Economic Growth
In their recent book on economic growth Robert Barro and Xavier Sala-i-
Martin [1995] express the view that ‘economic growth is the part of
macroeconomics that really matters’. In your Yrjo Jahnsson lectures [1987]
you seem to be saying something similar, that macroeconomists have spent
too much time on stabilization and neglected growth, which is a far more
important issue for macroeconomics to look at.
Yes. That is becoming the consensus view. David Romer’s new textbook,
which we use in our first-year graduate macro course at Chicago, begins with
growth. Romer would call himself a new Keynesian and he is perfectly
entitled to call himself that. But his book shows a shift in emphasis towards
long-run growth questions. Quite rightly, I think.
So it’s back to the classics and the grand issues of the long run?
Yes. OK [laughter].
What in your view was the stimulus to the new endogenous growth economics?
Was it the lack of convergence which people were observing empirically
between rich and poor countries, apart from maybe a ‘convergence club’?
No. What is new about the new growth theory is the idea that what we
ought to be trying to do is get a single neoclassical model that can account
for rich and poor countries alike in the same terms. This contrasts with the
view that we had in the 1960s that there was one theory for the advanced
countries and some other model was needed for the Third World. The whole
presumption in the 1960s was that some explicit policy, perhaps based on
the Russian model, was needed to promote development in poor countries.
We didn’t think of economic growth as something that just happened through
market forces.
What do you see as being the important policy implications of the work that
has been done so far on endogenous growth? Some economists have interpreted
the work as suggesting that there is a more positive role for government
than, say, was the case with the Solow model.
Yes. An implication of the Solow model was that the long-term growth rate of
an economy was dictated by technological change and there wasn’t anything
we could do about it. Some of the endogenous growth models have the
property that the long-term growth rate is endogenously determined and that
changes in the tax structure, for example, can influence what that growth rate
is. We can now use these new models to analyse the growth effects of
changes in tax policy. That is something we couldn’t do before. But these
effects I think are pretty small. Even where you have a model where growth
rates can be changed by policy the effects seem to be pretty modest.
What in your view is the reason why the ‘Tiger’ economies of South East Asia
have been so successful? While the Tiger economies have been catching up
with the West with 8 or 9 per cent growth rates, in Africa the 1980s was
almost a completely lost decade as far as economic growth was concerned.
Well, you know Africa has had awful politics.
Do you think African countries generally lack the necessary institutional
framework required for successful development?
No. There has been much too much socialist influence. The common feature
of countries like Taiwan, Korea and Japan is that they have had some kind of
conservative, pro-market, pro-business, economic policies. I mean I wouldn’t
exactly call them free trade because Japan and Korea at least are very mercantilist
in their trade policies, which I don’t approve of. But it is better than
socialism and import substitution by a long, long way.
While they have been outward-looking, some development economists would
argue that within many of the South East Asian Tiger economies there has
been quite a lot of government intervention. As such they see it as being an
example of successful government intervention.
Right. That is how everybody in Japan and Korea sees it [laughter].
You don’t see it that way?
Even Chicago Korean students think that the Korean growth rates have been
engineered by government manipulation. I don’t agree with that view. I don’t
see any evidence for that at all. But it is hard to refute. There is no question
that governments have been extremely active in doing things that they think
promote economic growth.
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