JEL O57 1. INTRODUCTION

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1 Dfferences n Long Run Growth Path Between Latn Amercan and Developed Countres: Emprcal Evdences Ronaldo A. Arraes (CAEN/UFC) Vladmr Kühl Teles (UnB) Abstract Comparng the long run growth paths between regons of Latn Amercan countres and developed countres s the man focus of ths paper. Exogenous and endogenous growth models provde the theoretcal background. Smulatons of growth rates for developng and selected developed countres are made based upon explanatory varables, usng the US as the benchmark. Data for the perod were appled to sutable econometrc models polynomal dstrbuted lag, smultaneous equatons where estmates showed wth confdence and accuracy that: 1) In all economes, smulatons have proved that human captal and, consequently, technologcal mprovement n the economy as an engne of growth are the responsble factors for generatng ncreasng returns to scale to accelerate the rate of growth; 2) Brazlan growth s the most senstve to technologcal change, compared to other regons of Latn Amercan Countres; 3) There s no unque growth polcy for the developng economes, but mprovement of productvty s common to all of them although at dfferent rates; 4) Poltcal and nsttutonal factors seem to play an mportant role to explan the growth gap between developed and developng countres. Key words: Economc Growth, Latn Amercan and Developed Countres, Forecastng. JEL O57 1. INTRODUCTION Economc growth has been one of the man concerns among economsts. There are two major conceptual approaches to explan the process of sustanable growth. The frst s the exogenous growth approach, based on Ramsey (1928) refned by Cass (1965) and Koopmans (1965) - and Solow (1956), and the second s the endogenous growth approach, based prmarly on Romer (1986) and, n another dmenson, Lucas (1988). Early studes bult models accountng for growth where product, captal and consumpton levels acheve a statonary state at exogenous rates of populaton growth and techncal progress. The endogenous approach suggests that the contrbuton of captal to growth s undervalued n the tradtonal model of Solow, snce there exst external factors n the use of captal. The basc dea s that captal nvestments, ether n machnes or labor, creates postve externaltes, so that, nvestment ncreases not only the productve capacty of the nvestng frm and ts workers, but also the productve capacty of other frms and workers. Ths s the startng pont for the foundaton of the endogenous growth theory on ncreasng returns. Unlke the tradtonal theory, human captal, technology, and government spendng help explan long run economc growth. The endogenous growth models are currently a theoretcal reference for the formulaton of macroeconomc polces, and they have been used worldwde by polcy makers n the socal, economc and poltcal realms to promote growth. As much research ponts out, government expendtures brng postve externaltes n the prvate nvestments. Endogenous growth models

2 2 vew government expendtures not as generatng growth through a Keynesan demand shft, rather, they are used to stmulate supply. In effect, a study that compares the endogenous versus exogenous growth models, demonstratng ther vabltes and possble lmtatons, may be consdered of extreme relevance for the formaton of strateges of sustanable economc growth, whle provdng to polcy makers theoretcal and emprcal underpnnngs to the comprehenson of new polces that ad to gude a optmal choce of the publc resources. Ths paper focuses on nvestgatng the formulatons of endogenous and exogenous growth models, startng wth an emprcal test n order to compare them. The factors that cause growth n Latn Amercan countres wll be compared to those of the most developed countres. Based upon ths theoretcal framework, emprcal tests to forecast and smulate the per capta product growth process n the analyzed economes wll be carred out. 2. THEORETICAL BACKGROUND The neoclasscal growth paradgm was accepted wdely n economc thought untl the mdeghtes. Snce then the feld has become a research area wth extreme actvty both n theoretcal and emprcal grounds, where several conceptual methodologcal alternatves have been mplemented by new models of economc growth. In order to apprecate the recent theoretcal developments and to understand the assocated controverses, t s necessary to say a few words on the foundatons of ths evoluton. Ths secton brngs a bref revew of the hypotheses and basc conclusons of the tradtonal neoclasscal models. These are then compared to the nnovatons n the endogenous growth models, and the ratonale for scale effects n growth s establshed Endogenous versus Exogenous Growth Models Tradtonal neoclasscal theoretcal models emphasze captal accumulaton as the engne of economc growth. Based upon the works of Solow (1956) and Swan (1956), ther theores use a producton functon that ams to satsfy the condton of flexble proportons n the use of the nputs to ensure that the prvate savng s equalzed to the ex-post nvestment, thus elmnatng Keynesan unemployment. Consequently, a stable equlbrum s attaned n these models. The specfcaton of the producton functon of the exogenous models n the smplest case s gven by, (1) Y = F ( K, L) where Y s product, K s stock of physcal captal, and L s labor. The fundamental assumptons of the model are constant returns to scale and decreasng returns to all nputs. Snce nvestment equals savng ex-post, and savng s a constant fracton of product, the stock of physcal captal wll be, (2) K = I δ K = s F( K, L) δ K

