MIT14 452F16 Lec1

14.
452 Economic Growth: Lecture 1, Questions and

Evidence
Daron Acemoglu
MIT
October 21, 2014
Daron Acemoglu (MIT) Economic Growth Lecture 1 October 21, 2014. 1 / 39

Growth and Development: The Questions and Evidence Cross-Country Income Dierences
Cross-Country Income Dierences
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Commons license. For more information, see https://ocw.mit.edu/help/faq-fair-use/.

Cross-Country Income Dierences (continued)

There are very large dierences in income per capita and output per
worker across countries today.
.00025
.0002
.00015
Density of coutries
1960
.0001 .00005
1980
2000
0
0 10000 20000 30000 40000 50000

gdp per capita
Figure: Distribution of PPP-adjusted GDP per capita.

Courtesy of Princeton University Press. Used with permission.

Part of the spreading out of the distribution in the Figure is because

of the increase in average incomes.
More natural to look at the log of income per capita when growth is
approximately proportional:
when x (t ) grows at a proportional rate, log x (t ) grows linearly,
if x1 (t ) and x2 (t ) both grow by 10%, x1 (t ) x2 (t ) will also grow,
while log x1 (t ) log x2 (t ) will remain constant.
The next Figure shows a similar pattern, but now the spreading-out is
more limited.

.4
1960
.3 2000
1980
Density of coutries
.1 0 .2
6 7 8 9 10 11
log gdp per capita
Figure: Estimates of the distribution of countries according to log GDP per capita
(PPP-adjusted) in 1960, 1980 and 2000.

Theory is easier to map to data when we look at output (GDP) per

worker.
Moreover, key sources of dierence in economic performance across
countries are national policies and institutions.
The next Figure looks at the unweighted distribution of countries
according to (PPP-adjusted) GDP per worker
workers: total economically active population according to the
denition of the International Labour Organization.
Overall, two important facts:
1 Large amount of inequality in income per capita and income per worker
across countries.
2 Slight but noticeable increase in inequality across nations (though not
necessarily across individuals in the entire world).

.4
1960
.3
1980
Density of coutries
2000
.1 0 .2
6 8 10 12
log gdp per worker
Figure: Distribution of log GDP per worker (PPP-adjusted).


Growth and Development: The Questions and Evidence Economic Growth and Income Dierences
Economic Growth and Income Dierences
10
USA
South Korea
UK Spain
9
Brazil
log gdp per capita
Singapore
Guatemala
8
Botswana
India
7
Nigeria
6
1960 1970 1980 1990 2000

year
Figure: The evolution of income per capita 1960-2000.

Growth and Development: The Questions and Evidence Economic Growth and Income Dierences
Economic Growth and Income Dierences

Why is the United States richer in 1960 than other nations and able
to grow at a steady pace thereafter?
How did Singapore, South Korea and Botswana manage to grow at a
relatively rapid pace for 40 years?
Why did Spain grow relatively rapidly for about 20 years, but then
slow down? Why did Brazil and Guatemala stagnate during the
1980s?
What is responsible for the disastrous growth performance of Nigeria?
Central questions for understanding how the capitalist system works
and the origins of economic growth.
Central questions also for policy and welfare, since dierences in
income related to living standards, consumption and health.
Our rst task is to develop a coherent framework to investigate these
questions and as a byproduct we will introduce the workhorse models
of dynamic economic analysis and macroeconomics.
Growth and Development: The Questions and Evidence Origins of Income Dierences and World Economic Growth
Persistence of Prosperity
1.1 LUX
US A
log GDP per worker relative to the US in 2000
1
SIRL
GP A UT B E LNOR NLD
FRA CHE
HK G ITAIS R GB DNK
R A US
CA N
JP N ES P FIN IS L S W E
NZL
P RT MUS TTO
K OR GRC
MY S CHL B RBA RG
GA B URY
.9
PA N ZAXFCRI
ME
IRN DZA VE N
GNQ DOMB RA
P RY COL
ECP V
TUR
GY JOR
ROM
THA CU S P
EGTM LVE R
LK A MA R P HL JA M NIC
IDN
.8
ZW E B OL
CHN PA K
IND SY R CMR HND
CIV GIN
LS O
SE N
NP L COG
GHA BE N NGA COM
KE N
.7
MLIUGA ZMB
MOZ
B FA
GMB TGOA
RW TCD
NEMDG
R
EMW
TH I
GNB
TZA
B DI
.6
.6 .7 .8 .9 1
log GDP per worker relative to the US in 1960
Figure: Log GDP per worker in 1960 and 2000.


