Economic Growth and Development: A Dynamic Dual Economy Approach

Preface
Contents
1 Overview
	1.1 Beyond the Solow Model
	1.2 Foreign Aid
	1.3 Why a Two-Sector Approach?
	1.4 The Dual Economy
	1.5 Growth Facts
	1.6 Outline
	References
Part IOne-Sector Growth Models
2 Overlapping-Generations Model of Economic Growth
	2.1 Firms, Production, and the Demand for Capital
		2.1.1 Capital and Labor Shares
	2.2 Household Saving and the Supply of Capital
		2.2.1 The Supply of Labor and Capital
		2.2.2 Household Saving
		2.2.3 Supply of Capital Per Worker
		2.2.4 The Wage Elasticity of Work and the Interest Elasticity of Saving
	2.3 Competitive Equilibrium in a Growing Economy
		2.3.1 Transition Equation Analytics
		2.3.2 From the Capital-Labor Ratio to Worker Productivity Growth
		2.3.3 Steady State Growth—Technical Progress
	2.4 Quantitative Theory
	2.5 Human Capital
	2.6 Intergenerational Transfers
		2.6.1 Altruism
		2.6.2 Explicit Household Level Solutions in Some Special Cases
		2.6.3 Warm Glow
	2.7 Related Literature
	2.8 Exercises
	Appendix
	References
3 Fiscal Policy
	3.1 Introducing the Government
		3.1.1 Government Capital and Private Production
		3.1.2 Households and Taxes
		3.1.3 Capital Market Equilibrium and Fiscal Policy
	3.2 Government Purchases
		3.2.1 Government Purchases–Consumption of Private Goods
		3.2.2 Government Purchases–Consumption via Public Employment
		3.2.3 Government Consumption Purchases
		3.2.4 Government Purchases–Investment Goods
	3.3 Public Capital and Productivity
	3.4 Pure and Impure Public Capital
	3.5 Capital Accumulation in an Open Economy
		3.5.1 Open Capital Markets and Growth in Developing Countries
	3.6 Government: Benevolent Dictator or Kleptocrat?
		3.6.1 Firms
		3.6.2 Households
		3.6.3 Capital Market Equilibrium
		3.6.4 Government Policy
		3.6.5 Steady State Equilibria and Income Gaps
		3.6.6 Severe Government Failure
	3.7 Slowing Long-Run Economic Growth
		3.7.1 Reduced Saving and Investment
		3.7.2 Slowdown in Human Capital Growth
		3.7.3 Technological Progress to the Rescue?
		3.7.4 Summary
	3.8 Convergence
	3.9 Exercises
	Appendix
	References
4 Schooling and Fertility
	4.1 The Quantity and Quality of Children
		4.1.1 Households
		4.1.2 Determinants of Fertility
		4.1.3 Determinants of Schooling ( et >overlinee)
	4.2 The Nature of the Fertility-Schooling Interaction
		4.2.1 Schooling and Fertility are Independent of Other Variables
		4.2.2 Changes in Fertility Across Time and Households
		4.2.3 The Relative Productivity of Children
	4.3 The Schooling Poverty Trap and Schooling Dynamics
	4.4 Numerical Example
		4.4.1 Tracking Fertility
	4.5 Schooling Poverty Traps: A Closer Look
		4.5.1 Escaping the Poverty Trap
	4.6 The Malthusian Era
		4.6.1 A Traditional Economy
		4.6.2 Malthusian Fertility-Income Dynamics
		4.6.3 Escaping the Malthusian Trap
	4.7 Rising Fertility in Early Development
	4.8 The Baby Boom
	4.9 One-Child Policy
	4.10 Human Capital and Inequality
	4.11 Exercises
	Appendix
	References
5 A Complete One-Sector Neoclassical Growth Model
	5.1 A Theory of Income Differences
		5.1.1 Households
		5.1.2 Firms
		5.1.3 Capital Market Equilibrium
		5.1.4 Government
		5.1.5 Steady State Equilibria
	5.2 Cross-Country Income Differences
		5.2.1 Comments
	5.3 International Financial Institutions and Foreign Aid
		5.3.1 Conditionality and Ownership
		5.3.2 Summary
	5.4 Foreign Aid and Policy Experiments
		5.4.1 Unconditional Aid—Budget Support
		5.4.2 Opening the Economy
		5.4.3 Eliminating the Poverty Trap
		5.4.4 Fiscal Policy Reform
	5.5 The Aid Cost of Reform
	5.6 Aid Failures
		5.6.1 Unconditional Aid is not Growth-Promoting
		5.6.2 Domestic Conflict Over Growth Policies
		5.6.3 Prohibitive Aid Cost
	5.7 Humanitarian Aid
	5.8 Conclusion
	5.9 Related Literature
	5.10 Exercises
	Appendix
	References
Part IITwo-Sector and Dual Economies
6 Two Sector Growth Models
	6.1 From Stagnation to Growth
