FOO Law and Economics

Saturday, January 10, 2009

Alice in wonderland in growth economics

What happens when we assume that income growth comes from savings (to increase the stock of capital) and from technological progress (at some reasonable rate)? Two economists (Roberto Mariano and Delano Villanueva) did so. Based on recent official data, they conclude that the we should save about 1/3 of GDP to achieve a 5% growth rate in per capita income, which would then double every 13 years.

Is this realistic? For those who believe we can progress within one generation, this seems daunting. The present savings rate is about 17% of GDP (official NEDA data for 2007), which is well below the optimal rate of 33%. The authors didn't say what would happen to the actual growth rate if savings is "too small."

It seems that the results ignore the possibility of economic growth through institutional improvements. But perhaps that's another story.

Please click here for the Mariano-Villanueva paper. Click on the title of this post to see and make comments.

1 comment:

Dan Villanueva said...

Orlando Roncesvalles quoted from an outdated article of Villanueva and Mariano. Villanueva has since corrected a fundamental analytical error in the original paper quoted by Roncesvalles. In Villanueva's latest book, Macroeconomic Policies for Stable Growth (World Scientific, 2008), in which Ch. 3, "External Debt, Adjustment, and Growth," using an intertemporal utility maximization framework, arrives at an optimal savings rate in the range of 18-22 percent of GDP, depending on estimated elasticities of intertemporal substitution. These are indeed feasible saving rate targets for most governments in Asia and elsewhere. The main source of growth is 'learning by doing' and associated productivity gains.

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