GROWTH AND DEVELOPMENT

Growth and Development

Growth and Development

What is the Respective Evidence In Favour Of Neoclassical And Endogenous Growth Theory? Which is Stronger?

Neoclassical growth theory is mostly that of the equilibrium of a competitive economy through time. It stresses capital accumulation, population growth and technical progress. It distinguishes momentary equilibrium (when the capital stock, the working population and technical know-how are fixed) from long-run equilibrium (when none of these elements is given). Long-run equilibrium is not a sequence of momentary equilibria, since it embodies the rational expectations of agents. The theory has little to say about the 'animal spirits' that may determine an economy's potential growth rate, but provides a good base camp for sallies into the study of particular economies.

Jones (2005) mentions it is an economic theory that outlines how a steady economic growth rate will be accomplished with the proper amounts of the three driving forces: labor, capital and technology. The theory states that by varying the amounts of labor and capital in the production function, an equilibrium state can be accomplished. When a new technology becomes available, the labor and capital need to be adjusted to maintain growth equilibrium.

The evident trouble with the neoclassical growth model outlined above is that it fails to explain even the most basic facts of actual growth behavior. To a large extent, this failure stems directly from the model's prediction that output per person approaches a steady-state path along which it grows at a rate [Gamma] that is given exogenously (Jones, 2005). For this means that the rate of growth is determined outside the model and is independent of preferences, most aspects of the production function, and policy behavior. As a consequence, the model itself suggests either the same growth rate for all economies or, depending on one's interpretation, different values about which it has nothing to say. But in reality different nations have maintained different per capita growth rates over long periods of time - and these rates seem to be systematically related to various national features, e.g., to be higher in economies that devote large shares of their output to investment (King and Sergio, 2003).

I think that endogenous growth theory is much stronger than neoclassical growth theory because it got growth in response to the various failures of the neoclassical model, Romer, Lucas, King and Rebelo, and other scholars have developed models in which steady growth can be generated endogenously - i.e., can occur without any exogenous technical progress - at rates that may depend upon taste and technology parameters and also tax policy.

In What Circumstances Is (I) Domestic Financial Liberalisation (Ii) Financial Integration With The Rest Of The World Good For Growth?

An efficient and stable financial system is important for economic growth and poverty reduction. The financial crises that have afflicted many countries in recent times have been a costly and painful reminder of the disastrous consequences for development of weak financial markets.

The recurrence of financial crises, at both the international and national levels, and the adverse effect they have ...