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1、Endowment Structures, Industrial Dynamics, and Economic Growth Jiandong Ju?, Justin Yifu Liny, Yong Wangz? September 2, 2009 Abstract This paper develops a dynamic general equilibrium model to explore industrial evolution and economic growth in a closed developing economy. The authors show that indu
2、stries will endogenously upgrade toward the more capital-intensive ones as the capital endowment becomes more abundant. The model features a continuous inverse-V-shaped pattern of industrial evolution driven by capital accumulation: As the capital endowment reaches a certain threshold, a new industr
3、y appears, prospers, then declines and nally disappears.While the industry is declining, a more capital-intensive industry appears and booms, ad innitum. Explicit solutions are obtained to fully characterize the whole dynamics of perpetual structural change and economic growth. Implications for indu
4、strial policies are discussed. Key Words: Endowment, Industrial Dynamics, Economic Growth, Structural Change JEL Codes: L50,O14,O40 ?University of Oklahoma, Email address:jdjuou.edu;yWorld Bank,Email address: justinlinworldbank.org;zUniversity of Chicago and Hong Kong University of Science and Techn
5、ology, Email address: wangyonguchicago.edu.Ju and Wang thank the World Bank for the hospitality and nancial support. 0 Contents 1Introduction2 2Static Model8 2.1Setup. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8 2.2Market Equilibrium. . . . . . . . . . . . . . . . . . . . .
6、. . . . . .10 3Dynamic Model13 4Industrial Dynamics18 5“Mistakes“ in Product Selection and Consequences21 6Conclusion25 7Appendix30 7.1Appendix 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .30 7.2Appendix 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .31 7.3Appen
7、dix 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .34 1 The growth of GDP may be measured up in the macroeconomic treetops, but all the action is in the microeconomic undergrowth, where new limbs sprout, and dead wood is cleared away. World Bank Commission on Growth and Development
8、, 2008, pp. 2-3 1Introduction The main goal of this paper is to develop a formal model to explain the industrial dynamics along the path of economic growth in developing countries. We show how the optimal leading industries are structurally dierent at dierent development stages, depending mainly on
9、the economy s endowment structure and its evolution. Sustained economic development from a low-income status to high-income status in countries in the modern times is characterized by continuous technological innovation and industrial upgrading (See Chenery, 1960; Kuznets, 1966; Maddison, 1980; Chen
10、ery, Robinson and Syrquin, 1986; Hayami and Godo, 2005). Beneath the rapid GDP growth rates, the products or major industries in the manufacturing sector of these economies are continuously changing over time. First some labor-intensive goods such as textiles and shoes are produced, then those indus
11、tries decline and are gradually replaced by the more capital-intensive industries such as machinery and electronics, and later those industries also decline while even more capital-intensive industries arise such as cars and aircraft, so on and so forth. Such pattern as shown in Figure 1 was referre
12、d as the ying geese pattern of economic development by Akamatsu (1962) in the 1930s and further developed by Kojima (2000). Insert Figure 1 Here Surprisingly, however, this continuous waxing and waning pattern of industrial development has rarely been formalized in the growth and development literat
13、ure, although it has been well documented for a long time.1Recall that most of the earlier 1There are some exceptions: CityplaceVernon (1965) develops a product-cycle argument to explain how the location of production for a commodity might shift across countries over time. 2 growth models aim at mat
14、ching the Kaldor facts and typically assume the same aggregate production function for countries at dierent development stages, which naturally leads economists to focus on the cross-country dierences in productivity or human capital while ignoring the structural dierences in the industries for coun
15、tries at dierent development stages (see Kaldor 1961; Solow, 1965; Barro and Sala-i-Martin 2004).2Recent growth models do start to address various types of structural change, but most of them mainly explore the long-run trend shift in the compositions of aggregate agriculture, industry and service s
16、ectors without exploring the dynamics within the aggregate sectors, say, the continuous upgrading of manufacturing industries. Consequently they do not characterize the inverse-V-shaped industrial dynamics described above. For example, Lucas (2004) studies the rural-urban transformation driven by th
17、e externality of human capital.Buera and Kaboski (2009) focus on the expansion of the service sector. Some other works strive to match Kuznets facts, which state that evelopment is typically a process of a decline in agriculture, a rise in services, and a hump-shaped change in industry. In addition,
