Immiserizing Growth in Expanding Economies
by
Elias Dinopoulos
University of Florida
July 2005
This note was prepared for the conference in honor of Jagrdish Bhagwati’s 70th birthday
at Columbia University, August 5-6, 2005.
1. Introduction
In one of the most influential papers in the theory of commercial policy, Bhagwati
(1958a, 1958b) demonstrated formally the possibility of immiserizing growth: An
open economy experiencing an expansion in its productive capacity (caused by
economic growth or/and technological progress) can become worse off if its terms of
trade deteriorate sufficiently and offset the beneficial effects of economic growth.
This path-breaking example set up the stage for the development of the generalized
theory of distortions and welfare which constitutes the analytical framework for the
modern theory of commercial policy: Johnson (1967) produced another example of
immiserizing growth according to which a small open economy facing an
exogenously imposed tariff could become worse off as a result of economic
expansion; Bhagwati (1968, 1971) related formally the three fundamental theoretical
ingredients of commercial-policy theory: welfare, distortions and growth. To put it
loosely, his analysis established that in the presence of economic distortions,
economic growth might cause deterioration in the level of social welfare.
The purpose of the present note is not to highlight the significance of this
fundamental insight, which is an elegant application of the theory of second best and
1
can be readily viewed as the equivalent of the “unification theory” in the field of
Physics. This has been described very elegantly by Srinivasan (1996). The purpose of
this note is to describe how the new growth theory can readily established cases of
immiserizing endogenous growth.
2. How is Growth Modeled?
Typical studies of immiserizing growth utilizes the standard two-by-two static
analytical framework and treats economic growth as an exogenous increase in the
economy’s productive capacity measured by an expansion in the production
possibility frontier. Viewed from the lenses of formal neoclassical growth theory
(which was the dominant one on these days), this treatment of economic growth is
consistent with two possible interpretations: First, the analyst has in mind a
comparison of steady-states of a growing economy where the initial equilibrium
refers to a per-capita production possibility frontier and the final equilibrium
corresponds to a higher per-capita growth steady-state (caused by an acceleration in
the rate of technological progress); Second, the researcher might have in mind
steady-state level effects of a growing neoclassical economy which are associated
with transitional per capita growth. For instance, a decline in the subjective discount
rate or in the rate of population growth generates a higher steady-state capital labor
ratio and transitional changes in the rate of economic growth.
In either case, if one were to cast the analysis of immiserizing growth
within the neoclassical growth-theoretic framework, then the analysis would have to
consider the effects of distortions during the transitional path from the initial to the
final steady-state equilibrium. A branch of literature addressed this issue by
analyzing the possibility of immizerizing neoclassical growth. More specifically,
during the 1970’s several researchers addressed the question of deadweight loss
caused by a move from autarky to free trade in growing economies (see Deardorff
(1973), Smith (1976), and Samuelson (1975) among others). These studies
demonstrated that a move from autarky to free trade could lower permanently the per-
capita steady state consumption expenditure, in the presence of a fixed savings ratio.
2
This result is consistent with the generalized theory of distortions and welfare,
because the assumption of a fixed savings ratio can be interpreted as being equivalent
to a domestic distortion. Starting from this conjecture, Srinivasan and Bhagwati
(1980) demonstrated that removing this domestic distortion, by assuming that the
savings rate is optimally determined and taking into account the welfare gains during
the transition, a move from autarky to free trade is intertemporary efficient.
Despite this novel finding, once could readily see the analytical difficulties in
applying the theory of distortions and welfare to the dynamic framework of the
neoclassical growth model: The existence of transitional dynamics coupled with
exogenous per-capita long- run growth constituted two barriers for the development a
dynamic theory of distortions, growth and welfare. The former makes any corrective
policy time dependent and therefore difficult to implement; and the second does not
leave a lot of room for the presence of distortions and no room at all for policies to
affect welfare by changing the level of long-run growth. The development of
endogenous growth theory in the early 1990s removed, at least partially, these two
barriers and highlighted several new links between the existence of endogenous
distortions, long-run growth and intertemporal efficiency.