3 3 where δ s the deprecaton rate of the stock of physcal captal. If all varables are measured n per capta values, then, after a slght rearrangement, equaton (2) becomes: (3) k = s f ( k) ( n + δ ) k where k s the stock of per capta captal, f ( k) s the ntensve form of (1) and n s the populaton growth rate. The model summarzes that at the steady state k = 0, therefore, per capta product, y, wll be constant as a consequence of ( k) y = f. Besdes, the per capta varables, k and y, are constants because K and Y ncrease at the same rate as populaton growth. Snce techncal progress s gven as exogenous, the key varables of the model, K and Y, ncrease at a rate x + n, where x s the growth of techncal progress. Thus, as a practcal result, the tradtonal neoclasscal model concludes that the margnal propensty to save only determnes the captal-labor rato and the speed of adjustment of the economy toward the steady state, whch s determned exogenously by the rates of technologcal progress and populaton growth. By consderng the tradtonal formulatons of Solow s model not suffcently robust, Romer (1986), and n a dfferent approach Lucas (1988), used an dea orgnally developed by Arrow (1962) and Sheshnsk (1967), to buld models of economc growth, and to ntroduce an endogenety proposton to acheve the long run steady state. The prncpal argument used by them s that the stock of physcal captal must be nterpreted as an ndex of accumulated knowledge and an experence of the type learnng by dong, so as to generate externaltes whch promote ncreasng returns or spllovers. Romer s startng pont s the formulaton of a homogeneous concave producton functon gven by, (4) Y = F ( c, C, x ) where Y and c are product and level of knowledge respectvely of frm, C s the aggregated stock of knowledge of the economy, and x s a vector of all other nputs, such as physcal captal and labor. It s mplct n ths functon that an ncrease n the stock of knowledge of the frm generates a postve effect on aggregate knowledge, whch, n ts turn, rases the product of other frms, and therefore the product of the economy grows. Thus, the essence of the model hypothess reles on the exstence of ncreasng returns to scale n the producton functon and ncreasng margnal returns of knowledge. Romer (1986) demonstrates mathematcally the occurrence of a fxed pont that supports a stuaton of compettve equlbrum under those hypotheses. He develops a smple relatonshp of

4 dependence of the product level on the exstent relatonshp between knowledge and prce of the knowledge, where the compettve equlbrum dffers from the optmum stuaton, whch ndcates the need of government nterventon so that aggregated knowledge matches wth the optmal socal level. A consequence of extreme relevance that stems from ths s the possblty of occurrence of dfferent levels of growth among dfferent economes n the long run Scale Effects versus Technologcal Adopton Models Dfferent theoretcal nterpretatons of models of endogenous growth have dvergent polcy mplcatons. The debate on whch of these nterpretatons provdes the best alternatve s crucal to the determnaton of the state of the art of economc growth theory. Ths secton provdes a bref dscusson of the man ponts of two basc theoretcal nterpretatons: models wth scale effects and models wth technology adopton. Models wth scale effects started wth Arrow (1962), where the engne of growth appears n the form of the process of learnng by dong n the producton of captal goods. In ths process, learnng s purely external to the productve sphere and productvty depends on the aggregate level of captal goods, where nventon costs or costs of technologcal adopton are not consdered. In that context, an nvestment promotes external effects besdes ts ntal purpose. The externalty s not approprated by any ndvdual agent; rather t elevates substantally the productve capacty of the economy and contrbutes to economes of scale. Snce then, several authors, lke Romer (1990), Jones (1995a), Aghon and Howtt (1992, 1995) and Grossman and Helpman (1991), have formulated such models by nsertng the research sector (R&D), n such a way to consder nventon cost. So, a component to accelerate the economc growth became represented by the number of researchers and new research, nstead of the populaton t self. At the same tme, cost of technologcal adopton remans null. In the formulatons of models that adopt R&D, the essental dea on the scale effects can be establshed n the followng equatons that descrbe a producton functon and the knowledge generaton (accumulaton of deas), that s, 1 α (5) ( ) Y = A P L (6) P = δ LP where, Y s product; K s captal; P s knowledge; Y α K LY s manpower used n producton; manpower used n the development of research; δ s an average rate of knowledge producton. 4 LP s The equaton (6) characterzes R&D n models of endogenous growth. There are several hypotheses on the average rate of arsng new deas (δ ) related to the scale effects of knowledge, φ whose generc specfcaton s gven by δ = δ P, where postve, negatve or null values denote that the rate of nnovaton of deas presents ncreasng, decreasng or null external returns,

