Abstract
Authors of Working Papers are normally staff members of the Fund or consultants, although on occasion outside authors may collaborate with a staff member in writing a paper. The views expressed in the Working Papers or their summaries are, however, those of the authors and should not necessarily be interpreted as representing the views of the Fund. Copies of individual Working Papers and information on subscriptions to the annual series of Working Papers may be obtained from IMF Publication Services, International Monetary Fund, 700 19th Street, Washington, D.C. 20431. Telephone: (202) 623-7430 Telefax: (202) 623-7201 This compilation of summaries of Working Papers released during July-December 1994 is being issued as a part of the Working Paper series. It is designed to provide the reader with an overview of the research work performed by the staff during the period.
In examining the dynamics of economic growth, this paper first takes a closer look at the standard neoclassical growth model with constant elasticity of intertemporal substitution. It demonstrates that this model can generate either increasing growth rates and international divergence in income levels, or diminishing growth rates and international convergence. The actual outcome will depend on the initial conditions that existed before the process of economic growth began. Furthermore, the paper shows that both theoretical arguments and empirical facts point to initial conditions that are exactly the opposite of those needed to generate the standard predictions of the model.
Second, the paper examines an alternative growth model. The alternative model is a generalized version of the neoclassical growth model, with increasing rates of intertemporal substitution due to a Stone-Geary type of utility. Both micro and macro studies in recent literature find strong evidence for this type of preferences. The dynamics of economic growth generated by this growth model are consistent with endogenously determined initial conditions. Moreover, they are in accord with the historical patterns of growth rates, capital flows, savings rates, and labor supply. This growth model generates these dynamics without the need to assume heterogenous preferences, externalities, or increasing returns.
This paper has important policy implications regarding the effectiveness of different strategies of development, explaining, for example, why a strategy of development based on capital flows to developing countries cannot have long-term effects. The model presented in the paper also suggests an alternative strategy of development: assist poor countries in getting richer by helping them to increase the level of technology and of knowledge, including human capital.