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Endogenous Growth Theory - Essay Example

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The article by Professor Romer looks into the controversy dealing with endogenous growth versus exogenous growth in the context of developing versus developed nations. The endogenous growth model approach is altogether opposed to the neo-classical model of growth. …
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Endogenous Growth Theory

Download file to see previous pages... The paper focuses on endogenous growth and utilises two major approaches to deal with the issue. These are namely the convergence controversy approach and the state of market competition (Romer). Romer’s contention is to fill out gaps in existing endogenous theory to make it more accountable for growth patterns in developing and developed countries.
Historically the neo-classical model has attributed economic growth to technology. Another basic assumption is that technology is freely available to all countries in the world since a perfect competition market exists (Rebelo). Romer uses the Cobb-Douglas production and cross-country regression models in order to highlight that endogenous factors can better explain such growth than exogenous models. He attributes growth to investments in human capital, innovation and knowledge whose spill over effects tend to augment the economy as a whole . The Philippines has been compared to the United States in order to bring out the savings rates that would be required by both nations to possess an equal level of economic growth. Romer argues that if the Philippines and the United States possessed the same level of technology, then their differing growth rates could be attributed to differences in labour productivity alone. It has been estimated that the share of investment in the United States is at least twice as large as it would have to be in the Philippines for a similar rate of growth. The lack of convergence between the growth rates for poorer countries and the more rich countries tends to indicate that the differences may be attributed to more than just technology. The rate of and amount of investment tends to differ between the North and the South. Using the neo-classical model, it would be hard to explain why the model attributes low investment in the North while that is not the case. The Summer-Heston model has been used in this regard to look into investments into human resources and capital to bring out the differences (Barro and Sala-i-Martin). Romer concludes this section by delineating that the only difference between developing and developed nations may not just be the availability of data that is blamed by neo-classical economists for a loosely fitting model. In the second section, Romer argues that aggregate level models had been missing in order to explain growth throughout the fifties, sixties and the seventies. He also expounds that certain assumptions have always been assumed as such but have not been explored to see their effects on growth models. It is generally assumed that there are many firms in an economy but it may be that these are concentrated to favour a monopolistic market structure. Scientific discoveries are not accessible to all entities operating in an economy since information is required to turn the scientific discovery into useful output. The shortage of information from one national economy to another (such as through trade secretes) signifies that scientific discoveries are not available to all and sundry. Another issue is the replication of physical activities which is not possible since all involved factors cannot be scaled up similarly all the time to receive an equally scaled up output. Technological developments are taken as having derived from factors external to the control of individuals. However, the application of human resources and attention is typically how technological progress is derived. Hence, assuming that technological progress is an exogenous factor is highly misleading (Sachs and Warner). Additionally, economic entities with the power to create new information and knowledge often possess the power to manipulate the information and knowledge into monopolistic systems. This would indicate that the owner of the information a ...Download file to see next pagesRead More
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