Thomas Cristofaro March 11, 2013 Econ 244

The Solow Growth Model in the Context of Developing Countries

The industrial revolution of the mid to late 19th century spawned the creation of the modern global economy. Increases in production capabilities, the specialization of labor, and expanded trade markets facilitated a rise in productive assets, known in economic terms as capital, used for the purpose of accruing wealth. Resultantly, there was a significant and sustained increase in international trade, personal incomes, and living status amongst a large portion of the worlds population. However, this increase has not been uniform across all geographic regions. Dozens of countries remain significantly underdeveloped in spite of the rise in technologies, informational systems, and uninhibited access to the global economy. The study of macroeconomics seeks to analyze and explain the causes of the disparity of wealth and growth rates between nations. The most famous and widely heralded contribution to the field of macro level growth analysis is Robert Solows economic growth model described in his publication entitled A Contribution to the Theory of Economic Growth (1956). Solows model ascribes development as a product of the combination of capital, technological, and labor levels within a country. The model was significant in that it proposed the idea of the diminishing return of productive assets. This contrasted with earlier growth theory assumptions that there existed constant returns to capital investment. Additional contributions to the model Solow Growth model were made by Robert Lucas (1988), who introduced the concept of human capital as an additional contributing factor towards growth. Combined, the work set forth by the two economic scholars ultimately led to the realization of the Human Capital Adjusted Solow Growth Model, also known as the modern Neo-Classical model of development. Evaluation of this model in the context of developing nations will be the primary focus of this chapter. Bangladesh,

considered on of the worlds most underdeveloped countries, will serve as a case study of this analysis. On average, the Human Capital Adjusted Solow Growth model has been fairly accurate in predicting growth and output levels of all nations in the past few decades (Knight, Norman, and Delano; 1993). However, there are distinguishing characteristics of developing countries that are unaccounted for in the model. Specifically, growth in developing countries is hampered by deficiencies in infrastructure, the lack of which inhibits the productivity of increasing units of capital. This chapter suggests amending the Modern Neoclassical Growth Model to include the presence of infrastructure constraints as a potential hindrance to growth from further capital investment. Furthermore, developing countries are unique in that significant portions of the labor population perform manual labor tasks that require little to no human capital, both in the agricultural and informal sectors of the economy. This chapter proposes an alternative approach to the evaluation of human capital accumulation that controls for levels of human capital type within an economy. This modified approach considers the fact that each of the employment types present in developing countries has a variable contributive rate of human capital towards aggregate human capital levels within an economy. Additionally, proposed changes model how growth rates of human capital vary by employment sector. Note that this analysis assumes that human capital learned by formal sector laborers contributes to the economy at a higher rate than human capital in either the informal or agricultural sectors of the economy. This chapter will remark on these changes on both a theoretical and functional level. The chapter will then proceed to discuss the implications of each of these proposed modificaitons within the context of Bangladesh. The rest of this chapter will be organized as follows: It will begin with a literature review that places the modern Human Capital Adjusted Solow Growth Model within the historical context of the intellectual history of macro-theory modeling. This will be followed by a brief but thorough description of how the model works, including the key assumptions of the model,

followed by a critique of these key assumptions. The chapter will then focus on improvements that could be made to the model. The two proposed improvements include the addition of a cap on output per capita as a result of infrastructural constraints, as well as a new method for modeling human capital based on employment types. Finally, the model will be discussed within the context of what developmental organizations can do to improve the quality of life within Bangladesh through existing and additional programs. This section will focus primarily on the work of the three developmental organizations of BRAC, Grameen, and USAID. Literature Review: The original Solow Growth Model was considered a revolutionary concept that challenged previous models of growth, fundamentally altering the field of growth theory. Early contemporary growth theory was primarily rooted in the Harrod-Domar growth model, developed by Roy Harrod and Evsey Domar, in 1939 and 1946 respectively and independently of each other. Their model states that output is a product of the level of technology and capital within a given economy. The key distinguishing assumption of the Harrod-Domar model relative to the Solow model is that there are constant returns to capital, even at very high levels of capital accumulation. Subsequently, this implies the presence of a high savings rate would instigate perpetual but unpredictable growth in an economy (Sato; 1964). The Harrod-Domar model claims that steady state level of growth exists, but also argues that there are no normalizing equilibrating forces in the model. Consequently, deviations from long run natural growth rate [results in] either growing unemployment or prolonged inflation (Sato; 1964). This instability also occurs as a result of the Harrod-Domar assumption that there should be a fixed ratio of capital to labor in the marketplace (Solow; 1956). Solow, in contrast, argued that there is an equilibrium output level as a result of a naturally occurring steady state level of capital/labor ratio based on the interaction between savings and depreciation rates of capital. Furthermore, Solow reasons that labor can be substituted for capital, and vice versa, which challenges the highly unstable equilibrium output level described by Harrod-Domar. Finally, and perhaps most