5 respectvely, wth the knowledge stock. Furthermore, due to the duplcaton and redundancy n research generaton, manpower n research should be realstcally expressed by L P λ, 0 < λ 1, nstead of smply equaton of R&D s derved: (7) L P. Thus, ncorporatng those changes n the equaton (6), the fundamental P = δ L g λ P P φ Ths equaton dffers from the models orgnally formulated due to the arbtrarly n takng φ = 1. Romer (1990), for example, argues that the exstence of ncreasng ( φ > 1) or decreasng returns ( φ < 1) n R&D s to some extent a phlosophcal matter. In vew of that, t s chosen to follow the plausble dea of Jones (1995b), who mposed the restrcton φ < 1, to allow for a balanced growth path. Along ths trajectory the growth rate of knowledge s, by defnton, constant, snce the acceptable hypothess that L P λ and 1 φ P grow at the same rate, as can be seen from equaton (7), or from equaton (8) below, whch s derved straghtforwardly. (8) P L = δ P P λ P 1 φ By dfferentatng both sdes of equaton (8), and usng the hypothess above mentoned, t s deduced that the growth rate of the balanced trajectory of the knowledge s gven by, (9) where n p λ n = 1 φ s the growth rate of the labor force. It s worth notng, that the balanced growth rate s very consstent, snce t grows wth the labor force and wth the ncrease of the scale returns n R&D. That result clearly addresses scale effects n agreement wth the dynamcs of the research actvty. However, t remans a pertnent queston on how large would be the scale effect n the model based on research. Takng ths queston nto consderaton several studes lke the one of Radner and Van Zandt (1992), mnmze the scale effects by assumng the relatve effects of the costs of adoptng new technologes. In ths reasonng t s found the models of technology adopton due manly to Stokey (1991), Lucas (1993), Parente (1994), and Young (1993), to explan the dfference n the rates of productvty growth among areas based on the level of worker's knowledge. In the mcroeconomc model of Parente (1994), expanded from Lucas (1993), let b be the ndex of average technologcal grade and h ( t) be the level of technologcal capacty n the nterval (0,1). Then t s mpled that the knowledge level s s ( t) s[ b ( t), h ( t) ] b () () () ( t) =. The product of the frm s measured by t h t. If a t s the sze of the technologcal nnovaton of the frm, then, 5

6 (10) b ( t + dt) = a ( t) b( t) If a () t = 1 of human captal, whereas, f, there are no nnovaton, even so the worker mantans tranng and a certan level a () t > 1 there s a loss of tranng from the technologcal upgrade of the frm. The varatons n technologcal capacty can be summarzed by, (11) h ( t + dt) h = h () t + { λ [1 h]} dt f a( t) () t [ κ + δ a () t ] f a () t where λ > 0 represents the speed of learnng a gven technologcal grade b, κ > 0 and δ are the fxed cost of ncorporng technologcal progress and the varable cost n the dmenson of technologcal progress, respectvely. So the relatonshp between the next nnovaton and the human captal requred for such nnovaton s clear. The basc concluson of such a model s that the choce for technologcal adopton can produce sgnfcant growth rates. The ncluson of technology adopton cost s mportant to explan dfferent growth levels reached by natons. Whle the models wth scale effects mply a gven productvty convergence whle assumng that technology adopton cost s equal to zero, the models of technologcal adopton nsert a crucal pont by consderng that the costs of technologcal adopton are dfferent among economes at dfferent perods of tme. Therefore, there s no unque recpe for economc growth, nsofar as dfferent countres, or even a gven country at dfferent perods of tme, have dstnct technology adopton costs and dfferent needs for the decrease of such costs. It s worthwhle to pont out that most evdence favors the models wth technology adopton. Jovanovc (1995), for example, states that the expenses n technology adopton n the Unted States are on the order of 20 to 30 tmes hgher than the expenses n nventon, whle, n the developng countres that proporton tends to assume much hgher values. Therefore, t seems clear that dfferences n nsttutonal organzaton, educaton, nfrastructure and fnancal markets, for nstance, alter the costs of technologcal adopton drectly, and so play an essental role for the formaton of dfferences n = 1 > 1 productvty levels among natons, and consequently, economc growth. Lucas (1993) dentfes the accumulaton of human captal as the man engne for economc growth, snce t tends to decrease the tranng cost consderably for a new technology. He reaches a parallel result to hs own orgnal model (1988), although n a dfferent framework, by relatng human captal and growth n a two way drecton relatonshp between human and physcal captal, what s denomnated the mbalance effect by Barro and Sala--Martn (1995). Benhabb and Spegel (1994) and Lau et al. (1993), for nstance, demonstrate emprcally the postve relatonshp between human captal and growth for countres and regons, respectvely. Endogenous growth calls for dfferent approaches to modelng. Barro (1990) notes the nfluence that dfferent fscal polces can promote n the long run growth, where government sze 6

