ESSAYS IN CROSS-COUNTRY ECONOMIC GROWTH BY HAMID-REZA BARADARAN-SHORAKA A DISSERTATION PRESENTED TO THE GRADUATE SCHOOL OF THE UNIVERSITY OF FLORIDA IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF DOCTOR OF PHILOSOPHY UNIVERSITY OF FLORIDA 1992 ACKNOWLEDGEMENTS This dissertation could not have been successfully completed without the support and guidance of Professor James D. Adams. I wish to thank him for his useful comments, insights and faith in me which kept me on track whenever I was faltering. I would also like to thank Professors Mark Rush and Prakash Loungani for their invaluable comments and suggestions. I am grateful also to Professors David Denslow and James Seale for serving on my dissertation committee and for their help. I am thankful also to Professors Lawrence Kenny and William Bomberger for their comments. I also appreciate the support of the Division of Sponsored Research of the University of Florida in my final year of study. Finally, I could not have endured the Ph.D. program without continual support frommy family. Without the patience and understanding of my wife Mansoureh, I could not have either started or successfully concludedmy doctorate. I thank my own and my wife's parents for all the support they have given me over the years. I also thank my brothers-in-law Ali- Reza, Mohammad-Reza, and All for their encouragement throughout my education. Last, the presence of my lovely sons Majid, Mohammad, andMassoud kept me going during these years. ii ! TABLE OF CONTENTS ACKNOWLEDGEMENTS ii ABSTRACT iv CHAPTERS 1 INTRODUCTION x 2 OIL PRICE CHANGES AND GNP FLUCTUATIONS 7 Introduction Trends in Macro Activities !!!!!!!!! 107 Consumption of Oil by Different Sectors: OECD Evidence 11 Model and Methodology 12 ECmopnicrliucsailonResults !!! 2107 3 HUMAN CAPITAL AND GOVERNMENT POLICIES 30 EDImantptairroidacunadcltiEoRxnepseuclttesd Results .!!..!. 333740 CIonntcelrupsrieotnation of the Findings 49 Notes 52 61 4 TECHNOLOGY CREATION AND TECHNOLOGY TRANSFER 63 Introduction NCEIDoomnetnptseicecsrlrriupicsrpaietlotinaotnRieosonufltotsfhethDeataFindings .'!..""!!!.!'*.."'*..'".."*...*.!'..*".*!!! 8876645383 [ g6 5 SUMMARY AND CONCLUSIONS 97 APPENDICES AB SDDCEEHFFOIIONNLIIITTNIIOGONNSSINAONFCDHAVPMATEREITARHBOLD3ESOFINCALCCHUALPATTEIRON2 O.F MEAN'YEARS'OTF.110042 REFERENCES BIOGRAPHICAL SKETCH ....'!.*!.'!!.'!.'.".*.".'.".'.*.'.*[]'].'].'].']['///JJ® iii Abstract of Dissertation Presented to the Graduate School of the University of Florida in Partial Fulfillment of the Requirements for the Degree of Doctor of Philosophy ESSAYS IN CROSS-COUNTRY ECONOMIC GROWTH By Hamid-Reza Baradaran-Shoraka August 1992 Chairman: Professor James D. Adams Major Department: Economics This dissertation consists of three essays that explore a variety of factors affecting economic growth across countries. The first essay deals with fluctuations in oil prices. These have trend effect as well as cyclical effects on growth. Data for ten OECD countries shows that the relative share of a country's transportation sector has a major impact on that nation's petroleum dependency. More important, I find that the transport sector's oil price elasticity is a key determinant of growth. The second essayanalyzes why countries growat different rates from an investment perspective. From my empirical work it appears that nations with higher initial incomes grow more slowlythan countries with initially lower incomes. This might iv seem to imply income convergence. However, I find that the initial stock of human capital and its subsequent growth are associated with faster growth which somewhat attenuates convergence. As in recent growth models, I find that government consumption, political instability, and higher rates of population growth are associated with slower growth. The third essay studies technology's contribution to growth. In advanced economies, consistent with their comparative advantage in R&D, domestic technology proxied by resident patents strongly influences growth. However, my results suggest that imitation by less advanced countries of technologies developed in thosemore advanced is the principal engine of growth in these nations. I also find that in advanced countries, inventions per scientist and engineer raise the rates of growth which is consistent with the literature on invention exhaustion. Finally, I find that the potential for enhanced division of labor through interrelated growth of advanced and follower countries, is associated with higher growth in the advanced countries, but that technology acquisition in the newly industrializing countries is associated with deceleration of growth in the advanced countries. CHAPTER 1 INTRODUCTION The substance of this dissertation is contained in three independent but related essays comprising chapters 2, 3, and 4. All deal different factors impinging on economic growth across countries. This dissertation considers one determinant of cyclicality of growth, oil price shocks, and two key determinants of long-term growth: the accumulation of capital and improvements in technology. Capital here broadly encompassesphysical capital (machines andbuildings), aswell as human capital (improvements in the guality of labor force due to education and training). We shall see that the accumulation of capital is an important element of growth. We shall also find that technological advance plays a crucial role in sustaining growth in the long run. In addition, the dissertation studies the impact of oil price shocks on growth. The data that I use on growth rates of real per capita income in 114 countries for the period I960 to 1985 is based on Summers and Heston (1988). As a result of their work, two facts about world economic growth have emerged. First, growth in per capita income has occurred continually in many