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 2019

Essays on Economic
Development and Growth

Dr. Maiju Johanna Perälä

Dr. MaijuScience
Classical Johanna Perälä 2
Monographs
CLASSICAL SCIENCE MONOGRAPHS 2
ESSAYS ON ECONOMIC DEVELOPMENT AND GROWTH
Essays on Economic Development and Growth: A Dissertation Submitted to the Graduate
School of the University of Notre Dame in Partial Fulfillment of the Requirements for the
Degree of Doctor of Philosophy

Available in the following languages

English

CLASSICAL SCIENCE MONOGRAPHS

1. On Distributed Systems Architectures and Organisation: A Plan for a More Objective

Search Engine by Dr. Maiju Johanna Perälä.

2. Essays on Economic Development and Growth: A Dissertation Submitted to the Graduate

School of the University of Notre Dame in Partial Fulfillment of the Requirements for the
Degree of Doctor of Philosophy by Dr. Maiju Johanna Perälä.
ESSAYS ON ECONOMIC DEVELOPMENT AND GROWTH

BY

DR. MAIJU JOHANNA PERÄLÄ

CLASSICAL SCIENCE MONOGRAPHS 2

AUTHENTIC VEGAN PUBLISHING

RIUTTALA, FINLAND
Essays on Economic Development and Growth: A Dissertation Submitted to the Graduate
School of the University of Notre Dame in Partial Fulfillment of the Requirements for the
Degree of Doctor of Philosophy

Copyright © 2002 by Dr. Maiju Johanna Perälä

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ISSN 2669-9192
ISBN 978-952-7376-50-8 (PDF)
 To those
with genuine respect
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and see
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in human existence
and life.
 TABLE OF CONTENTS

HALF TITLE
SERIES TITLE
TITLE PAGE
COPYRIGHT
DEDICATION
EPIGRAPH

LIST OF TABLES I

LIST OF FIGURES III

ACKNOWLEDGEMENTS IV

INTRODUCTION 1
References 7

CHAPTER 1 A REVISION OF HISTORY ALLYN YOUNG AND THE EMERGENCE OF DEVELOPMENT

THEORY 10
1.1 Introduction 10
1.2 Allyn Young's Vision of Growth 13
1.2.1 Drawing upon Marshall 15
1.2.2 Borrowing a theme from the master 21
1.2.2.1 First variation on the theme: incorporation of roundabout, capital-
intensive, production methods 22
1.2.2.2 Second variation on the theme: industrial division of labor 29
1.2.3 Assessing the impact 30
1.3 Paul Rosenstein-Rodan: Dynamic Externalities and Absence of Growth 33
1.4 Ragnar Nurkse: Theory of Stagnation and Theory of Growth 40
1.5 Concluding Remarks 46
1.6 References 49

CHAPTER 2 INCREASING RETURNS IN THE AGGREGATE: FACT OR FICTION? 52

 2.1 Introduction 52
2.2 Literature Review 58
2.3 Methodology and Data Sources 64
2.3.1 Cobb-Douglas production function 65
2.3.2 Constant Elasticity of Substitution production function 70
2.3.3 Parameter robustness tests 75
2.3.4 Data and empirical estimation methods 77
2.4 Empirical Analysis 83
2.4.1 Cobb-Douglas production function estimation results 83
2.4.2 CES production function estimation results 105
2.4.3 Summary of main empirical findings 110
2.5 Concluding Remarks 112
2.6 References 114

CHAPTER 3 EXPLAINING GROWTH FAILURES: AN EMPIRICAL INVESTIGATION OF NATURAL

RESOURCE TYPE AND GROWTH 118
3.1 Introduction 118
3.2 Stylized Facts of Growth Failures: Geography, Size, and Stage of Development
122
3.3 Explanations for Failures 130
3.4 Methodology 141
3.4.1 Initial conditions analysis 142
3.4.2 Cross-country growth regression analysis 143
3.4.3 Sample and data sources 144
3.5 Empirical Analysis 149
3.5.1 Initial conditions analysis for point source and diffuse economies 154
3.5.2 Robustness regressions for lack of social cohesion in point source
economies 162
3.6 Conclusions 172
3.7 References 174

APPENDIX 1 ADAM SMITH: THE DIVISION OF LABOR IS LIMITED BY THE EXTENT OF THE
MARKET 178

APPENDIX 2 181
A2.1 Barro (1999) Simple Formulation of Romer (1986) 181
 A2.2 Simple Formulation of Lucas (1988) 182
A2.3 Variable Sources and Definitions 184
A2.4 Tables 186