7 7 can affect growth n a postve or negatve way, dependng bascally on the magntude of the tax burden and the effcency of the publc expendtures. Aschauer (1989) analyses several types of publc expenses to fnd those that promote postve effects on ncome, fndng that an ncrease n expendture on nfrastructure decreases producton costs causng postve externaltes on the productvty and, consequently on the output level. Such a relatonshp s consderably strengthened by the emprcal evdence gven by Munnel (1992), Easterly and Rebelo (1993) and Hall and Jones (1998), among others. Regardng the mportance of the degree of economc openness on the level of economc growth, Rvera-Batz and Romer (1991), Sachs and Warner (1995), Grossman and Helpman (1990) and Edwards (1993) affrm the relevance of such a connecton, argung that moblty of deas, the specalzaton through comparatve advantage n producton, and technologcal catch-up are the crucal factors. A concludng remark ponts to the elevaton of the technologcal level n those economes wth larger degree of economc openness and, consequently, hgher rates of economc growth. Another mportant source of nfluence n the endogenety of growth s provded by Alesna and Rodrk (1994), Dennger and Squre (1995), Benabou (1996), and Barro (1999) where they relate the path of economc growth due to alteratons n the level of dstrbuton of ncome. A roughly equal dstrbuton of ncome, together wth a democratc system where a natural poltcal competton prevals, would tend to favor the majorty by taxng captal, resultng n a deceleraton of economc growth. In agreement wth the Kuznets curve, that effect would tend to not happen n wealther economes even f the ncome s not very evenly dstrbuted. The mportance of a developed fnancal sector s also treated by Greenwood and Jovanovc (1990), Kng and Levne (1993) and Levne (1997) as a stmulatng factor for economc growth, followng a tradtonal Schumpeteran analyss, as a developed fnancal market broadens the exstent technologcal base. Four basc dfferences between the endogenous and exogenous growth models, based upon mcro foundatons, can be summarzed:. Tradtonal models emphasze physcal captal as the engne of economc growth, whle the endogenous models emphasze technologcal change and the stock of human captal as the man factors for growth, both beng taken as measurement of aggregate knowledge;. Exogenous growth models, unlke the endogenous models, do not take nto consderaton the possblty of any alteraton n the cost of the process of knowledge dffuson as the technologcal parameters of the economy are changed;

8 8. Endogenous growth models allow a better understandng of the dynamcs of the effects of economc plannng on dfferent growth rates, as long as nternatonal trade, fscal polcy, educatonal formaton, ncome dstrbuton, stock of nfrastructure, nsttutonal qualty, and ncentves to technologcal progress, consttute externaltes generated to the productve process, that s, spllovers; v. Endogenous growth models allow the possblty of theoretcal dvergence n the levels of ncome for dfferent economes, nsofar as models such as Lucas (1988) conclude that the normal tendency s the perpetuaton of dfferences of growth rates among natons, resultng n a contnued gap between developed and developng economes. Based on ths theoretcal dscusson, three questons wll be approached by the emprcal analyss: To what extent do scale effects and costs of technologcal adopton explan the dfference n ncome among countres or regons? Does the economc growth of developng economes present the same dependence on the factors consdered for the developed economes? What polces should be adopted to am an ncrease n the economc growth rate of developng countres Latn Amercan countres for example? 3. METHODOLOGY The academc world has recently exhbted a return of nterest to models of economc growth. Ths renewed nterest has accompaned the spread of endogenous growth models, whch are dstngushed from tradtonal models, such as those of Ramsey and Solow, fundamentally by the fact that techncal progress s determned endogenously, rather than beng an exogenous factor. Whle n tradtonal models the exstng condtons and stablty of growth trajectores are only certan for gven ndvdual preferences and technology, the endogenous growth models theory reles on the fact that economc externaltes promote the dynamcs of the process of economc growth. In other words, models of endogenous growth formulate that varatons n educaton, fscal polcy and market openness, dstrbuton of ncome, and development of the fnancal sector provoke permanent effects on the per capta product. Snce models of endogenous growth predct that the behavor of externaltes n the economy leads to contnuous effects on per capta product, whle models of exogenous growth predct that such varables are not capable of permanently nfluencng per capta product, a test of these two classes of models can be performed by examnng the permanent effects of externaltes on growth.

