os Pe©rez(CAERP) 9, Centro de Altisimos Estudios Rios Perez (CAERP). [Downloadable!]
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  7. Ross Levine, 1997. "Napoleon, Bourses, and Growth in Latin America," RES Working Papers 4106, Inter-American Development Bank, Research Department. [Downloadable!]
  8. Cristina Echevarria, 2000. "Non-homothetic preferences and growth," Journal of International Trade & Economic Development, Taylor and Francis Journals, vol. 9(2), pages 151-171, June. [Downloadable!] (restricted)
  9. Reinhart, Carmen & Ogaki, Masao & Ostry, Jonathan, 1995. "Saving behavior in low- and middle-income developing countries," MPRA Paper 13757, University Library of Munich, Germany. [Downloadable!]
  10. Lopez, Humberto & Serven, Luis, 2009. "Too poor to grow," Policy Research Working Paper Series 5012, The World Bank. [Downloadable!]
  11. Easterly, William & Loayza, Norman & Montiel, Peter, 1997. "Has Latin America's post-reform growth been disappointing?," Policy Research Working Paper Series 1708, The World Bank. [Downloadable!]
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  12. Holger Strulik, 2005. "Geography, Health, and Demo-Economic Development," Discussion Papers 05-15, University of Copenhagen. Department of Economics. [Downloadable!]
  13. Thomas M. Steger, 1997. "Productive Consumption and Growth in Developing Countries," Development and Comp Systems 9710001, EconWPA, revised 02 Dec 1997. [Downloadable!]
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  14. Larry E. Jones & Rodolfo E. Manuelli, 2000. "Endogenous policy choice: the case of pollution and growth," Staff Report 276, Federal Reserve Bank of Minneapolis. [Downloadable!]
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  15. Adam, Christopher S. & O'Connell, Stephen A., 1998. "Aid, taxation, and development: analytical perspectives on aid effectiveness in Sub-Saharan Africa," Policy Research Working Paper Series 1885, The World Bank. [Downloadable!]
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  16. Benjamin N. Dennis & Talan Iscan, 2007. "Agricultural Distortions, Structural Change, and Economic Growth: A Cross-Country Analysis," Department of Economics at Dalhousie University working papers archive distort35, Dalhousie, Department of Economics. [Downloadable!]
  17. Beck, Thorsten, 2001. "Financial development and international trade : is there a link?," Policy Research Working Paper Series 2608, The World Bank. [Downloadable!]
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