IDEAS home Printed from https://ideas.repec.org/p/wbk/wbrwps/344.html
   My bibliography  Save this paper

Policy distortions, size of government, and growth

Author

Listed:
  • Easterly, William R.

Abstract

This paper analyzes the structural relationship between policies that distort resource allocation and long-term growth. It briefly reviews the Solow model in which steady-state growth depends only on exogenous technological change, but finds it unsatisfactory as a model of long-term growth. The author proposes an increasing-returns model in the spirit of the new literature on economic growth. With increasing returns, endogenous economic variables - and thus policy - will affect the steady-state rate of growth. This model gives output as a linear function of total capital, but a decreasing function of each of two types of capital. The distortion is defined as a policy intervention that increases the cost of using one of the types of capita. The results suggest that simple linear relationships between distortions and growth, or between size of government and growth, are untenable. Easterly's model shows that reducing the distortions does not have an equal effect on growth in all circumstances. The effect depends on how flexible the economy is, how large the share of the factor being penalized in production is, and how high the distortions are initially. Small changes in either very low or very high levels of initial distortions have a minimal effect on growth.

Suggested Citation

  • Easterly, William R., 1989. "Policy distortions, size of government, and growth," Policy Research Working Paper Series 344, The World Bank.
    • Handle: RePEc:wbk:wbrwps:344
    as