9 9 The hypothess test wll be then for the exstence of feedback from temporary changes n the dentfed varables and level of long-term growth. To do so, the use of lagged varables s requred to measure the dynamc effect on the per capta product. If t s assumed that the effect of a change s perpetual, although decreasng n the future, a nfnte lag model s called for to test such a trend. The model, n a smple form, s gven by, (12) Y = t β X = 0 t + ε t where Y s per capta product; X s an explanatory varable. There are several assumptons that can be used to reduce the nfnte parameters n equaton (12) to a fnte number, where the most common are the models of adaptve expectaton or partal adjustment, such that the effect of the varable decreases geometrcally wth the followng basc hypothess, β = α λ, 0 < λ < 1. By substtutng ths hypothess nto (12), and usng the geometrc nfnte summaton, t comes to 1, (13) Yt = α + β X t + γ t + λ Yt 1 + ε t ε t = ε t λ ε t 1 On the other hand, there are other polynomal lag models when the effect of varaton of one varable on the dependent varable occurs only temporally n a fnte horzon of tme. In ths case, econometrc theory approaches several specfcatons and hypotheses, from where t s chosen a polynomal dstrbuted lag model specfed by, (14) Yt = δ + φ w X t + ε t n = 1 and consderng Almon s polynomal equaton, (15) w = c k j= 0 j j Where Y s the per capta product, X s the explanatory varable, n s the maxmum lag k s the polynomal degree. Substtutng (15) nto (14) yelds, j (16) Y = δ + ( φ c ) X + ε t n k = 1 j= 0 j t * t * 1 The ntroducton of varable t n model (13) s justfed to capture any exogenous movements on the per capta product growth.

10 Model (16) s then estmated by OLS for each one of the explanatory varable n each consdered regon, and the estmates of the parameters n model (14) are obtaned. If 10 of model (14) s statstcally sgnfcant, then t can be concluded that the correspondng explanatory varable produces a cumulatve effect on per capta product, supportng thereby the endogenous growth model. It s worth notng that there must be a dstnct dynamc effect of each varable on per capta product n each regon due to partcular characterstc of several factors and the growth rate among the varables. The explanatory varables chosen to meet the theoretcal foundaton are: technologcal progress (A), per capta physcal captal (K), sze of government (G), economc openness (OPEN), fnancal market (F), transportaton nfrastructure (TRANSP), electrcty/communcaton nfrastructure (ELETEL), ncome nequalty (GINI). n φ w = 1 The second model ams to evaluate the mpacts of the explanatory varables on the economc growth of each country/regon n panel data, so that, gven the endogenous characterstcs of the varables per capta product growth rate, physcal captal, human captal (H) and technology, the structural smultaneous equatons model s bult as, (17) GDPC = f A = f K = f H = f p ( A, K, H,G) ( K,G,OPEN, F) ( TRANSP, ELETEL, GINI, H) ( K, TRANSP, GINI) a k h The key-endogenous varable of that model, GDPC, follows the theoretcal arguments of Barro (1990). The technologcal component, assumng endogenous behavor n the model, s determned by the levels of economc openness, the development of the fnancal sector, as well as the stock of physcal captal and the government's sze, snce t s expected that more captal ntensve economes have larger technologcal levels, and a great deal of technologcal research s dependent on government nfluence. The stock of physcal captal vares wth the nfrastructure stock, dstrbuton of ncome and human captal, whose relatonshp s referred to the mbalance effect, whch also contans an mportant element n the fourth equaton, where human captal s dependent on the stock of physcal captal, the dstrbuton of ncome and transportaton nfrastructure, whle the latter s nserted here as a proxy for the conglomeraton condtons gven by Lucas (1999) and Henderson (2000). The methodology of panel data was used because of the heterogenety of the rates of economc growth among countres. Several works have converged to a methodologcal consent about the use of ths procedure, among whch stand out Benhabb and Spegel (1997), Canova and Marcet (1995), Casell et. al. (1996), Evans (1998), Islam (1995), Lee et. al. (1997) and Nerlove (1996). Durlauf and Quah (1998, p.47) pont out that the estmates n panel data reduce the