APPENDIX 3 189
A3.1 Figures and Tables 189
A3.2 Sample Description and Stage of Development Groups 195
A3.2.1 Sample description 195
A3.2.2 1960 income groups for economies 196
A3.3 Variable Definitions and Sources for Initial Conditions Analysis 199
A3.4 Variable Definitions and Sources for Robustness Regressions 202
A3.5 Natural Resource Endowment and Social Cohesion in Point Source
Economies 205
A3.6 Natural Resource Endowment and Social Cohesion in Diffuse Economies209
 ACKNOWLEDGEMENTS

I gratefully acknowledge the dissertation completion grant and the graduate assistantship

award from the Department of Economics and the Graduate School of the University of Notre

Dame, respectively; the PhD research internship grant from UNU/WIDER; and the

dissertation research grant from the Finnish Cultural Foundation. They have not only made

this research possible but also have contributed to improving its quality.
 INTRODUCTION

The contributions included in this dissertation are motivated by the paradox that two research

fields within economics, pursuing, in essence, identical research questions exist in parallel to

each other. One of the most central lines of inquiry within development economics is the

understanding of the process of growth and development. At the same time, a separate

research field, growth economics, dedicated to the study of economic growth is actively

explaining the same phenomenon. While the former field, emerged in the aftermath of the

Second World War with the sole purpose of explaining, understanding, and overcoming

underdevelopment in the regions affected by it,1 the latter soon after began explaining the

process of growth in advanced, developed economies.2

During the last decade, a ‘hybrid’ literature with a deliberate intent of bridging the gap

between development and growth economics has begun forming. Researchers contributing to

this literature adjoin insights of development economics with those of growth economics and

1
Rosenstein-Rodan (1943) is widely heralded as the seminal contribution that ignited the field, though Arndt
(1987) points out that Sun Yat-sen (1922) closely resembled the core notions of post war development theory
(16).
2
Solow himself is quite explicit about the focus of his seminal contribution. “In my view, growth theory was
conceived as a model of the growth of an industrial economy” (Solow 2001, 283). He continues that “... I have
never applied such a model to a developing economy, because I thought the underlying machinery would apply
mainly to a planned economy or a well-developed market economy” (ibid, 283). Although this emphasis that
neoclassical growth theory solely focuses on developed economies is quite recent as there has been a number of
contributions pointing to a peculiar characteristic of growth empirics literature, analyzing developed and
developing economies under an identical framework (e.g., Temple 1999).

1
vice versa to better understand the process of growth and development across countries. 3

Though it is observable that this hybrid literature is gaining momentum, the close historical

relation between the classical growth theory and the early development theory is not fully

recognized today. As development economics pioneers began explaining the phenomenon of

underdevelopment, they drew heavily upon the notions present in the classical growth theory

that culminated in Allyn Young (1928). While there are scattered references within

development economics literature that recognizes this connection, a thorough analysis

between the theoretical thought of Young and development economics pioneers such as Paul

Rosenstein-Rodan and Ragnar Nurkse is missing. Within the general history of thought

literature on economic growth, the narrative on Young also lacks the recognition of the

influence that Young’s thought had on development economics pioneers and he is argued to

have been a case of professional neglect apart from a few references to him from demand side

growth theory, most notably advocated by Kaldor.4

Hence the main objective of the first chapter is to extend the history of thought narrative on

Young by recognizing the close relationship that early development economics contributions

had with the classical growth theory. While doing so, the chapter also clarifies the historical

background of recent contributions to the study of economic development and growth. It

argues that the notions of pecuniary externalities and complementarities, the ‘engines’ of the

3
Contributions belonging to this literature are Murphy, Shleifer, and Vishny (1989a,b), Krugman (1991, 1993),
Rodríguez-Clare (1996), and Ros (2000), to name a few. Sala-i-Martin (2001), a recent assessment of economic
growth literature, recognizes the formation of this body of knowledge and points out that this type of “cross-
discipline interaction” is also taking place with economic growth and other subfields as well (e.g., economic
geography, econometrics, and industrial organization). Perhaps one measure how new developments within
economics become established in the core of economic theory, history, and history of thought is when they
become adopted into standard textbooks. The recognition of the paradox and the hybrid literature in introductory
textbooks on growth economics such as Gylfason (1999) testifies for the growing recognition and acceptance of
this novelty within development and growth economics.
4
Blitch (1983a,b; 1995) have been quite influential in promoting the view that Young has been neglected by the
profession. “Despite the attention it received at the time of delivery, Young’s paper has not been utilized for the
purpose of constructing a new version of the economic paradigm. His insights and conclusions have not been
followed, with the notable exception of Nicholas Kaldor ...” Blitch (1983a, 22).

