On the Mechanics of Economic Development and Non--

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2020-01-24

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OntheMechanicsofEconomicDevelopmentandNon{DevelopmentHolgerStrulikCambridgeUniversityDepartmentofAppliedEconomicsSidgwickAvenueCambridgeCB39DE,U.K.hs244@econ.cam.ac.ukAbstractYoungadultsobservethecurrentinterestrate,wagerate,andchildmortalityanddecideaboutsavingsandthequantityandqualityoftheirchildren.Humancapitalisproducedasanexternaleectofexpenditureonchildqualityanditsproductionissubjecttodecreasingreturns.Dependingontheeconomicenvironmentindividualsdecideononeofthreedierentlifestyles.Therstonegeneratesstabilizationatalowincomelevelandhighpopulationgrowth,thesecondonegeneratesthedemographictransitionandthethirdoneperpetualgrowthofamoderneconomy.IftheswitchfromMalthusianexpansioninsizetowardsdemographictransitionisnotgeneratedendogenously,aproperlytimeddevelopmentprogramoneducationcanmanagetheescapefromthelow{incomeequilibrium.Keywords:DemographicTransition,EconomicGrowth,StagesofDevelopmentJEL:J10,J13,011,O12IwouldliketothankMartinBrunner,SeanHolly,AndreasPick,andparticipantsoftheWorkshopforDemographicMacroeconomicModelling,Rostock,June1999,forhelpfulcomments.ThisresearchwassupportedthroughaMarieCurieResearchFellowshipoftheEuropeanCommission.MyaddressfromDecember1999on:UniversityofHamburg,DepartmentofEconomics,VonMellePark5,20146Hamburg,Germany.Email:strulik@hermes1.econ.uni-hamburg.de1IntroductionInthewakeofNewGrowthTheorymodelshavebeendevelopedwhichusethedecisiontoaccumulatehumancapitalasanexplanationforlong{runeconomicgrowthaswellasanexplanationforeconomicstagnation.ThecenterpieceoftheapproachoriginatesfromBecker’s(1960)theoryonfertilityandchildquality:Atthestageofyoungadulthoodafamilyhastodecidehowmanychildrentheywouldliketohaveandhowmucheorttheywouldliketospendoneachchild.Giventheconstraintsoftheintertemporalmaximizationproblemparentsdecidetorearonlyafewchildrenandspendmucheortoneachofthemwheneconomiccircumstancesarefavorableandtohavemorechildrenwithlesseortspentoneachofthemotherwise.Undertheassumptionthatparentaleorts,whichmaybemeasuredintimeormoneyorboth,expandhumanknowledge,thedecisioninfavorofafewwelleducatedchildrencanproduceeconomicgrowthwhereasthedecisiontohavemanychildrencanproducestagnation.Thestatesofstagnationandperpetualgrowthareconnectedbyapathofdemo{economictransitiononwhichfertilitydecreasesandeconomicdevelopmenttakeso.ThemostprominentcontributionstothisapproacharebyBecker,MurphyandTamura(1990,extendedbyTamura,1996)andbyEhrlichandLui(1991).Maintainingthecenter-pieceofthetheorythepresentpapersubstitutesseveralassumptionsbyalternativeonesandthuspresentsanalternativeviewoneconomicdevelopmentandnon{development.First,Iwillsubstitutetheassumptionofperfectforesightwiththeassumptionofextrapolativeexpectations.1BarroandSala-i-Martin(1995,p.199)arguethatmultipleequilibriacanbeorderedbythepareto-criterionandthatperfectforesightmodelswhichdonotselectamongthepossibleequilibriaareincomplete.Itcould,however,bearguedthatifindividualscor-rectlycalculatethefuturetimepathofthefollowinggeneration’sfertility,theirsavingsratio,theimpliedcapitallaborratioandcorrespondingwagesandinterestrates,andthendeliber-atelydecidetoconvergetowardsanequilibriumofstagnationalthoughtheoptionoflong{rungrowthisavailablethenstagnationisperdenitionetheiroptimalsolution.ThemainreasonwhyIskiptheassumptionofperfectforesightisthefollowing:Theintroductionofextrapola-tiveexpectationsleadsustoadierentunderstandingoftheproblemofunderdevelopment.Theunderstandingwillbemoresympatheticsincetheeconomymaynowconvergetothebadequilibriumratherthantothegoodonebecausepeoplehavenotperfectlyforeseenallfutureconsequencesoftheiractions.Althoughnotomniscient,individualsoptimizetheirlifeatallstagesofeconomicdevel-opment.Ayoungadultobservesthecurrentinterestrate,whichmaybethecurrentcropyieldifheislivinginaruralarea,hisownlaborproductivitygivenbyhiswagerateandtheprobabilityinhisareaorcountrythatabornchildsurvivesuptoadulthood.Assumingthathischildrenwillbefacingjustthesameconstraintshethenoptimizeshisutility.Hencehisbehaviormaybecalledboundedorlocallyrational.Hisdecisionvariablesarehissavingsrate,thenumberofchildrenandtheexpenditureoneachchild.Thesecondnoveltyofthepaperisthatittreatshumancapitalaccumulationasanon{internalizedexternaleectofparentaldecisionmaking.Toseethatthisprovidesacomple-mentingapproachletusconsideralternativeexplanationsforwhyJasonboughtacomputerforhisdaughterPolly.FollowingBeckeretal.(1990)JasonhascalculatedPolly’sproductivityinadulthood1Atasteady{stateperfectforesightandextrapolativeexpectationscoincide.Hence,itistheadjustmentprocesswhichmaybedierent.InasimilarcontexttheassumptionofextrapolativeexpectationshasrecentlyalsobeenmadebyGalorandWeil(1998).1withandwithoutschoolingonthecomputerandthecorrespondingwageratessheisgoingtoreceive.HehasthencalculatedthealternativeimplicationofPolly’swagesonherfertilityandtheimpliedendowmentofhisgrandchildrenwithhumancapital,theirfertilitydecisionetc.Thediscountedsumofgenerationalutilitieshasexceededthesumofutilitiesgeneratedfromhavinginsteadanotherchildwithoutacomputeraswellastheutil