11 11 ndvdual effects that represent obstacles to a clearer statstcal nterpretaton. It can also be argued that any bas contaned n the regresson tends to be reduced as the tme seres ncreases. Nevertheless, regressons n panel data call for an nevtable queston regardng a dstncton between fxed and random effects models. Although Mundlak (1978) argues that cross-sectonal effects should always be treated as random, a Hausman test s to be performed to gude the estmaton procedure to avod nconsstency or neffcency due to omtted varables from the fxed effects. The sample data covered the followng countres: 1) Developed countres (Unted States, Canada, Japan, France, Germany, Italy and Unted Kngdom). 2) Central Amerca (Barbados, Costa Rca, Domncan Republc, El Salvador, Guatemala, Honduras, Jamaca, Ncaragua, Panama, Puerto Rco, Trndad Tobago). 3) Group A, ncludes countres that possess largest GDP n Latn Amerca, except Brazl (Argentna, Mexco, Chle, Colomba, Venezuela). 4) Group B (Bolva, Ecuador, Guyana, Paraguay, Peru, Uruguay). 5) Brazl. Annual data for the perod , where per capta GDP, the government's sze (total expendture/gdp) and economc openness ((Exports+Imports)/GDP) are from Penn World Table 5.6a., human captal (average of years of educaton of the populaton over 25 years of age) are from Barro and Lee (1993), per capta physcal captal s from Kng and Levne (1994), fnancal market (total of suppled credt) s from IMF, nfrastructure data are from Cannng (1998), and dstrbuton of ncome (Gn coeffcent) s from Dennger and Squre (1996). After testng several hypotheses t was verfed that the rato product/human captal s the better proxy found to represent the technologcal bass of the economes. The mssng values of human captal and dstrbuton of ncome were estmated by polynomal nterpolaton. 4. EMPIRICAL ANALYSIS The parameters of models (13) and (16) were estmated. For the latter the best ft s obtaned through the polynomal of thrd three, checkng wth the smulatons done by Amemya and Mormune (1974, p.383). For the fnte lag models each varable was lagged up to twenty years, at fve year ntervals. The results, expressed n elastctes, are n Tables 1-5. The results should be nterpreted as the systematc tme effects correspondng to the extenson of the lag of each varable on per capta GDP. For nstance, annual ncrements of 1% n the physcal captal n the short term of fve years would ncrease per capta GDP of the developed countres by 2,96%, Brazl by 0,94%, Central Amerca by 0,76%, countres of group A by 0,66%

12 12 TABLE 1. DYNAMIC EFFECTS ON THE PER CAPITA PRODUCT OF DEVELOPED COUNTRIES # FROM CONSTANT VARIATION IN EACH VARIABLE Varable Lag (Years) nfnte H * * * * * A * * * * * K * * * * G * * * * * OPEN * * * * F * * * * GINI * * * * TRANSP * * * * ELETEL * * * * * sgnfcance up to 5% # Unted States, Canada, Germany, Italy, Japan, France and Unted Kngdom TABLE 2. DYNAMIC EFFECTS ON THE PER CAPITA PRODUCT OF BRAZIL FROM CONSTANT VARIATION IN EACH VARIABLE Varable Lag (Years) nfnte H * * * * A * * * * * K * * * * G * * * * OPEN * * * F * * * * GINI TRANSP * * * * * ELETEL * * * * * sgnfcance up to 5% TABLE 3. DYNAMIC EFFECTS ON THE PER CAPITA PRODUCT OF GROUP A # FROM CONSTANT VARIATION IN EACH VARIABLE Varable Lag (Years) nfnte H * * * * A * * * * * K * * * * G * * * * * OPEN * * * * F * * * * GINI TRANSP * * * ELETEL * * * * * * sgnfcant up to 5% # Mexco, Argentna, Chle, Venezuela and Colomba and countres of group B by 0,76%. However, when analyzng the longer run lags 10, 15, 20 years, t s observed that there s a tendency of the physcal captal effect beng reduced gradually, reachng neglgble effects n the long run, for all countres. It s possble that there s a transtory nfluence of physcal captal on product, although, not so short as estmated by Jones (1995b) for

13 some developed countres when the contnuous effect of nvestment on the product s null after the seventh year. Hs concluson s to reject the hypothess of endogenous growth model AK for developed countres. TABLE 4. DYNAMIC EFFECTS ON THE PER CAPITA PRODUCT OF GROUP B # FROM CONSTANT VARIATION IN EACH VARIABLE 13 Varable Lag (Years) nfnte H * * * * A * * * * * K * * * * G * * * * OPEN * * * * * F * * * * GINI TRANSP * * * ELETEL * * * * * sgnfcant up to 5% level # Peru, Paraguay, Uruguay, Guyana, Ecuador and Bolva TABLE 5. DYNAMIC EFFECTS ON THE PER CAPITA PRODUCT OF CENTRAL AMERICA FROM CONSTANT VARIATION IN EACH VARIABLE Varable Lag (Years) nfnte H * * * * * A * * * * * K * * * * * G * * * * * OPEN * * * * F * * * * * GINI TRANSP * * * * ELETEL * * * * * sgnfcant up to 5% level From a theoretcal standpont, the most nterestng fndng s the sgnfcantly negatve coeffcents of human captal n the polynomal dstrbuted lag specfcatons for developng countres. Among the polynomal dstrbuted lag specfcatons for developng countres, only the Brazlan 5 year equaton does not have a sgnfcantly negatve coeffcent. Ths s the opposte result from developed countres, where all polynomal dstrbuted lags are postve and sgnfcant. Ths result, together wth the result for technologcal progress, are consstent wth the endogenety of economc growth n the long run. The negatve sgn of the human captal coeffcent for short lags ponts to dmnshng returns. Both short and long run effects may be explaned through low nvestments and vulnerablty to all sorts of nsttutonal crses and transtory economc problems, corroboratng the fndng of Senhadj (1999), among others. On the other hand, technologcal progress (A) produces sgnfcant postve effects on sustanable long-run growth n all countres,