	6.2 A Traditional Economy
	6.3 The Structural Transformation of a Two-Sector Economy
	6.4 Two Sectors and Two Goods
	6.5 Declining Budget Shares Spent on Food
	6.6 Conclusion
	6.7 Exercises
	References
7 Wage and Fertility Gaps in Dual Economies
	7.1 Wage and Fertility Gaps
	7.2 Perfectly Competitive Markets in the Traditional Sector
	7.3 Missing Land Markets in the Traditional Sector
	7.4 Missing Labor Markets in the Traditional Sector
	7.5 The Forces that Bind Us: Missing Markets and Labor Mobility
	7.6 Asian Growth Miracles
	7.7 Productivity Gaps: Measurement and Interpretation
	7.8 More on Labor Misallocation During Development
	7.9 Conclusion
	7.10 Exercises
	References
8 Physical Capital in Dual Economies
	8.1 Farmer-Owned Land I—Wages Gap in U.S. History
	8.2 Farmer-Owned Land II—De-Industrialization in the Ottoman Empire
	8.3 Other Theories of Trade and Growth
	8.4 Large Landowners—Growth and Endogenous Fiscal Policy
	8.5 Conclusion
	8.6 Exercises
	References
9 A Complete Dual Economy
	9.1 The Dual Economy
	9.2 Transitional Growth in the Long-Run
	9.3 Great Waves of Growth
	9.4 South Korea: A Development Success Story
	9.5 Human Capital Extensions
	9.6 Convergence Revisited
	9.7 Politics and Growth
	9.8 The Structural Transformation in Later Stages of Development
	9.9 Conclusion
	9.10 Exercises
	References
10 Urbanization
	10.1 Urban Bias
		10.1.1 Production
		10.1.2 Households
		10.1.3 Demographics
		10.1.4 Migration in Equilibrium
		10.1.5 Government
		10.1.6 Efficient Urban Bias
	10.2 Growth and Urbanization
	10.3 Extensions
	10.4 City Size and Development
	10.5 Urbanization Today: New Mechanisms and Consequences
	10.6 Hukou
	10.7 De-urbanization: Past and Present
	10.8 Conclusion
	10.9 Exercises
	References
Part IIIAdditional Topics and Summaries
11 Government Borrowing
	11.1 Fiscal Accounting with Government Debt
		11.1.1 The Fiscal Gap
		11.1.2 Debt Sustainability
	11.2 Economic Effects of Sustainable Debt
		11.2.1 Modeling Adjustments
		11.2.2 The Economic Effects of Intergenerational Redistribution
		11.2.3 Debt Policy #1
		11.2.4 Debt Policy #2
		11.2.5 Government Pensions—Fully Funded
		11.2.6 Government Pensions—Pay-As-You-Go (PAYG)
		11.2.7 Infrastructure Investment and Debt
	11.3 Political Economy of Borrowing
		11.3.1 Credit Constraints and Government Borrowing
		11.3.2 Human Capital, Inequality, and Public Debt
		11.3.3 Political Polarization
	11.4 Defaults
		11.4.1 Debt Faults in Theory
		11.4.2 Debt Defaults in Practice
	11.5 Money, Inflation, and Debt
		11.5.1 Review of Monetary Economics
		11.5.2 Seignorage in a Steady State
		11.5.3 Money Creation and Unexpected Inflation
		11.5.4 Monetary and Fiscal Policy Coordination
	11.6 Avoiding Debt Pitfalls
	11.7 Exercises
	Appendix 1: The Government Intertemporal Budget Constraint
	Appendix 2: Polarization, Debt, and Public Investment
	Appendix 3: Calvo Model of Public Debt Default
	Appendix 4: Solving for the Price Level with a Cagan Money Demand Function
	References
12 Growth Slowdown
	12.1 Documenting Slowdowns
	12.2 Beyond Diminshing Returns
		12.2.1 Investment Rates Over Development
		12.2.2 Efficiency Gains and Development
		12.2.3 Efficiency of Investment
	12.3 Growth Slowdowns and Rising Inequality—Close Cousins
	12.4 Higher Growth for Longer
		12.4.1 Why Maintaining Growth and Reducing Earnings Inequality Matters
		12.4.2 Addressing Growth and Inequality with Human Capital Policy Reforms
	12.5 The Service Sector and Growth
	12.6 AI, Growth, and Inequality
	12.7 Growth Slowdowns in Developing Countries
	References
13 Conclusion
	13.1 The Onset of Growth
	13.2 The Nature of Modern Growth
	13.3 Policy Implications
	13.4 Ideas for Future Research
Technical Appendix
	Two Useful Functions
	Optimization
	Nonnegativity Constraints and Corner Solutions
	Total Differentials and Linear Approximations
	L’Hospital’s Rule
	Quadratic Equations
	Infinite Series
Index