3. Immiserizing Endogenous Growth
The development of the new growth theory placed the presence of externalities
and economic distortions at the heart of long-run economic growth. This section use
the insights of Schumpeterian growth theory which concentrates on the analysis of a
particular type of economic growth, namely growth based on the endogenous
introduction of new products and/or processes. The endogenous generation of new
innovations is governed by the process of creative destruction described by Joseph
Schumpeter (1942). The presence of endogenous distortions, associated with
temporary monopoly power and positive economic profits, creates strong incentives
for firms to engage in R&D investments in order to discover new products and/or
processes. And assuming that the economy is populated with profit-maximizing
single-product firms, economic profits generated by temporary monopoly power are
necessary to finance the upfront costs of R&D investments. In other words, the
3
presence of economic externalities and endogenous distortions (associated with
imperfect competition) are necessary for the existence of endogenous long-run
growth. Romer (1990) has elaborated on the role of non-convexities and imperfect
competition in the generation of long-run endogenous Schumpeterian growth.
We are now ready to describe how the new growth theory can readily generate
cases of immiserizing growth. For that purpose, we will use the quality-ladders model
of endogenous growth developed by Grossman and Helpman (1991a, 1991b chapter
4). Similar considerations apply to endogenous growth models based on expanding
product variety developed by Grossman and Helpman (1991b, chapter 3). Consider
then a global economy consisting of a continuum of structurally identical industries
producing final consumption goods. The quality of each product can be improved
through endogenous innovations. Each innovation is the outcome of a stochastic
R&D race and the arrival of innovations in each industry is governed by a stochastic
Poisson process whose intensity is denoted by I and is identical to the level of R&D
services utilized by profit-maximizing firms in a particular industry. Under the
assumption that the continuum of industries is of measure one, the industry- wide
level of R&D investment is equal to the economy- wide level of R&D investment.
Labor is the only factor of production and one worker produces one unit of output
or α units of R&D services. Following the standard practice we use labor as the
model’s numeraire and set up the wage equal to unity. The winner of each R&D race
becomes the sole producer of the state-of-art quality product in each industry and
enjoys global temporary monopoly profits for a random time interval until further
innovation occurs in that particular industry. Furthermore, assume that the global
economy consists of two structurally identical countries to simplify the analysis and
exposition.
Even if the productivity of labor does not differ across the two countries, at each
instant of time half of the industries are populated by firms that discovered the state-
of-the-art products in one country and the rest are populated by monopolists located
in the other country. Therefore, there is a lot of innovation-based trade in this global
economy. Moreover, the assumption of a continuum of industries eliminates the
presence of aggregate uncertainty. And because firms choose the level of R&D
4
services and consumers choose the level of consumption expenditure, the economy
does not have transitional dynamics.
It turns out that the steady-state equilibrium of this Schumpeterian global
economy is characterized by the following equations: The long-run growth of a
quality-weighted consumption index (i.e., the growth rate of total factor productivity)
is endogenous and given by
lng I λ= (1.1)
where I is the steady-state level of industry and economy-wide R&D services and
equals the rate of innovations (the intensity of the Poisson process that governs the
arrival of innovations; and 1λ > is the magnitude of quality increment generated by
an innovation (i.e., the magnitude to each innovation). Any policy-related parameter
change that affects the allocation of labor between manufacturing and R&D services
has an impact on long-run Schumpeterian growth.
In the absence of aggregate uncertainty and transitional dynamics, the aggregate
discounted welfare of this global economy -which is proportional to per-capita
welfare- is given by
1 ln gU Cρ ρ
⎛= +⎜⎝ ⎠
⎞⎟ (1.2)
where C is the industry (or economy)-wide global quantity consumed; and 0ρ > is
the subjective discount rate, which is equal to the steady-state market interest rate.
Equation (1.2) states that global welfare is an increasing concave function of
aggregate consumption and the discounted rate of long-run growth. Two more
equations define the steady-state market values of global R&D services I and global
aggregate consumption level : C
ln
g C Lα λ + = , (1.3)
( 1) 1
ln
C
g
λ
αρ λ
− =
+
. (1.4)
Equation (1.3) is the full-employment of labor (resource) condition and states that the
demand for labor engaged in R&D ( / / lnI gα α λ= ) plus the demand for labor in
5
manufacturing of final consumption goods (C) must equal the global supply of labor
(L). Equation (1.4) is the R&D condition and states that the expected discounted
profits associated with R&D in each industry must be equal to zero; that is, the flow
of monopoly profits [ ( 1)Cλ − )] of a winner of an R&D race discounted by the market
interest rate ( ρ ) plus the probability of default due to further innovation ( / lnI g λ= )
must equal to the unit cost of R&D services (1/α ).