14 14 wth the largest effect for the Brazlan economy. Ths result seems plausble as the effects of the consdered varables on growth n developng countres tend to ncrease wth product. Results for the effect of nfrastructure on growth are accordng to expectatons, snce n developed countres, the effect on product should be stronger n the short run than n the long run, and for developng countres, due to the lmtaton of stock, the effect on product should be roughly equal throughout the perod. The emprcal results demonstrate a strong relatonshp between the explanatory varables and the per capta growth rate path n the long-run. We therefore fal to reject the endogenous growth hypothess for all countres/regons. Therefore, smultaneous equatons models n panel data wll estmate the effects of the explanatory varables, as specfed by equaton (13), for each group of countres and Brazl. The estmates are presented n table 6. TABLE 6. SIMULTANEOUS EQUATIONS ESTIMATES FROM PANEL DATA Equatons Developed Countres Central Amerca Group A Group B Brazl GDPC C * * * * H * * * * K * * * * A * * * G * * * * R A C * * * * OPEN * * * * F * * * * G * * * * K * * * * R K C * * * * * TRANSP * * * * ELETEL * * * * * GINI * * * * * H * * * * R H C * * * * * GINI * * * * * TRANSP * * * * * K * * * * * R Notes: group A: Mexco, Argentna, Chle, Venezuela and Colomba. group B: Peru, Paraguay, Uruguay, Guyana, Ecuador and Bolva. (*) sgnfcance at the 10% level. The results of the smultaneous equatons dentfy dfferent relatonshps between the explanatory varables and per capta GDP for the analyzed economes. The effects of the factors can be grouped by three types of behavor dentfed by the estmates. Frst, for developed economes, there s a sgnfcant effect of physcal captal, technology and the government's sze on per capta GDP, and strong evdence toward the mbalance effect, gven by the mpacts of the human captal

15 15 on the physcal captal, as demonstrated n the thrd equaton. Such results pont notably to an elevated scale effect of the technologcal factor, as well as to an effcent use of publc resources. The results of equatons for physcal captal and human captal demonstrate a relatvely weak effect of the dstrbuton of ncome, as predcted by the Kuznets curve, and the relevant effect of the varable TRANSP on the stock of human captal, whch, followng a logc traced by Lucas (1999), ndcates that the tendency for agglomeraton of economc actvtes can motvate the accumulaton of human captal and, on the other hand, the controversal result of such a varable n the equaton of physcal captal demonstrates that agglomeraton economes, at the extreme act as a negatve externalty to the accumulaton of physcal captal. The second pattern of results s for Brazl, "group A" that ncludes the largest economes of Latn Amerca, excludng Brazl, (Mexco, Argentna, Chle, Colomba and Venezuela), and "group B" that ncludes the other countres of South Amerca (Uruguay, Peru, Guyana, Paraguay, Ecuador and Bolva). Ths pattern s characterzed by a reduced scale effect of the factor technology, and by the neffcency of the government, ndcated by the negatve relatonshp or small elastcty between government sze and per capta GDP n the frst equaton. That result can be attrbuted to an napproprate system of taxaton n such economes, as well as of the neffcent allocaton of resources, whch s llustrated by the negatve relatonshp between government and technology n the second equaton, contrary to what s observed n the developed countres where the government plays an mportant role on the technologcal research. The agglomeraton effects seem to act ncsvely, although n dfferent ways on those economes, the same happenng wth the mbalance effect between human captal and physcal captal, corroboratng wth the fndngs of Arraes and Teles (1999), that foresees heterogenety among ndustral sectors n dfferent economes. Also, mprovements n the dstrbuton of ncome show a clear effect on growth. The thrd pattern refers to the countres n Central Amerca, whch are characterzed by ther low development stage and seem to present the same growth dagnoss. The results converge n the sense of the mportance of the stock of physcal captal and the government s sze n the process of growth of ths regon. The structure of such economes s characterzed by the formaton of ndustres of low technologcal level and by lttle need for qualfed human captal. The negatve and sgnfcant effect of the government's sze on technology demonstrates that the relatonshp between the government nterventon and the economy s preponderantly one of dependence, not actng as an ncentve to economc effcency, promotng n last analyss, a perverse effect on long run growth. The mbalance effect and the relatonshp between ncome dstrbuton and growth demonstrate smlar results to the second pattern of results presented prevously. Furthermore, the postve relatonshp between agglomeraton and growth ndcate that such economes are not aware of the mportance of economc ntegraton. Low levels of economc openness (varable OPEN) have