Over Longer Periods Persistence and Divergence
10
Western Offshoots
Western Europe
9
log gdp per capita
8
As ia
Africa
Latin America
7
6
1800 1850 1900 1950 2000

year
Figure: Evolution of GDP per capita 1820-2000.


Growth in the Last 200 Years
10
USA
9
log gdp per capita
Spain
China
8
Britain
Brazil
7
India
Ghana
6
1800 1850 1900 1950 2000

year
Figure: Evolution of income per capita in various countries.


Growth and Development: The Questions and Evidence From Proximate to Fundamental Causes
From Correlates to Fundamental Causes

Correlates of economic growth, such as physical capital, human
capital and technology, will be our rst topic of study.
But these are only proximate causes of economic growth and
economic success:
why do certain societies fail to improve their technologies, invest more
in physical capital, and accumulate more human capital?
Return to Figure above to illustrate this point further:
how did South Korea and Singapore manage to grow, while Nigeria
failed to take advantage of the growth opportunities?
If physical capital accumulation is so important, why did Nigeria not
invest more in physical capital?
If education is so important, why our education levels in Nigeria still so
low and why is existing human capital not being used more eectively?
The answer to these questions is related to the fundamental causes of
economic growth.
Growth and Development: The Questions and Evidence Persistence, Reversal and Geography
Persistence and Reversal
But is there persistence even if we go further? If yes, this might

suggest there are important unchanging factors aecting growth at
the country level (such as geography).
If, on the other hand, this persistence breaks down during periods of
fundamental institutional change, this would put the spotlight on
institutions.
How to approximate prosperity/GDP before national accounts? Some
proxies:
Urbanization: before industrial times only more prosperous places (and
those with agricultural surplus) could support large urban areas.
Population density: similar justication.
Focusing on the sample of former colonies, we do in fact see a sharp
reversal from before colonization to today.

Reversal of Fortune in Urbanization
.
USA
SGP
HKG
10 CAN
AUS
NZL
GDP per capita, PPP, in 1995
CHL
ARG
VEN
URY
9 MYS MEX
COL PAN
CRI
BRA
ECU TUN
DOM BLZ PER DZA
GTM
PRY JAM
PHL IDN MAR
8 GUY SLV BOL EGY
LKAHND
NIC
PAK
IND
VNM
HTI
LAO
7 BGD
0 5 10 15 20
Urbanization in 1500
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Creative Commons license. For more information, see https://ocw.mit.edu/help/faq-fair-use/.

Reversal of Fortune in Population Density
.
USA
SGP
HKG
10 CAN
AUS
NZL
CHL
GDP per capita, PPP, in 1995
BHS
BRB
ARG VEN
URY
9 BWA ZAF GAB
MYS
KNA
PAN
MEX
COL TTO
CRI
BRA
NAM LCA
GRD ECU TUN
PER
BLZ
DOM
DMA DZA
VCT
GTM
PRY JAM
SWZ PHL IDN MAR
SUR
8 GUY
CPV BOL SLV EGY
AGO LKA
ZWE HND
NIC
CMR GIN
COG CIV
MRTGHA
SEN
COM
LSO SDN PAK
IND
GMB
TGO VNM
CAF
HTILAO KEN BEN
7 TCD ZAR
MDG BFA
UGA NPL
BGD
ZMB NGA
NER
MLI ERI BDI
MWI MOZ RWA
TZA SLE
6
-5 0 5
Log Population Density in 1500
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Reversal of Fortune: Timing
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Reversal of Fortune: Role of Industrialization

Industrial Production Per Capita, UK in 1900 = 100
(from Bairoch)
400
350
300
250
200
150
100
50
0
1750 1800 1830 1860 1880 1900 1913 1928 1953
US Australia Canada New Zealand Brazil Mexico India

Growth and Development: The Questions and Evidence Institutions and Growth
Institutions and Growth
What about direct evidence of the eect of institutions of growth?

Three types of evidence have been presented in the literature:
1 Country-level evidence on the long-run eects of institutions, exploiting
potentially exogenous sources of variation (e.g., Acemoglu, Johnson
and Robinson, 2001).
2 Within-country evidence on the long-run eects of institutional features
that three across localities within a country (e.g., Dell, 2010).
3 Growth regressions, focusing on shorter periods (such as decades or
even shorter periods).
Even though growth regressions are the most problematic from a
variety of viewpoints (as we will discuss later), since they connect to
some of the issues we will discuss in this course, I now provide
evidence using a modied version of growth regressions.