Equations (1.3) and (1.4) provide the following closed-form solutions for the
long-run market values of long-run growth and aggregate consumption:
[ln( , , , ) ( 1)g L L ]λα λ ρ α λ ρλ
+ + + − = − − (1.5)
1( , , , )C L L ρα λ ρ λ α
− + − + ⎡ ⎤= +⎢ ⎥⎣ ⎦ (1.6)
The sign above each parameter on the left-hand-side in the above two equations
indicates the direction of comparative statics exercises. Substituting the steady-state
value of aggregate consumption from the resource condition (1.3) into the expression
of welfare in (1.2) yields the following expression for the discounted welfare:
1 ln( )
ln
g gU Lρ α λ ρ
⎡ ⎤= − +⎢⎣ ⎦⎥
0
. (1.7)
The socially optimal level of long-run Schumpeterian growth maximizes equation
(1.7) (i.e., is the solution to ) and is given by /U g∂ ∂ =
lnmg Lα λ ρ= − . (1.8)
The socially-optimum long-run Schumpeterian growth is an increasing function of the
productivity of labor in R&D services, the global endowment of labor and the size of
innovations. It is also a declining function of the subjective discount rate.
It is well known that the presence of distortions creates a deviation between the
socially-optimum and the market-equilibrium rate of innovation and long-run growth
in quality ladder models of economic growth. The presence of monopoly power
which is necessary to finance the R&D investment and to pay the wage bill of R&D
researchers prior to manufacturing of newly discovered goods creates a positive price
cost mark-up equal to 1λ − in each industry. This distortion does not result in
misallocation of resources across industries because all industries in the economy are
6
symmetric by assumption, but creates an incentive for over investment in R&D and
excessive market-driven growth: Each innovation contributes to social welfare by
raising the instantaneous utility by an increment equal to lnλ which is strictly less
than the price cost mark-up 1λ − , which serves as the market incentive for firms
engaged in R&D. In addition, firms discount profits by a discount factor equal to the
market interest rate plus the probability of default due to further innovation, Iρ +
because their lives are finite (due to creative destruction effect); whereas the social
planner discounts the contribution of each innovation using the equilibrium market
interest rate ρ . This difference in the market and socially optimal discount factors
creates an intertemporal distortion which generates a tendency for underinvestment in
R&D by profit-maximizing finite-lived firms. As a result one cannot rank the
socially-optimum and the market-equilibrium rates of long-run innovation and growth
in this global economy.
Since long-run growth is endogenous, we are interested in parameter changes that
accelerate long-run economic growth and reduce the level of economic welfare in this
global Schumpeterian expanding economy. In order to illustrate the role of economic
distortions and generate immiserizing endogenous growth, denote with
( , , , )Lθ α λ ρ∈ a typical parameter that affects long-run growth and obtain the
following standard decomposition of discounted welfare:
1 1 1
ln )
dU U U dg U dg
d g d L g dθ θ θ θ ρ ρ α λ
⎡∂ ∂ ∂= + = + −⎢∂ ∂ ∂ −⎣ ⎦ θ
⎤⎥ (1.9)
Immiserizing growth can arise from parameter changes that accelerate the rate of
long-run endogenous economic growth (i.e., an increase in the productivity of R&D
α , the economy’s labor endowment L, or the magnitude of innovations λ ) but
reduce the discounted welfare (i.e., / 0dU dθ < ).
Consider first the case in which there is a corrective domestic policy (in the
present model this policy can take the form of an R&D tax or subsidy) which
achieves the socially optimum level of economic growth. This means that the term in
square brackets of (1.9) is equal to zero, and therefore /dU d U /θ θ= ∂ ∂ . It is
obvious, then, from inspection of (1.5) and (1.7) that a marginal increase in α , L, or
7
λ raises the levels of long-run growth and welfare: In the presence of a corrective
licy, the possibility of immiserizing growth does not arise. This result is consisten
with the theory of distortions and welfare.