significantly, Solow states that productive assets have decreasing marginal utility towards output. Note that the original Solow model did not consider human capital as a production factor. The underlying assumptions of the Solow model state that: a. there is a steady state level of output that will be realized regardless of initial capital stock and b. there is a decreasing marginal product of capital. Furthermore, Solow contests that there should be unconditional convergence of all economies towards a steady state of income and capital levels. When combined, these arguments lead to the conclusion that less developed countries will have higher rates of growth than rich countries as a result of low initial capital levels. An early example of the intuition that low initial capital levels produced high growth levels was the high rates of growth of Western Germany and Japan following World War II. During WWII, both Japan and Germany were subject to intense carpet-bombing. A large emphasis of this air campaign was the destruction of factories in order to reduce the war fighting capacity of the axis powers, reducing the effective physical capital of the two nations. After the war, both countries were left in shambles, yet managed to rebuild quickly and experience incredible growth rates within a decade of the conclusion of conflict. Germany, for example, experienced an 8% catch up growth rate in 1951 due to the effects of high capital yields for initial capital stock as hypothesized by the original Solow model (Lucke; 2002). Also consistent with Solows hypothesis was the gradual decline in growth levels over time (Appendix: Figure 1). The growth rate of developing countries in the 20th century, however, has not been nearly as robust as was hypothesized by the original Solow model. In fact, growth rates of developing countries tended to be lower than growth rates of higher income countries in the years between 1960 and 1980 (Lucas; 1988). The dissonance between the hypothesized growth rates of developing countries and their actual growth rates led to a reevaluation of the model in order to account for other factors of output not explained in the original Solow model. Robert Lucas proposed an amended version of the Solow model that included human capital as a factor of production. Lucas begins his argument by challenging the idea of

unconditional convergence set forth using data of growth rates and income of low and highincome countries in the mid 20th century. Lucas argues that countries exhibit conditional convergence based on initial levels of technology, human capital etc. Lucas proposes amending the original Solow growth model to include human capital, defined by Lucas as general skill used for the purpose of expanding economic output, as an additional factor for growth (Lucas; 1988). Lucas argues that countries with higher levels of human capital will have higher output and per capita levels of income than countries with similar levels of technology, capital, and other economic conditions for growth. This rationale explains the high growth rates of Germany and Japan following WWII, countries which had high levels of human capital and a history of strong institutional structure. Lucas also contests that human capital can be accumulated by two methods: through teaching (what he considers withdraw[ing] effort from production) or via learning by doing method, equivalent to on the job training (Lucas; 1988). Lucas applies these lessons to the creation of cities, which he considers hyper efficient centers of productivity. With the addition of Lucas concept of human capital to the original production function, the newly formed Human Capital Adjusted Solow Growth Model behaves the same as the original Solow model, but with Human Capital as an additional factor of productivity. Model: The Human Capital Adjusted Solow Growth model argues that output is a product of physical capital, human capital, labor, and technology. The model can be written quantitatively in Cobb-Douglass form:

Y = HK(AL)1--
Where Y is total output, H is level of human capital, K is level of physical capital, A is level of technology, and L is labor force. Beta () and alpha () are exponents of values between 0 and 1 that, when applied to the mathematical framework of the equation, represent the diminishing returns of the respective input factors towards total output. This production function is represented by the concave output function in Figure 1. The concavity represents the diminishing

returns of the various production factors. Note that this output function can be taken on a per capita basis as well. We can rewrite the Solow growth model output equation to represent output Figure 1- Output Function per capita, which is done by dividing all of the factors of production by labor
Output

levels (L):
f(k,h)

Y/L=y = hk(A/L)1--
In this instance, y represents income per capita, h represents human capital per

