Explaining modern growth
It’s human capital….
Some figures
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Last millennium:
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1000-1820
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World population growth = 22-fold
Income per capita growth = 13-fold
World GDP growth = 300-fold
Income per capita growth = 50%
Life expectancy = 24 years
1820 onwards:
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Income per capita growth = 8-fold
Life expectancy now = 66 years
No consensus

Economic growth models have attempted to
explain the change in growth rates but no
consensus has emerged.
Regularities – modern times

Per capita output grows over time and its
growth rate does not tend to diminish

Physical capital per worker grows over time

The shares of labor and physical capital in
national income are nearly constant

The growth rate of output per worker differs
substantially across countries.
Divergence

Modern economic growth:
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Divergence in relative productivity levels and living
standards.
In the last century: income in the “less” developed countries
have fallen far behind those in “developed” countries.
Developed countries:
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Strong convergence in per capita incomes within these
countries
No obvious acceleration of overall growth rates over time.
What we see in the data
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Variability of growth rates over time
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Variability of growth rates between countries
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Convergence in richer countries
Growth rates over time
Annual Growth Rates by decade
6.0%
US
Italy
Argentina
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
1870
-1.0%
-2.0%
-3.0%
1880
1890
1900
1910
1920
1930
1940
1950
1960
1970
1980
1990
Growth between countries
GDP per capita
1990 International Geary-Khamis dollars
30000
Western Europe
Western Offshoots
Asia
Africa
World
Latin America
25000
20000
15000
10000
5000
0
1
1000
1500
1600
1700
1820
1900
1950
2000
Convergence club
Convergence: GDP per capita
- Western Europe & Western Offshoots30,000
25,000
Denmark
20,000
France
Germany
Italy
15,000
Sw itzerand
United Kingdom
Australia
10,000
Canada
United States
5,000
18
70
18
76
18
82
18
88
18
94
19
00
19
06
19
12
19
18
19
24
19
30
19
36
19
42
19
48
19
54
19
60
19
66
19
72
19
78
19
84
19
90
19
96
0
Making a miracle by Lucas
GDP per capita growth (1960-2000)
Philippines: 62%
South Korea: 1200%
GDP per capita growth, annual rate (1960-2000)
Philippines: 1.2%
South Korea: 6.6%
East Asian miracle
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Features
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Large exporters of manufactured goods of
increasing sophistication.
Highly urbanized and increasingly well-educated.
High savings rates.
Pro-business governments.
Human capital
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The main engine of growth
Main source of differences in living standards
among nations.
Physical capital plays an essential but
subsidiary role.
Expansion of the definition of HK: not only
formal education but on the job.
Lucas’ contribution
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Human capital: additional input in production

Labor force can accumulate human capital

Accumulation of human capital involves a
sacrifice of current utility
Why isn’t the whole world developed?
By Easterlin
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Spread of economic growth depended on the
diffusion of knowledge of new production
techniques.
Acquisition of knowledge closely associated with
formal schooling.
The expansion and establishment of formal
schooling has depended in large part on political
conditions and ideological influences.
Since WWII, modern education systems have been
established almost everywhere
=> spread of modern economic growth accelerated.
Slow spread of economic growth
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Why has technological change been limited
to so few nations?
Transfer of technology as an educational
process:
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Teachers’ side: readily access to new technology.
Students’ side: no native differences among
nations in the native intelligence of their
populations.
Problem: different incentives for learning.
Growth and schooling

The more schooling, the easier to master
new technological knowledge.

Significant increases in formal schooling
=> improvement in the incentive structure.
Primary enrolment per 10,000
2500
2000
USA
UK
Argentina
Mexico
Japan
1500
1000
500
0
1830
1850
1882
1900
1910
Education and growth

More advanced nations educationally
developed first.
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Cause-effect: effect of education on
economic growth or vice-versa?
The political economy of growth

Political roots to mass education
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Colonialism
Monarchical rule
Catholic Church
Conclusions and predictions
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Expansion of formal schooling:
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Commitment to mass education:
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positive shift in the incentive structure
Symptom of major shift in political power
Greater social mobility
Once developing countries complete their
demographic transition: long-term per capita
growth as high as in developed countries.
Easterlin’s contributions
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Three aspects of knowledge facilitate growth

new knowledge is complementary to existing
knowledge.

knowledge is non-rival.
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knowledge is only partially excludable.
Data
Source: World Development Indicators.
Data