18、 that literature mainly focuses on the long-run (balanced or asymptotic) growth rate (or steady state) without explicitly and completely characterizing the whole dynamics for the structural change per se. Moreover, in those models the structural changes are driven either by the demand shift in the c
19、onsumption goods as people get richer, see Laitner (2000), Caselli and Coleman (2001), Kongsamut, Rebelo, and Xie (2001), Gollin, Parente and Rogerson (2002); or by the dierent productivity growth across dierent sectors as rst suggested by Baumol (1967), and further developed by Hansen and Prescott
20、(2002) and Ngai and Pissarides (2007). In this paper, we would like to argue that the inverse-V-shaped industrial dynamics in a developing country is driven mainly by the change in its endowment structure. The endowments are Schumpeter (1942) expatiates the idea of creative destruction based on tech
21、nology advancement instead of capital endowment improvement, which is further developed by Aghion and Howitt (1992).Those studies focused mainly on the mechanism of industrial evolution in developed countries instead of developing countries. 2Kaldor facts refer to the relative constancy of the growt
22、h rate of total output, the capital-output ratio, the real interest rate, and the share of labor income in GDP. 3 given at any given time and changeable over time. One of the key dierences between a developed and developing country is the dierence in the relative abundance of capital in their endowm
23、ent structures.The economic development process in a developing country is characterized by the continuous upgrading of its endowment structure from relatively scarce in capital and relatively abundant in labor/natural resources to relatively abundant in capital and relative scarce in labor/natural
24、resources. Recently, Lin (2003, 2009) argues that the optimal industrial structure in an economy at a given time should be consistent with the given endowment structure at that time: as the capital accumulates and becomes relatively cheaper, the industries should optimally upgrade toward the more ca
25、pital-intensive ones accordingly. Motivated by Lin s argument, our model will show that the driving force for the ying-geese pattern of industrial upgrading in the development process of a developing country is the continuous capital deepening in the endowment structure. Acemoglu and Guerrieri (2008
26、) have examined how the capital deepening has an asymmetric impact on the sectors with dierent capital intensities, but their main objective is to study how the elasticity of substitution between two sectors with dierent capital shares aects the long-run asymptotic aggregate growth rate. Moreover, t
27、heir model has two sectors and thus unable to explain the ying-geese pattern of repetitive inverse-V-shaped industrial upgrading dynamics. It s very important to understand the widely observed inverse-V-shaped industrial dynamics in the process of economic development. What type of industry should a
28、 government support at a certain stage of development?Would it be optimal for the government in a low-income country to support the development of certain industries that prevail in high-income countries? To answer these questions, it is not enough to merely recognize the long-run structural change
29、among the primary, secondary and tertiary sectors or the rural-urban transformation. In what follows, we develop a growth model featuring this inverse-V-shaped industrial dynamics along the development path.The major force driving the structural 4 change is the increase in the capital-labor ratio (o
30、r alternatively, endowment structure). As the capital becomes more abundant and hence relatively cheaper, the more capital-intensive industrial goods are produced, because the more capital-intensive industry products are more desirable for the consumers. At the same time the more labor-intensive goo
31、ds are gradually displaced. As the capital becomes even more abundant, an even more capital-intensive goods will now become more desirable to produce and consume. This generates the endless inverse-V-shaped industrial dynamics. Our model underscores the key role played by the changes in endowment st
32、ructure instead of productivity increase. This might be reasonable because our model is mainly geared toward the developing economies where the industrial upgrading relies mainly on borrowing existing technologies from developed countries (Hayami and Goto 2005), in contrast to the developed economie
33、s where huge R Schotter, 2003). However, there is a nontrivial dierence. These multiple diversication-cone models mainly consider open economies where the production structure of a country is determined by international specialization, whereas in our closed economy model the household selects endoge