The Eects of Democracy on Growth
Democracy is a key aspect of political institutions of a society.

Much controversy on its merits, and many popular writings and some
economists emphasize its weaknesses and distortions (which are
indeed many). Relatedly, the conventional wisdom appears to be That
democracy is not good for economic growth and main fact be bad.
Is this true?
Let me share results from Acemoglu, Naidu, Restrepo and Robinson
(2014) attempting to answer these questions.

Challenges of Estimating the Eect of Democracy
Measuring democracy create a dichotomous measure of democracy,

minimizing measurement error.
Not comparing apples and oranges models that country xed eects.
Dynamics allow for mean reversion in income per capita exploiting
our annual data.
Sources of exogenous variation.

Importance of Dynamics
Democratizations are more likely to happen when nondemocracies are
having economic di culties:
Courtesy of Daron Acemoglu, Suresh Naidu, Pascual Restrepo, and James A. Robinson. Used with permission.

Method I: Panel Data
Consider the following linear panel data model at annual frequency:

p
yct = Dct + j yct j + c + t + ct .
j =1
Here yct is the log of GDP per capita in country c at time t, and Dct
is the dichotomous measure of democracy in country c in year t.
In addition c denote a full set of country xed eects, the t denote
a full set of year xed eects, and ct is the error term.
Note that this specication has level on the RHS rather than growth
(does that matter?)
It also imposes that democracy does not have a permanent eect on
growth (does this matter?).
Crucially, none of the intermediating variables like education or
investment are controlled for on the right-hand side.
Results: Importance of Dynamics Again

Inspecting the Residuals: The Case of Korea
Figure: Red: Korean before democracy. Orange: Korea after democracy.

The Nickell Bias
The presence of the lagged dependent variable creates bias in panel

estimates. But this potential bias turns out not to be important in
this case.
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more information, see http://ocw.mit.edu/help/faq-fair-use/

Robustness
The results are quite robust to a range of controls for other factors
and trends.

Semi-Parametric Matching
Relax linearity and allow for richer dynamics.
More generally, and using the potential outcomes notation, the causal
eect of a transition to democracy at time t on GDP s periods
thereafter for countries that are democratizing is
s = E (yct
s
(1) ycts (0)|Dct = 1, Dct 1 = 0) .
The challenge in estimating s is that countries that democratize may
be dierent in terms of their potential outcomes than those that
remain in nondemocracy.
To overcome this problem, let us assume:
Assumption 2 (selection on observables):
ycts (d )D |D
ct ct 1 = 0, yct 1 , yct 2 , yct 3 , yct 4 , t for all
yct 1 , . . . , yct4 , and for all c, t, and s 0.
Estimation then uses inverse propensity score weighting and
regression adjustment based on observables.
Semi-Parametric Estimates: Democratizations

Semi-Parametric Estimates: Reversal in Democracy

Instrumental Variables
So far, the strategy for identifying the eect of democracy on future

economic outcomes has been to condition on observables.
Alternative is to use an instrumental-variables (IV) strategy exploiting
a source of variation that is less likely to be contaminated with
omitted variable biases.
There is no perfect instrument for democracy, but a plausibly
exogenous source of variation still provides useful estimates for
triangulatingthe eect of democracy.
Democracy spreads within (culturally homogeneous) areas,
reminiscent of democratization waves.
Here exploit regional democratization waves.

IV Strategy
Let Rc denote the geographic region of country c.

Construct the set of countries
Ic = {c ' : c ' = c, Rc ' = Rc , Dc ' t0 = Dct0 }, countries in the same
region ith the same political history, i.e., Dc ' t0 = Dct0 .
Then construct the instrument
1
|Ic | c
Zct = Dc ' t .
' I
c
Here, Zct is the jack-knifed average of democracy in a region initial

regime cell, which leaves out the own-country observation.

First Stage

IV Estimates

Mechanisms

Mechanisms (continued)

Summary
A range of dierent strategies yield positive and large eects of

democracy on future GDP per capita, indicating roughly that a
country that democratizes becomes 20-30% richer than it would
otherwise be in the next 20 years.
This eect does not appear to be related to other confounding eects
or country-specic trends potentially impacting both democracy and
growth.
But important to control for GDP dynamics (and of course country
xed eects).
We will see later that many cross-country regressions do not do this,
sometimes leading to unreliable or unstable results.