    Download full text from publisher

    File URL: http://www-wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/1989/12/01/000009265_3960928153028/Rendered/PDF/multi0page.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Romer, Paul M, 1986. "Increasing Returns and Long-run Growth," Journal of Political Economy, University of Chicago Press, vol. 94(5), pages 1002-1037, October.
    2. Robert M. Solow, 1956. "A Contribution to the Theory of Economic Growth," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 70(1), pages 65-94.
    3. Robert J. Barro, 1991. "A Cross-Country Study of Growth, Saving, and Government," NBER Chapters, in: National Saving and Economic Performance, pages 271-304, National Bureau of Economic Research, Inc.
    4. Robert J. Barro, 1991. "Economic Growth in a Cross Section of Countries," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 106(2), pages 407-443.
    5. Baumol, William J, 1986. "Productivity Growth, Convergence, and Welfare: What the Long-run Data Show," American Economic Review, American Economic Association, vol. 76(5), pages 1072-1085, December.
    6. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July.
    7. Findlay, Ronald, 1989. "Is the new political economy relevant to developing countries ?," Policy Research Working Paper Series 292, The World Bank.
    8. Easterly, William R. & Wetzel, Deborah L., 1989. "Policy determinants of growth : survey of theory and evidence," Policy Research Working Paper Series 343, The World Bank.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Matías Berthelon, 2004. "Growth Effects of Regional Integration Agreements," Working Papers Central Bank of Chile 278, Central Bank of Chile.
    2. Patrick Artus, 1993. "Croissance endogène : revue des modèles et tentatives de synthèse," Revue Économique, Programme National Persée, vol. 44(2), pages 189-228.
    3. Korhan Gokmenoglu, 2013. "Re-Examination Of Wagner’S Law For Oecd Countries," Annals - Economy Series, Constantin Brancusi University, Faculty of Economics, vol. 1, pages 28-37, February.
    4. Jones, Larry E. & Manuelli, Rodolfo E., 1997. "The sources of growth," Journal of Economic Dynamics and Control, Elsevier, vol. 21(1), pages 75-114, January.
    5. Solimano, Andres, 1991. "Inflation and growth in the transition from socialism : the case of Bulgaria," Policy Research Working Paper Series 659, The World Bank.
    6. Devarajan, Shantayanan & Swaroop, Vinaya & Heng-fu, Zou, 1996. "The composition of public expenditure and economic growth," Journal of Monetary Economics, Elsevier, vol. 37(2-3), pages 313-344, April.
    7. Jones, Larry E. & Manuelli, Rodolfo E., 1995. "Growth and the effects of inflation," Journal of Economic Dynamics and Control, Elsevier, vol. 19(8), pages 1405-1428, November.
    8. Trish Kelly, 1997. "Public Investment and Growth: testing the non-linearity hypothesis," International Review of Applied Economics, Taylor & Francis Journals, vol. 11(2), pages 249-262.
    9. Romain Wacziarg, 2001. "Measuring the Dynamic Gains from Trade," The World Bank Economic Review, World Bank, vol. 15(3), pages 393-39-429.
    10. Ivo Sever & Sasa Drezgic & Helena Blazic, 2011. "Budget spending and economic growth in Croatia Dynamics and relathionships over the past two decades," Zbornik radova Ekonomskog fakulteta u Rijeci/Proceedings of Rijeka Faculty of Economics, University of Rijeka, Faculty of Economics and Business, vol. 29(2), pages 291-331.
    11. Jones, Larry E. & Manuelli, Rodolfo E., 1992. "Finite lifetimes and growth," Journal of Economic Theory, Elsevier, vol. 58(2), pages 171-197, December.
    12. Shantayanan Devarajan & Vinaya Swaroop & Heng-fu Zou, 1993. "What do governments buy?," CEMA Working Papers 513, China Economics and Management Academy, Central University of Finance and Economics.
    13. Devarajan, Shantayanan & Swaroop, Vinaya & Heng-fu Zou, 1993. "What do governments buy? The composition of public spending and economic performance," Policy Research Working Paper Series 1082, The World Bank.
    14. Ludena, Carlos E. & Hertel, Thomas W. & Preckel, Paul V. & Foster, Ken & Nin-Pratt, Alejandro, 2005. "Technological Change and Convergence in Crops and Livestock Production," Conference papers 331411, Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project.
    15. Hartler, Christina, 1991. "Agricultural Pricing and Growth," Working Paper Series 307, Research Institute of Industrial Economics.
    16. Chow, Peter C.Y. & Wang, Zhi & Tuan, Francis C., 2001. "The Impact of WTO Membership on Economic / Trade Relations Among the Three Chinese Economies--China, Hong Kong and Taiwan," Conference papers 330900, Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Levine, Ross & Renelt, David, 1991. "Cross-country studies of growth and policy : methodological, conceptual, and statistical problems," Policy Research Working Paper Series 608, The World Bank.
    2. Themba G Chirwa & NM Odhiambo, 2019. "An Empirical Test Of Exogenous Growth Models: Evidence From Three Southern African Countries," Economic Annals, Faculty of Economics and Business, University of Belgrade, vol. 64(220), pages 7-38, January –.
    3. ?gel de la Fuente, "undated". "Convergence Across Countries And Regions: Theory And Empirics," UFAE and IAE Working Papers 447.00, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
    4. Kostakis, Ioannis & Lolos, Sarantis & Doulgeraki, Charikleia, 2020. "Cultural Heritage led Growth: Regional evidence from Greece (1998-2016)," MPRA Paper 98443, University Library of Munich, Germany.
    5. Adriana Di Liberto, 2007. "Convergence and Divergence in Neoclassical Growth Models with Human Capital," Economia politica, Società editrice il Mulino, issue 2, pages 289-322.
    6. Cunado, J. & Perez de Gracia, F., 2006. "Real convergence in Africa in the second-half of the 20th century," Journal of Economics and Business, Elsevier, vol. 58(2), pages 153-167.
    7. Renelt, David, 1991. "Economic growth : a review of the theoretical and empirical literature," Policy Research Working Paper Series 678, The World Bank.
    8. Sylwia Zajączkowska-Jakimiak, 2006. "Wiedza techniczna i kapitał ludzki w teorii wzrostu gospodarczego," Gospodarka Narodowa. The Polish Journal of Economics, Warsaw School of Economics, issue 11-12, pages 47-69.
    9. Tushar Kanti Das, 2002. "Convergence across Indian States: Cross-Sectional and Panel Estimations," South Asia Economic Journal, Institute of Policy Studies of Sri Lanka, vol. 3(2), pages 227-239, September.
    10. George Petrakos & Panagiotis Artelaris, 2009. "European Regional Convergence Revisited: A Weighted Least Squares Approach," Growth and Change, Wiley Blackwell, vol. 40(2), pages 314-331, June.
    11. Maria Garrone & Dorien Emmers & Alessandro Olper & Jo Swinnen, 2018. "Subsidies and Agricultural Productivity: CAP payments and labour productivity (convergence) in EU agriculture," Working Papers of LICOS - Centre for Institutions and Economic Performance 634340, KU Leuven, Faculty of Economics and Business (FEB), LICOS - Centre for Institutions and Economic Performance.
    12. Ben-David, Dan, 1996. "Trade and convergence among countries," Journal of International Economics, Elsevier, vol. 40(3-4), pages 279-298, May.
    13. Evans, Paul & Karras, Georgios, 1996. "Convergence revisited," Journal of Monetary Economics, Elsevier, vol. 37(2-3), pages 249-265, April.
    14. Mushtaq Ahmad Malik & Tariq Masood, 2022. "Dynamics of Output Growth and Convergence in the Middle East and North African Countries: Heterogeneous Panel ARDL Approach," Journal of the Knowledge Economy, Springer;Portland International Center for Management of Engineering and Technology (PICMET), vol. 13(2), pages 1444-1469, June.
    15. Peter Mulder & Henri Groot, 2007. "Sectoral Energy- and Labour-Productivity Convergence," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 36(1), pages 85-112, January.
    16. Magrini, Stefano, 1999. "The evolution of income disparities among the regions of the European Union," Regional Science and Urban Economics, Elsevier, vol. 29(2), pages 257-281, March.
    17. Kenneth Button, 2011. "The Economist’s Perspective on Regional Endogenous Development," Chapters, in: Robert Stimson & Roger R. Stough & Peter Nijkamp (ed.), Endogenous Regional Development, chapter 2, Edward Elgar Publishing.
    18. Jones, C.I., 2016. "The Facts of Economic Growth," Handbook of Macroeconomics, in: J. B. Taylor & Harald Uhlig (ed.), Handbook of Macroeconomics, edition 1, volume 2, chapter 0, pages 3-69, Elsevier.
    19. Urmas Varblane & Priit Vahter, 2005. "An Analysis Of The Economic Convergence Process In The Transition Countries," University of Tartu - Faculty of Economics and Business Administration Working Paper Series 37, Faculty of Economics and Business Administration, University of Tartu (Estonia).
    20. Eftychia Tsanana & Constantinos Katrakilidis, 2014. "Do Balkan economies catch up with EU? New evidence from panel unit root analysis," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 41(4), pages 641-662, November.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wbk:wbrwps:344. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Roula I. Yazigi (email available below). General contact details of provider: https://edirc.repec.org/data/dvewbus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.