In the absence of a corrective policy, on
po t
e could demonstrate readily the possibility
of immiserizing growth. A necessary condition for this possibilty is that the market
rate must exceed the socially optimum level of long-run growth, which implies that
the term in square brackets in (1.9) is negative. Because an increase in any of these
parameters increases both the discounted value of welfare for any given level of
growth and the level of long-run growth ( i.e., / 0U θ∂ ∂ > and / 0g θ∂ ∂ > for
( , , )Lθ α λ∈ ) the sign of (1.9) is ambiguous. H the m the
( / )( / )U g dg d
owever, if agnitude of
negative term θ∂ ∂ is sufficiently large, that is larger in absolute v
than the positiv r growth is associated with lower welfare: An
increase in the economy’s labor endowment L, the magnitude of innovations
alue
e term, then highe
λ , or
the productivity of R&D services α , raises the level of long-run Schumpeterian
growth but reduces the level of discounted welfare. The intuition for this seeming
paradoxical result comes from the theory of welfare and distortions: In the presence
of distortions and increase in the productive capacity of this global economy increase
the difference between the market and socially optimal rates of innovation and long-
run growth. This affects negatively the level of welfare and can dominate the direct
welfare enhancing effect of these capacity-augmenting parameter changes. Therefore
even when the presence of economic distortions generates endogenous long-run
growth, the main insights of immeserizing-growth theory apply with equal clarity
force to a growing expanding economy as it applied to a static setting more than 45
years ago.
ly
s
,
and
4. onclusions
958) discovered the possibility of immiserizing growth using a
static a
C
Bhagwati (1
nalytical framework. This discovery set up the stage for the development of
the theory of distortions and welfare which constitutes the backbone of the modern
theory of commercial policy. The insights of the latter as well as the possibility of
immiserizing growth apply to formal neoclassical or endogenous growth dynamic
8
settings. In the absence of distortions, an expansion in an economy’s productive
capacity enhances growth and dynamic efficiency; however the presence of
distortions might create the conditions for a negative correlation between lon
economic growth and welfare. Using the theory of distortions to identify policies th
affect the level of long-run growth and welfare and prevent the possibility of
immeserizing growth is an important and relatively unexplored area in the new
generation of Schumpeterian growth models which constitutes an avenue for fu
research.
g-run
at
rther
h, (1958a), “Immiserizing Growth: A Geometrical Note”, Review of
Bhagw Economic Expansion”,
Bhagw
r, pp. 481-485.
Bhagw
.
Deardo ,
Dinopo Schumpeterian Growth
Dinopo n Schumpeterian
57-
Grossm ene and Elhanan Helpman, (1991a), “Quality Ladders in the Theory of
Growth”, Review of Economic Studies 58: pp. 43-61.
1
References
Bhagwati, Jagdis
Economic Studies, 25(3), June, pp. 201-205.
ati, Jagdish, (1958b), “International Trade and
American Economic Review, 48(5), December, pp. 941-953.
ati, Jagdish, (1968), “Distortions and Immiserizing Growth: A
Generalization”, Review of Economic Studies, 35(104), Octobe
ati, Jagdish, (1971), “The Generalized Theory of Distortions and Welfare”, in
J.N. Bhagwati, R. A. Mundell, R.W. Jones, and J. Vanek, eds., Trade, Balance
of Payments and Growth: Papers in International Economics in Honor of
Charles P. Kindleberger, Amsterdam, North Holland, Chapter 4, pp. 69-90
rff, Alan, (1973), “The Gains from Trade in and Out of Steady-State Growth”
Oxford Economic Papers, N.S. 25, July, pp. 173-191.
ulos, Elias and Fuat Sener, (2004), “New Directions in
Theory”, in H. Hanusch and A. Pyka, eds., Elgar Companion to Neo-
Schumpeterian Economics, Edward Elgar, Cheltenham.
ulos, Elias and Peter Thompson, (1999), “Scale Effects i
Models of Economic Growth”, Journal of Evolutionary Economics 9: pp. 1
185.
an, G
1 See Dinopoulos and Sener (2004), Dinopoulos and Thompson (1999) and Jones (1999) for overviews of
these models.
9
Grossman, Gene and Elhanan Helpman, (1991b), Innovation and Growth in the
Global Econo
本文档为【Immiserizing Growth in Expanding Economies 经济增长中的贫困化扩张[悲惨性的成长 英文版]】,请使用软件OFFICE或WPS软件打开。作品中的文字与图均可以修改和编辑,
图片更改请在作品中右键图片并更换,文字修改请直接点击文字进行修改,也可以新增和删除文档中的内容。
该文档来自用户分享,如有侵权行为请发邮件ishare@vip.sina.com联系网站客服,我们会及时删除。
[版权声明] 本站所有资料为用户分享产生,若发现您的权利被侵害,请联系客服邮件isharekefu@iask.cn,我们尽快处理。
本作品所展示的图片、画像、字体、音乐的版权可能需版权方额外授权,请谨慎使用。
网站提供的党政主题相关内容(国旗、国徽、党徽..)目的在于配合国家政策宣传,仅限个人学习分享使用,禁止用于任何广告和商用目的。