Capital Level

capita, and k represents physical capital per capita. A, L, Beta, and Alpha all represent the same variables as before. Note that in calculating steady state capital and income levels, technology is viewed as a constant. Equilibrium capital values are determined where change in capital per worker equals zero. The changes of physical capital and human capital are determined as follows

K = skY- K H = sHY- H
Where sk and sH represent the savings rates of physical and human capital as a proportion of total output respectively, and represents the depreciation rates of capital (which is not necessarily the same for both K and H). Change in capital per worker is represented by the equation:

K/L = sky- (+n)k

Where n is equal to population growth rate. Note for the sake of simplification, this equation represents the combined amount of both physical and human capital as k. To solve for equilibrium capital, we set growth rate of capital per worker equal to zero and solve for k. The equation for calculating growth rate is deduced by dividing change in k by k. In order to solve for k* explicitly (in terms of exogenous variables), we assume the presence of technological progress. The resulting equation for the growth of K/L equals:

(K/L)/k=gk= sky- (+n+g)k = skk - (+n+g)k

In this equation, g represents growth rate of technology and k is equivalent to y. When this

growth rate is set equal to zero, we can determine k as a product of exogenous variables: k*= (s/ +n+g)^(1/1- )
This equilibrium capital level (k) is represented

Figure 2

in Figure 2 as K0. This is considered an equilibrium point because at values of k< k*, capital will increase due to increases in investment relative to depreciation, while at values of k> k*, capital levels will decrease as depreciation will exceed the accumulation of capital through savings. This tendency of an economy to reach steady state is represented by

the arrows pointing towards the equilibrium point A in figure 2. Value K1 represents a below equilibrium capital level while K2 represents and above equilibrium capital level. Equilibrium output per capita is calculated by plugging this equilibrium value of capital into the production function. This equilibrium value is represented as y0 on the Y- axis. The vertical distance between y0 and A represents consumption in the present period. Assumptions and Predictions of the Model: There are several key baseline assumptions to the Human Capital Adjusted Solow Growth model. The most important is that there are diminishing returns to both physical and human capital. The model assumes that there is a steady state at which the marginal increase in capital stock from an additional unit of capital will equal the marginal decrease in capital stock resulting from depreciation of the entire capital stock. It is also assumed that one will reach equilibrium levels of capital and output regardless of how much capital one begins with initially.

When tinkering with the model, there are some assumptions that are revealed. Notably, it is assumed that an increase in either the depreciation rate or population growth rate will decrease equilibrium output levels, while a decrease in these variables will have a positive effect on the. An increase in the population growth rate is modeled graphically in Appendix: Figure 2. It is also assumed that an increase in the savings rate will permanently increase per capita incomes, while a decrease in the savings rate will permanently lower income. An increase in the savings rate is modeled graphically in Appendix: Figure 3. Referencing the idea of convergence rates, the original Solow growth model argues that countries will exhibit unconditional convergence towards equilibrium output and capital levels. It was subsequently theorized that lower income countries would have higher growth and convergence rates than higher income countries. The Human Capital Augmented Solow Growth Model, developed by Robert Lucas, argues that convergence rates are dependent on the levels of other factors of production in the economy. Thus less developed countries will have slower growth rates from capital accumulation than higher income countries. Within these conditional groupings, however, lower income countries with lower initial levels of physical and human capital will still exhibit higher convergence rates than nations with higher initial capital stocks, according to the intuition of the model. The fundamental argument that there are depreciating benefits to capital, both physical and human, is fundamentally sound. To put this in the context of a theoretical micro level example, it is a logical conclusion that increasing the amount of machinery in a factory does no good if their are either too few people to staff those new machines or the costs of maintaining these machines outweigh the benefit they produce. Similarly, human capital increases can only lead to a limited number of improvements in work efficiency. I also agree with the intuition of variable convergence rates based on conditions for growth as proposed by Robert Lucas. Like Lucas argues, I agree that there are conditions required for growth, such as effective institutions, which have a tremendous impact on convergence rates