Growth and Development: The Questions and Evidence Rest of the Course
Rest of the Course
In the rest of the course, we will introduce several workhorse models

of economic growth used in macroeconomics and other elds more
broadly (as well as some applications of techniques of dynamic
economic analysis utilized even more widely).
Three objectives:
Build practice and skills in the analysis of dynamic economic models.
Obtain intuition and insight about sources and causes of dierences in
long run economic performance across countries.
Start thinking about how to map some of these ideas to data.
In the process, of the second goal, we will focus on proximate causes
of economic growth (physical capital, human capital and technology),
but useful to bear in mind that, especially in the context of the third
goal, it is also important to investigate why these vary systematically
across countries the question of fundamental causes.

MIT OpenCourseWare
https://ocw.mit.edu
14.452 Economic Growth

Fall 2016
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14.

452 Economic Growth: Lecture 1, Questions and

October 21, 2014

Daron Acemoglu (MIT) Economic Growth Lecture 1 October 21, 2014. 1 / 39

Cross-Country Income Dierences

Daron Acemoglu (MIT) Economic Growth Lecture 1 October 21, 2014. 2 / 39

Cross-Country Income Dierences (continued)

0 10000 20000 30000 40000 50000

Figure: Distribution of PPP-adjusted GDP per capita.

Daron Acemoglu (MIT) Economic Growth Lecture 1 October 21, 2014. 3 / 39

Cross-Country Income Dierences (continued)

Part of the spreading out of the distribution in the Figure is because

Daron Acemoglu (MIT) Economic Growth Lecture 1 October 21, 2014. 4 / 39

Cross-Country Income Dierences (continued)

Daron Acemoglu (MIT) Economic Growth Lecture 1 October 21, 2014. 5 / 39

Cross-Country Income Dierences (continued)

Theory is easier to map to data when we look at output (GDP) per

Daron Acemoglu (MIT) Economic Growth Lecture 1 October 21, 2014. 6 / 39

Cross-Country Income Dierences (continued)

Figure: Distribution of log GDP per worker (PPP-adjusted).

Daron Acemoglu (MIT) Economic Growth Lecture 1 October 21, 2014. 7 / 39

Economic Growth and Income Dierences

1960 1970 1980 1990 2000

Figure: The evolution of income per capita 1960-2000.

Economic Growth and Income Dierences

Figure: Log GDP per worker in 1960 and 2000.

Daron Acemoglu (MIT) Economic Growth Lecture 1 October 21, 2014. 10 / 39

Over Longer Periods Persistence and Divergence

1800 1850 1900 1950 2000

Figure: Evolution of GDP per capita 1820-2000.

Daron Acemoglu (MIT) Economic Growth Lecture 1 October 21, 2014. 11 / 39

Growth in the Last 200 Years

1800 1850 1900 1950 2000

Figure: Evolution of income per capita in various countries.

Daron Acemoglu (MIT) Economic Growth Lecture 1 October 21, 2014. 12 / 39

From Correlates to Fundamental Causes

Persistence and Reversal

But is there persistence even if we go further? If yes, this might

Daron Acemoglu (MIT) Economic Growth Lecture 1 October 21, 2014. 14 / 39

Reversal of Fortune in Urbanization

Daron Acemoglu (MIT) Economic Growth Lecture 1 October 21, 2014. 15 / 39

Reversal of Fortune in Population Density

Daron Acemoglu (MIT) Economic Growth Lecture 1 October 21, 2014. 16 / 39

Reversal of Fortune: Timing

Daron Acemoglu (MIT) Economic Growth Lecture 1 October 21, 2014. 17 / 39

Reversal of Fortune: Role of Industrialization

US Australia Canada New Zealand Brazil Mexico India

Daron Acemoglu (MIT) Economic Growth Lecture 1 October 21, 2014. 18 / 39

Institutions and Growth

What about direct evidence of the eect of institutions of growth?

Daron Acemoglu (MIT) Economic Growth Lecture 1 October 21, 2014. 19 / 39

The Eects of Democracy on Growth

Democracy is a key aspect of political institutions of a society.

Daron Acemoglu (MIT) Economic Growth Lecture 1 October 21, 2014. 20 / 39

Challenges of Estimating the Eect of Democracy

Measuring democracy create a dichotomous measure of democracy,

Daron Acemoglu (MIT) Economic Growth Lecture 1 October 21, 2014. 21 / 39

Daron Acemoglu (MIT) Economic Growth Lecture 1 October 21, 2014. 22 / 39

Method I: Panel Data

Consider the following linear panel data model at annual frequency:

Results: Importance of Dynamics Again

Daron Acemoglu (MIT) Economic Growth Lecture 1 October 21, 2014. 24 / 39

Inspecting the Residuals: The Case of Korea