34、nously which set of products to consume and produce. 6 More importantly, our dynamic model enables us to obtain explicit solutions to characterize the whole inverse-V-shaped dynamics of innite industrial upgrading, while HO models with multiple diversication cones are mostly static. To highlight the
35、 direct impact of endowment change on the industrial dynamics, we purposefully ignore the eect of international specialization according to comparative advantage and only consider a closed economy in this paper.4We suspect that our main proposition, namely, the change in endowment structures drives
36、the change in industrial structures, will be only strengthened in an open economy, as predicted by standard HO trade models.5Our model characterizes the rst-best scenario in which the industrial structures evolve optimally in a perfectly competitive and frictionless economy.In such an ideal world, n
37、o government intervenes and the market itself can identify and support the right industries at each development stage.But what if the government pursues a wrong development strategy and pushes the economy to develop some inappropriate industries? We show in this paper that such policy mistakes may s
38、ometimes cause the economy to fall into a poverty trap such that long-run growth becomes impossible without foreign help. The markets are far from perfect in the real world, so it may be desirable for the government to have an industrial policy so as to provide rms with information, coordinate rmsin
39、vestments and compensate for externalities produced by pioneer rms (Murphy, Shleifer, and Vishny, 1989; Lin 2009). However, the prerequisite 4We assume a close-economy model to obtain a general-equilibrium solution. However, a developing country is assumed to be able to borrow the technology knowhow
40、 of more capital intensive industries freely from the developed countries. The main conclusions of the model are expected to hold in an open economy model Moreover, except for plausibly an extremely small economy, the domestic market plays a major role in economic development. For example, Chenery,
41、Robinson and Syrquin (1986) nd that expansion in the domestic demand accounted for 72%-74% increase in domestic industrial output in those countries with population larger than 20 million, and that even for small and manufacturing-oriented countries with population less than 20 million, domestic dem
42、and expansion accounts for 50%-60% increase in the total industrial output.See Murphy, Shleifer and Vishy (1989) for more argument. 5CityplaceVentura (1997)showstheoreticallyhowfactor-price-equalizationdrivenby international trade can explain the rapid catching-up growths of several export-oriented
43、East Asian economies. Krugman (1979) constructs a North-South trade model to explore how the catching up process depends on whether the rich country s innovation speed exceeds the poor country s imitation speed. 7 for a successful industrial policy is to identify what type of industries should be su
44、pported at each dierent development stage. Our rst-best characterization sets a theoretical benchmark that may potentially help us think further about these issues. The paper is organized as follows. Section 2 presents the static model. The dynamic model is analyzed in Sections 3 and 4. Welfare cons
45、equences of the mistakes in industrial choices are discussed in Section 5. Section 6 concludes. Technical proofs and derivations are delegated into the Appendix. 2Static Model 2.1Setup Consider a closed developing economy with a unit mass of identical households. Each household is endowed with L uni
46、ts of labor and E units of capital. The given commodity space has innite dimensions. Let cndenote the consumption of good n = 0;1;2:. In particular, good 0 may be interpreted as household product, and good n for n ? 1 may be interpreted as “industrial”product. Let s dene the aggregate good as C = 1
47、X n=0 ?ncn; where the quality coe cient for good i is ?n.6We require cn? 0 for any n: The representative household s utility function is CRRA: U = C1? 1 1 ? ? ; where ? 2 (0;1:(1) 6This specication is mathematically isomorphic to the following alternative economic interpretation: C is the nal good w
48、hile all the cn;n = 0;1;2: are intermediate goods, so ?n should be interpreted as the “productivity“ for good n. It is not unusual in growth literature to assume perfect substitutability for the output across dierent production activities. For example, the agricutural Malthus production and the mode
49、rn Solow production are two linearly additive components for the total output in Hansen and Prescott (2002).A further discussion will be devoted to this “perfect substitutability“ assumption later. 8 All the production technologies exhibit constant returns to scale. In particular, good 0 is produced with labor only. One unit of labor produces one unit of good 0. For any industrial good n = 1;2;3;:; both labor and capital are required and the production functions are Leontief: 7 Fn(k;l) = minf k an ;lg;(2) where anis the capital in