The shape of transitional dynamics depends on initial physical capital and technology intensity

What is it about?

Historical post take-off evidence for the nowadays most developed countries seems to suggest monotonic (downward) transitional dynamics of the economic growth rates. However, if one looks at the growth experience of a number of countries in the postwar period, the data also suggests non-monotonic transitions, either hump-shaped or inverted hump-shaped. This paper develops a growth model with physical capital and two types of R&D, where both the intensive and extensive growth margins are fully endogenous. Our model is able to predict monotonic, hump-shaped, and inverted hump-shaped trajectories, therefore encompassing the diverse convergence behaviour observed in the empirical data on modern growth experiences. In particular, we show how distinct shapes and speeds of the transition path may emerge depending on the economy’s characteristics at the outset of the modern growth process, namely the initial endowment of physical versus immaterial inputs (e.g., physical capital versus technological knowledge).

Featured Image

Why is it important?

Overall, our results suggest that institutions may be relevant for a country’s growth experience also by playing a role in the determination of the initial endowment of physical versus immaterial inputs: on one hand, physical capital versus technological-knowledge stock; on the other, the proportion of the extensive versus the intensive (or human-capital) component of a given technological-knowledge stock. In this context, not only may institutions be capable of influencing the timing of the economies’ take-off, but also the characteristics of their transition (speed and shape) towards the respective long-run equilibrium. It would be interesting to further connect our results to the historical experience of several of these countries and, in particular, to the role played by the early industrialization policies they set in place. For instance, while the import-replacement policies in the first years of industrialization in several Latin American countries led to a rapid building-up of physical capital vis-a-vis the remaining inputs, the export-based industrialization policies followed in several Southeast Asian countries induced a more balanced accumulation of physical and immaterial inputs. As noted above, these sorts of dynamics correspond in our model to economies following, respectively, inverted hump-shaped and hump-shaped transitions.