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Summary

The transition of the growth rate differs from the other transitions, as it has a first difference variable on the vertical axis. Hence, it is very fuzzy, but as the full sample consists of 10,329 observations, a clear pattern is found. It is hump-shaped, so that middle-income countries catch up with the high-income countries. However, the speed of the catch-up is slow. The hump-shape it rather robust. The hump-shape implies that low-income countries diverge and high-income countries converge, just as they do in all seven institutional indices. The hump-shaped transition curve is inconsistent with the one-sector Solow model that has been the workhorse model in the literature over the last 30 years. However, it is easy to explain by the two-sector models of development that used to be common. Two-sector models also show why miracle growth is possible, though difficult to reach.

This paper examines the effect of the elasticity of technological substitution on the existence of equilibrium indeterminacy in two-sector economies. Following recent empirical evidence, the elasticity of substitution between capital and labor is below unity and we find that this requires a higher degree of productive externalities in order to still be able to produce indeterminate equilibria. However, empirically realistic rates of substitution do not rule out indeterminacy.

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12 - The Hump-Shaped Transition Path for the Growth Rate

Summary

CAPITAL–LABOR SUBSTITUTION, SECTOR-SPECIFIC EXTERNALITIES, AND INDETERMINACY

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12 - The Hump-Shaped Transition Path for the Growth Rate

Summary

CAPITAL–LABOR SUBSTITUTION, SECTOR-SPECIFIC EXTERNALITIES, AND INDETERMINACY