16 16 hndered the technologcal formaton of ths regon, consequently, reflectng nsgnfcant effect of technology on growth, as opposed to the sgnfcant and expected postve effect for all other groups of countres. Whle the effects of fnancal market on the growth pont for a postve and sgnfcant relatonshp for all nvestgated economes, the results reached for the nfrastructure varables are nconsstent, so that the ndvdual effects of each nfrastructure type tend to vary dfferently for each economy. In order to verfy the productve defcency lacks of each analyzed country, the model specfed by equaton (13) accomplshes comparatve smulatons between the country leader and each regon of countres as shown by the results n table 7. TABLE 7. SIMULATIONS FOR PER CAPITA PRODUCT Countres GDPC A H K G OPEN F GINI TRANSP ELETEL Unted States leader n GDPC USA Canada Japan Germany France UK Italy Group A leader n GDPC Group A Brazl Central Am Group B Notes: group A: Mexco, Argentna, Chle, Venezuela and Colomba group B: Peru, Paraguay, Uruguay, Guyana, Ecuador and Bolva The second column of table 7 shows the rato of the logarthm per capta products of each country and regon and The US, whle the remanng columns present the smulaton of that relaton f the country or regon had the stock of the correspondng factor of producton (A, H, K, etc.) by the same amount of the leader country. As an example, consder the Brazlan case whose per capta product n 1992 represented X% of the amercan one, f Brazl possessed the amercan technologcal level ts per capta product would ncrease Y%. That s, the technologcal gap accounts for a crucal determnant of the backwardness of the Brazlan productve system n relaton to the Amercan one. By repeatng ths exercse for each country, the results pont to human captal and technologcal progress as the man factors to nduce comparatve advantage among the sampled countres.

17 17 Two basc conclusons arse from ths analyss. Frstly, scale effects seem to be broader for the developed countres, whereas the costs of technologcal catch up are hgher for underdeveloped countres. Ths fndng has severe mplcatons on the convergence process among heterogeneous economes, leadng to conclude that the velocty of convergence s faster among the developed economes. Secondly, there are dstnct pattern of the explanatory factors n the formaton of per capta product, therefore, recpes for growth are not constant across countres. The reason for that s very probably due to nsttutonal background of each country. 5. CONCLUSIONS The purpose of ths paper was to compare emprcally endogenous versus exogenous growth models and to make comparsons of the processes of growth of developed countres wth Brazl and Latn Amerca. To reach ths goal, several polynomal dstrbuted fnte lag models and an nfnte lag model were used to verfy the mpacts of eght varables: human captal, nfrastructure ral, electrcty, road and communcatons openness, government expendture, dstrbuton of ncome and development of the fnancal sector on the process of economc growth of long term by testng the hypothess of the nfluence of such varables on the growth rates, as predcts the endogenous growth model. Statstcal tests resulted n the falure to reject the endogenous model hypothess n all countres. In the second part of the work, a model of smultaneous equatons was appled to developed countres, to Brazl and Latn Amercan countres. Results are consstent wth an endogenous model hypothess wth respect to the sgnfcant dependence of product growth on technologcal levels n the economy, whch mprove economes of scale, rather than the level of physcal captal, as predcted by the tradtonal models. The results also ndcated that human captal elevates strongly, not just the level of the product, but fundamentally, the level of technologcal progress of the productve sector, where effects work smultaneously for the rasng ncome ether n developed or developng countres. Smulatons for the analyzed economes by means of smultaneous equatons estmaton were performed, and the conclusons ndcated that the stocks of human captal and physcal captal are the man decsve varables of comparatve advantages for developng countres, where the former plays a stronger role n those countres wth hgher GDP per capta. Moreover, the technologcal gap turned out to be the determnant of nter-regonal dfferences of per capta ncome. Nevertheless, some puzzlng results found here, contrary to growth theory, mght ndcate that the nsttutonal background of developng countres s defntely a factor to be taken nto account for a better understandng of ther growth path. Inserton of poltcal varables, such as corrupton, cvl rghts, colonal nhertance, may be a good start to solve those shufflng effects.

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