Dominican University Economic Growth in Developing Economies Discussion

This module provides a general framework for the study of economic growth. The model allows to understand both, growth in developed and developing economies, and the level of income across countries. In the model, developing countries exhibit lower income because they are thought to have the equivalent of an implicit tax on capital (because of bribes or frictions for doing business), which reduces investment, output, and wages.

The question of income differences across countries is a big puzzle among economists. If you think for a moment about the issue, natural questions arise: why are the gaps so large given that capital and technology can move around the world, and that countries’ populations can be educated? Part of the explanation lies in history and its by-product institutions: rules and norms that govern social and economic interactions.

In this Box you have to synthesize the theoretical and empirical aspects that explain the gap between rich and poor nations. Theory suggests that a “tax” on capital reduces investment, wages, and output; on the flip side, in practice, weak institutions in the form of bribes or heavy regulatory burden, for instance, lead to the same result.

The challenge in this Box is to lay out both lines of reasoning (growth theory and institutions) and illustrate the point using the resources below.

– Go to worldbank.org and look for the World Development Indicators. Once you are there pick a developing country (or countries —could be more than one) and also look for the USA. Retrieve the data for GDP per capita starting in the year 2000, up to the latest available year. There are many variables with that name so pick: GDP per capita constant -“latest year”-US$; the series are constantly updated, so look for the latest base-year available.

– Look online for the Worldwide Governance Indicators and match the countries and years that you have picked from the World Bank. There are six categories for institutional scores, you can focus on one only, on all (average), or on a few. You will find a percentile ranking and an absolute score. The absolute score, which ranges between -2.5 to 2.5, is better suited for this analysis so use that one.

In this box talk about the income gap between the countries in general [25 points]. Explain through the lens of the theory and institutions why this is the case [25 points]. Discuss whether there is evidence of convergence/divergence in income terms [25 points] and institutional quality [25 points] among your selection of countries. The charts (one for GDP per capita and another for Governance Indicators) should have a title and have the axis labeled (with time in x-axis, and label variable(s) and units in the y-axis).

When talking about the theory from the book chapter be sure touch on the set up of the model, interpretation, and its predictions. For the practical side, a good reference to get a sense of the role of institutions in economic performance read Hali Edison, “How strong are the links between institutional quality and economic performance?”, Finance and Development, June 2003, Vol. 40, Num. 2, International Monetary Fund. There is a large literature on the topic, but this a good introduction, so don’t look further for this assignment. In the Box focus on the complementarity between the theory and the concept of institutions to explain the issue to a reader that does not much about either. This type of exercise is useful for, say, a firm looking to expand into foreign markets.