One concern I have with the original model is the intuition that a permanent increase in saving will permanently increase long run income per capita. Let me start out by saying that I do agree with the Solow Models intuition that increasing the savings rate will increase incomes in the long run. However, I think that a sacrifice in current consumption in certain economies brought on by increasing savings could potentially disrupt the economy, inhibiting economic growth in future periods. This concern is furthered by the widely recognized notion that an increase in savings rates will have an immediate positive impact on growth rates, and that there is no decrease in income per capita even in the short run as a result of increased savings. This is the viewpoint presented in current macro theory textbooks (Carlin and Soskice; 2006). I do agree with the fact intuition that, as modeled in the Solow Model, there are decreasing marginal benefits to increases in savings. Another critique of the Solow Growth Model is that it assumes very poor countries are able to benefit immediately from an influx in capital. Furthermore, the model assumes that the rate of return of this capital will be very high relative to benefits from future increases in capital. However, it is somewhat optimistic to assume that very poor nations will be able to fully optimize their newly acquired or developed capital stock. This reality tends be the case for exceedingly poor countries stuck in extreme poverty traps. The problem is articulated by the UN millennium

Figure 3: Solow Model with Extreme Poverty Constraints

project, which states that when capital levels are very low initially marginal productivity of capital also tends to be very low (instead of nearly infinite, as the standard theory assumes), because a minimum threshold of capital is needed before modern production processes can be started (Sachs et al; 2004). This phenomenon is shown in Figure 3,

which illustrates a country in which there are practically no returns to additional units capital

when added to an exceedingly low initial stock of capital. Furthermore, Figure 3 also illustrates the intuition of a poverty trap, as capital levels below kT will be eaten away naturally by depreciation, which exceeds savings capabilities in extremely poor countries. Though this poverty trap may not exist in Bangladesh, the Solow models incapacity to explain this phenomenon is a critique of the models capacity to explain growth in developing countries, which tend to exhibit particular economic constraints. Critical Assessment and Modifications This section will focus on adjustments to the Human Capital Solow Growth Model that will enhance the models effectiveness in describing growth within developing countries. I propose two changes to the model. The first is a cap on output per capita as determined by infrastructure constraints. The second is proposed adjustments to the evaluation of human capital within developing countries as a result of unique labor markets. The current Human Capital Adjusted Solow Growth model theorizes that increases in capital, both human and physical, will have ever decreasing but positive marginal benefit towards per capita income of a given country. This occurs even with increases in capital levels above equilibrium output. However, this model does not consider infrastructure shortcomings as a limitation towards the effectiveness of additional units of capital, particularly physical capital. Developing countries such as Bangladesh typically suffer from deficiencies in infrastructure as a result of a combination of factors including poor central management, corruption, and lagging economic development. As a result, additional units of capital to the existing physical capital stock of such underdeveloped countries are either not effectively used or they detract from other physical capital usefulness due to the finite infrastructure capacity of a given country. With ever increases in physical capital levels, additional units of capital eventually yield no effective output as infrastructure constraints fully limit the amount of physical capital that can be used within a country. This scenario is shown in Figure 4. In this graphical example, equilibrium output level of capital per worker is still determined by where growth of capital per worker is equal to zero.

At this equilibrium capital level, however, potential output (represented by the original production function) is handicapped by the limits set by infrastructure, represented by the horizontal line at y*. Instead, output is determined by the maximum amount of effectively used capital. In figure 4, k* represents the equilibrium capital determined by conventional means (equating gk=0 and finding the corresponding k value) while k*Max represents the maximum amount of capital that can be used effectively as based on the augmented equation. y0 represents equilibrium output without infrastructural constraints, while y* represents maximum output per capita as determined by the function of k*max. The vertical distance between y0 and y* represents the loss in income per capita that results from infrastructural constraints. Figure 4: Modified Solow Growth Model with Infrastructure Constraints

In a situation represented by figure 4, an economy does not benefit from capital investment over k*Max. Equilibrium output is set by the function of the maximum amount of effectively usable capital.

As a result of the intuition of the infrastructure cap system articulated above, I propose changes to the formulation of the Solow Growth Model production function with consideration to the infrastructure cap. Currently, our output per capita function is represented by:

y = hk(A/L)1--
In order to represent the potential limits of infrastructure towards growth, I propose the reformulation of the Solow output per capita function as a min function of the original output function and the infrastructure constraint:

y = MIN [hk*(A/L)1--, Infrastructure Constraint at (kMax)]