countries over long periods of time. Second, this performance 2 has varied enormously across countries and over time. Also, Maddison (1982) looked over still longerperiods and finds the same sustained growth. How do the above facts, sustained positive growth rates that vary systematically from country to country, bear on theorists' attempts to explain the process of economic growth? Classical writers likeMill andMarx speculated that standards of living could not rise indefinitely unless advances in technology helped augment the productivity of resources. This proposition received support from neoclassical growth theorists, who built models based solely on capital accumulation. In the latter models production of output was characterized by diminishing returns to capital and a steady state ratio of capital per head. This suggests that net investment per capita goes to zero in the absence of technological progress. But the fact that investment has continued for more than two centuries since the industrial revolution implies that technical change has played a crucial role in the growth process. In the more recent literature, Paul Romer (1986, 1990) stresses the role played by the accumulation of disembodied knowledge, as opposed to human capital. In his 1986 paper, he proposes a model in which growth takes place because the production function is subject to increasing returns to scale through knowledge spillovers. In his later paper, Romer explicitly allows for a permanent effect on the rate of growth 3 stemming from the stock of initial human capital. His model suggests an empirical "fanning out" of incomes among countries: very low levels of human capital result in very slow growth in underdeveloped economies; very high levels of human capital cause very rapid growth in developed economies. The same reasoning suggests that pooling of human capital would raise world growth rates. Lucas (1988) takes a different approach to the role of human capital in growthmodels. He postulates both an internal and external effect of human capital. The internal effect is the impact of an individual's human capital on his private marginal product. The external effect, which is identified withthe country's average level of human capital, contributes to the productivity of all persons and factors of production. This model implies strictly parallel growth paths: economies that are initially poor will remain relatively poor, though their long-run rate of income growth will be the same as that of initially and permanently wealthier economies. Both Romer's (1990) fanning out results and Lucas's (1988) parallel growth path results ignore technology transfer, which can result in convergence, if follower countries are "activist" enough in their education and technology policies. Evenson (1984), basing his analysis on data on patented inventions from many countries, reaches two principal conclusions: first, the data show comparative advantage 4 patterns in invention similar to patterns observed in production. The production of pioneering invention is concentrated in certain firms located in countries with the best laboratories. Large parts of industry in most countries import inventions and concentrate onadaptive invention rather than investing heavily in R&D. Second, the data show that inventions per scientist and engineer have declined from the late 1960s to 1970s in almost all of the 50 countries for which data are available, which may suggest diminishing returns to invention in the present era. Grossman and Helpman (1991) make much of the fact that countries vary greatly in their growth performances. They point out that a reading of recent economic history suggests two important trends. First, technological innovations are ever more important contributors to growth. Second, nations arebecoming increasingly open and interdependent. The two are not unrelated. Grossman and Helpman suggest that rapid communicationand closecontacts among innovators in different countries facilitate the process of invention and the spread of new ideas. Finally, Krugman (1979) in his famous model of product cycle divided countries into innovating North and noninnovatingSouth. Innovation consists of thedevelopment of new products, which can be produced at first only in the North, but eventually the technology of production is transferred to the South. This technological lag gives rise to . . 5 trade, with the North exporting newproducts and importing old products The dissertation is built on these themes. The first essay inthedissertation focuses on government policy towards the transportation sector. I study the interaction between oil price changes and the share of petroleum-based transportation in 10 OECD countries, in order to determine if this has a significant effect on the macroeconomic impacts of oil price shocks The second essay sets out to test the effects of human capital on growth. I consider how initial levels of human capital, growth of human capital, government consumption, investment, political instability, and public infrastructure influence economic growth. I do so using a sample of 50 countries during the guarter century from 1960 to 1985. I have assembled a rich data set that includes relevant variables that have not previously been put to use. The third essay uses patent data to study relative the contribution oftechnology creationandtechnology transferto growth. Growth is fueled by both innovation and imitation. Imitation by newly industrialized countries (NICs) of technologies developed in the advanced countries turns out to be the main source of growth. A related point is that primary research in advanced countries can be imported by less developed countries (LDCs), thereby permitting adaptive invention, ratherthan expensive original research. Toexamine