In this example, output per capita is either the minimum of the original production function or the infrastructure constraint, which limits output per capita at a set value. Establishing a formula for the infrastructure constraint that could be used across different countries would be difficult mainly due to the fact that: a. the effects of infrastructure are very difficult to measure and b. infrastructure problems vary between different countries. For example, a country such as Bangladesh has plenty of water available for usage in physical production, but may be limited by power availability, while an oil rich country like South Sudan may have the opposite problem. For the sake of example, I consider electricity to be the limiting output in developing countries. Using this assumption as the basis for my equations, I formulate a method for determining maximum output per capita as a product of the maximum level of fully effective physical capital as constrained by the amount of available electricity within an economy. Notation: PK represents power that can be used for capital, TEC represents total electrical capacity within a country, n represents population with access to electricity, Ahc represents average home power consumption (for those with power) not used in output/ production of goods, AvgK represents the average amount of electricity used by each unit of capital, KMax represents the total amount of capital that can be supported by the current level of infrastructure, k*Max represents maximum capital available per worker (KMax/ L)

Equations: Step 1: Calculate amount of power available for capital usage Available power available for capital usage = Total Electrical Capacity population * (Average home electrical consumption) Simple notation form: PK= TEC n (Ahc) Step 2: Calculate maximum amount of capital that can be used at optimal electrical usage Available power available for output (Average power requirement per unit of capital)*capital=0 Simple notation form:

PK (AvgK) * KMax = 0

KMax = PK/ (AvgK)

Step 3: Calculate maximum output per capita by plugging the max capital value (KMax) into the original production function Maximum output per capita = Production Function (Kmax) Simple Notation Form

y* = F(KMax/L) = hk*Max(A/L)1--
This value y* is represented by the horizontal line in Figure 4. Note that these series of equations assume that production is hampered by only one infrastructural type (such as electricity), which is considered the constraining variable towards growth. It assumes that all capital up to K Max levels is optimized to its full potential. It also assumes that capital additions above k*Max levels reduces the effectiveness of existing capital (ie doubling the total amount of capital will make all units of capital half as effective as its potential). The intuition of this model suggests that increases in population with electricity or increases in non-productive electrical usage rates will decrease output per capita levels (and vice/versa for both variables). Increasing the total amount of electricity within a country or making capital more energy efficient (lowering AvgK) will raise output per capita (and vice/ versa for both variables). This example considers electricity as the constraining variable, but the

same intuition could be used in substituting other types of infrastructure into the equation. For example, this model could assume that water is the limiting factor towards capital optimization, which would not change the math but only the labels on the equations. The implications of this model suggest that equilibrium output in developing countries could potentially be lower than previously calculated if infrastructure limits capital effectiveness. The next modification I propose to the Human Capital Adjusted Solow Growth Model is a series of adjustments to the treatment of human capital within an economy. The equations related to human capital as modeled by Robert Lucas treat[s] all workers in the economy as being identical. (Lucas; 1988). However, as shown in the work of Harris and Todaro, developing countries are unique in that there are three primary types of employees within developing countries: well paid formal sector workers with high output jobs, poorly paid informal sector laborers in the slums of productive city centers, and agricultural laborers (Harris-Todaro; 1970). This analysis assumes that these three different employee types contribute useful human capital to the economy at different rates. Furthermore, this analysis assumes that each individual employment type has its own unique human capital stock, which accumulate at different rates. We assume that formal sector laborers will both accumulate human capital faster and be able to apply their human capital knowledge to the economy at a higher rate than the other two employment types. (Whether informal laborers or agricultural workers contribute more to the economy in terms of human capital is unkown.) Hence, we propose adjustments to the growth rates of human capital based on the various contributive rates of the three types of laborers. The current human capital accumulation function is such:

H = sH Y H
Where H represents total human capital, sH represents the savings rate of new human capital, and represents depreciation rate of existing human capital. This formulation treats all workers the same. In order to represent the various human capital accumulation of the three different

employment types, we introduce three functions representing the change in human capital of the three working types listed above. Formal: HF = sHF Y HF Informal: HI = sHIY HI Agricultural: HA = sHA Y HA This classification system implies that the Human Capital Adjusted Solow Growth Model should be based on three unique types of human capital. Consequently, we must also assume that the Human Capital Adjusted Solow Growth Model is a function of three different labor types as well. The new implications of the model change are included in an adjusted output function, modeled as such:

Y= f[(HF, HI, HA,) K(A(LF, LI, LA)) 1--

This equation models output as a function of the three types of human capital, the three types of laborers, as well as technology and capital. However, this equation is incomplete. This equation requires further adjustments in order to actually calculate output based on a system of three employment types. In its current state, this equation is merely a representation of an equation that would be able to calculate output based on distinct employment types. The purpose of such an equation would be to find a more precise method of measuring equilibrium output levels based on the workforce structure in developing countries. The implications of this model are unclear, however. Whether equilibrium output per capita rises or falls based on changes to the structure of the model is dependent on labor environment within a given country. Case Studies in Bangladesh: The remainder of this chapter will focus on case study analysis of infrastructure/ capital building and educational programs occurring within Bangladesh. These programs will be discussed as how they relate to the both the original Human Capital Adjusted Solow Growth Model as well as the modified interpretation of the model. Current programs and programs that

could be undertaken by the non-governmental organizations (NGOs) of BRAC and Grameen, as well as USAID will be the focus of this section. This section will conclude with suggestions about what more could be done to improve the operations of these NGOs in developing Bangladesh. This case study section will begin with an introduction and analysis of the infrastructural building programs within Bangladesh. Grameenphone is perhaps the most prominent example of infrastructure development undertaken by the NGOs within Bangladesh. Grameenphone is coowned by Telenor, a Norwegian based for profit telecommunications company, and Grameen Telecom, a non-profit wing of the Grameen family of social programs. Grameenphone, which is a for profit company when viewed as a sum of its parts, has invested over a billion dollars in communications infrastructure within Bangladesh (New Media and Development Communication) Concurrently, Grameen Telecom, which is partially funded by the for profit sector of the company, through its own operations provides low cost cellphones to poor villagers enrolled in Grameens microfinance program. According to Grameen Telecoms website, this program has resulted in phone access for over 1 million poor villagers in 81,000 out of 85,500 villages in the country (Present Status (as on 31 December, 2012)). Beneficiaries of such subsidized phones profit immensely from an expansion of information and ease of communication across regions. Furthermore, these phones can be shared, resulting in positive externalities for villagers not enrolled in the program. The combined profit seeking and nonprofitable work of Grameenphone has been instrumental in both providing additional physical capital to Bangladesh, as well as improving existing human capital effectiveness by improving communication between individuals. BRACs driving school is an example of a program that improves physical capital efficiency by increasing the amount of human capital within the economy. BRACs driving school intends to expand safe driving practices within Bangladesh, which has notoriously bad traffic and road safety due to infrastructure constraints and lack of driving regulations. By

increasing the driving knowledge of Bangladeshs drivers, roads will be safer and more efficient, decreasing transportation costs within Bangladesh. Grameen Shakti, in contrast to BRACs driving school, improves human capital through an influx of physical capital. By giving villagers access to power, they are able to watch TV, and read books at night, for example. In doing so, these villagers are better educated and more aware of the world around them. In each of these three programs, initiatives by Bangladeshs NGOs help expand and promote efficient usage of physical and human capital. On the basis of Solow Growth principals, this will have a positive impact on GDP per capita of Bangladeshs residents. The positive relationship is especially significant when considering the modified version of the growth model proposed earlier, given the fact that these initiatives will reduce infrastructural limits towards growth through increases in physical and human capital stocks. One major shortcoming I see with aid organizations in solving the problems of infrastructure within Bangladesh is the lack of a framework for large public works projects in the country. This critique is directed in particular at USAID, which has not explicitly made improvements in infrastructure a priority of their organization moving forward (Bangladesh Country Development Cooperation Strategy: FY2011-2016). Andrea Amaro and William Miles make an argument that investments in infrastructure in developing countries can be particularly helpful when taken in the context of production costs for international corporations (Miles and Amaro; 2006). In general, developing countries that benefit from foreign aid are concerned that an increase in the salaries of workers within a country as a result of development will discourage foreign companies from continuing to invest in their country in the future. By focusing foreign direct investments in infrastructure through organizations such as USAID, the effects of increasing wages towards production costs are oftentimes mitigated by decreases in transportation costs, helping to retain foreign investors. An example of the cost saving benefits of infrastructure investment can be seen quite clearly in the case of the construction of the Jumana Bridge in central Bangladesh. The Jumana Bridge

(completed in 1998) was the first bridge to span the Jumana River, connecting the less developed Figure 5: Rates of Transport Margins by Sector (Before and After Bridge) northern regions of Bangladesh with the more developed southern regions. According to a report on the effects of the Jumana Bridge, within 5 years of the completion of the bridge transportation costs of transporting goods by truck over the river had fallen by 30% while transportation times for truck transport had fallen by 50% (Luppino et al; 2004). This fall in transport rates is illustrated in figure 5, which illustrates the fact that transportation costs fell for the transportation of all types of goods across the river (Luppino et al; 2004). Major public works projects such as the Jumana Bridge are few and far between in Bangladesh. Unfortunately, organizations such as BRAC and Grameen are ill equipped to undertake massive infrastructural projects on their own. This is due to the fact that public works projects such as roads are both costly and yield a public good. As roads are public goods, organizations that were to build roads could not recoup any return on investment from such roads, as there are no limits as to who can access the roads. The only way to extract rents from a road project would be instituting a toll system. Such a system, however, brings up ethical concerns about who can use this roads, especially in a country as poor as Bangladesh. Hence, any public works project undertaken by BRAC or Grameen would likely occur on a small scale, benefitting small communities in particularly dire circumstances. USAID, in contrast to the NGOs, has the capacity to loan money to the government in order to be used for the purpose of building major public works. Such investment would surely work to improve infrastructural constraints described in the augmented version of the Human Capital Augmented Solow Growth Model, but may have low rate of returns due to the high cost

of government corruption. In summary, infrastructure constraints will continue to prohibit growth within Bangladesh moving forward. However, there are a limited remedies available to development organizations in combatting this problem. The rest of the case study section will focus on education programs within Bangladesh. Currently, BRAC, Grameen, and USAID are all involved in some sort of education program for children. BRAC runs an expansive system of schools, which provides education to young children in regions where there are no government schools. Grameen has recently developed a pre-school system called Grameen Shikkha-OKWorld Pre-school Project, which provides programs for toddlers before primary school. Grameen also program also provides scholarships to poor but talented students through its educational bureau, Grameen Shikkha. USAID does not run any schools of its own, but finance education programs via outside contracting to other NGOs. Each of these organizations has been instrumental in promoting the educational system within Bangladesh. These efforts, when considered in the context of the Human Capital Adjusted Solow Growth Model, should be viewed as positive contributions to growth within the Bangladeshi economy. Earlier in the chapter, I suggested adjusting method for evaluating human capital accumulation within the Human Capital Adjusted Solow Growth Model. The basis for my argument was that there tends to be three primary types of workers within a developing economy; formal sector workers, informal sector workers, and agricultural laborers. I postulated that the contributive rate of an individual worker towards human capital levels to a developing economy would be dependent on which one of the three labor types this individual worker occupied. Furthermore, I postulated that an individual workers human capital growth would vary depending on which one of the three labor types this individual worker occupied as well. My assumption was that the rates of human capital contribution and growth would be highest for formal sector laborers. These conclusions may imply that greater educational investment should be made in educating formal sector workers. However, this is not the conclusion that one should

make. The argument for my modification was merely a proposal for reevaluating human capital levels based on the types of workers typical in developing countries. Education should be available to all members of a developing society in order to promote equality across both regions and employment types. Conclusions: The Human Capital Adjusted Solow Growth Model remains the most influential and widely lauded macro-level explanatory model for growth within states. The models effectiveness resides in the fact that it provides a relatively simple representation of a complex series of growth variables. In general, the human capital adjusted version of the model has been relatively effective in predicting and describing growth rates and income levels within most nations. However, the model could be amended in its treatment of developing countries in order to account for certain unique characteristics of developing countries. Specifically, the model should consider infrastructure as a constraint towards the effectiveness of capital within developing countries. Furthermore, the model should consider the distinctive characteristics of the labor market in developing countries in measuring human capital levels within developing countries. Bangladesh is considered a success story of development. All development indices illustrate a positive development of the country. Poverty rates, for example, have fallen from 58.8% in 1991-92 to 31.5% in 2010 (Islam; 2004) (CIA World Factbook; 2010). Organizations such as BRAC, Grameen, and USAID have been instrumental in fostering positive changes within the country. However, Bangladesh is far from reaching first world status. In order to promote continuous growth, a committed effort needs to be made to improve existing development programs, particularly educational programs, while establishing reforms to promote continued development of capital, including infrastructure. Through these initiatives, Bangladesh will continue to inch towards becoming a middle-income country.

Appendix: Figure 1: GDP Growth Rate and Catch U Growth Rate of Germany following WWII

Figure 2: Rise in Population Growth Rate Solow Growth Model

Figure 3: A Rise in Savings Rate Solow Growth Model

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