2
growth process in Rosenstein-Rodan’s and Nurkse’s theories of the ‘big push’ and ‘vicious

circle and balanced growth’, 5 respectively, are quite similar to the notions described by

Young. Furthermore, indivisibilities and inelasticities of demands and supplies outlined by

Young (1928) as complications present in real world that hamper the operation of his

externalities-fuelled growth are brought forward as obstacles for economic development and

growth in early development theory literature. Most notable difference between the theories

of the former authors and that of the latter is the context in which they were applied and

hence a reader gets dramatically different impressions from them at first sight. However, a

more thorough analysis shows that the conditions that prevent development and growth in

underdeveloped regions according the early development theory represent the breakdown of

the conditions that Young highlights as necessary ones for self-sustaining growth to occur.

Hence the cumulative growth process as described by Young underlies the view of both early

development theorists, though their focus is on the malfunctioning of this process.

While there are by now a number of theoretical contributions that have formalized many

early development economics insights and have brought them into the domain of formal

economic theory,6 hence addressing one of the shortcomings of the development economics

literature as highlighted in Krugman (1993), empirical contributions in this vein seem to lag

behind. With hindsight, this seems rather surprising, as during the past decade and a half,

there has been a dramatic improvement in the availability and above all, the quality of

international data, necessarily accompanied with the improvement in national data collection

that is taking place especially in developing countries. As a matter of fact, systematic

empirical research within development economics tradition seeking to discern commonalities

5
Nurkse’s contribution can also be called as theory of stagnation and growth.
6
Murphy, Shleifer, and Vishny (1989a,b); Krugman (1991, 1993); Rodríguez-Clare (1996); Skott and Ros
(1997); and Ros (2000).

3
in development experiences across countries seems to have ceased, paradoxically, at the time

the publication of major internationally comparable datasets began in easily accessible

electronic formats7 and the most common theories and beliefs within the literature stood the

greatest chance of being critically examined.

As anyone familiar with the empirical research on growth knows, these datasets have

certainly not suffered from a lack of attention and there is no shortage of empirical work

investigating the determinants of growth, especially in a cross-country framework. As a

matter of fact, these empirical contributions might seem excessive to some and useless to

others as the fragility of any given regression specification is well-known, as argued

convincingly in sensitivity studies by Levine and Renelt (1992) and Sala-i-Martin (1997).

Given that the majority of these studies have been done in the tradition of growth economics,

they are problematic in their approach as they adopt a relatively high level of abstraction and,

almost as a rule, ignore the characteristic differences between developed and developing

economies.8 From the perspective of development economics, the resistance to executing a

sample split between developed and developing countries seems rather astonishing, even

though it has been advocated as a solution to overcome parameter heterogeneity and to

7
The release of major datasets, such as Penn World Tables (Summers and Heston 1988) and World Bank’s
World Tables, concentrated towards the end of 1980s. The greatest treatises examining the patters of
development and structural transformation of economies in the process of industrialization (such as Chenery and
Syrquin 1975; Chenery, Robinson, and Syrquin 1986; Morris and Adelman 1988, Syrquin and Chenery 1989)
were published by the mid to end 1980s, and hence these studies, though undoubtedly using best data sources
available at the time, have not been able to take advantage of this novel development in the history of empirical
research, proliferation in international data.
8
A careful observation of the emergence of this literature, which gained momentum as a by-product of the
convergence controversy, shows that the level of abstraction adopted in the seminal contributions, such as
Abramovitz (1986) and Baumol (1986), was at a much lower level than what was adopted by those who were to
follow. Abramovitz (1986) discusses in detail the possible forces that are likely to act as an impediment for the
forces of convergence among the low-income economies and points to the fact that “technological
backwardness is not usually a mere accident” (384). Hence he recognizes the strong societal forces preventing
the catch-up process that are present in many of the backward countries. Furthermore, Baumol (1986) brings
forth empirical evidence showing that less developed countries have not converged, a result that is reiterated in
Baumol and Wolff (1988). However, the ensuing contributions within the classical tradition have abstracted
away from this empirical finding despite its early theoretical and empirical recognition.

4
investigate the robustness of regression results for methodological reasons, as in Temple

(1999). A recent shift in this trend can be detected as an increasing recognition of the

characteristic differences between developed and developing economies can be deduced from

novel contributions that recognize the differences in the parameter estimates between sub-

samples, such as different stage of development groups (e.g., Ades and Glaeser 1999, Duffy

and Papageorgiou 2000, Durlauf and Johnson 1995, and Masters and McMillan 2001).

Current growth empirics literature has much to gain from development economics insights

and approach which adopts a lower level of abstraction accompanied with “the attempt to

learn about the problems of development and the processes of growth by comparing the

situations and growth experiences of different countries” (Stern 1989, 599). At the same time,

the empirical growth research can provide a real benefit to that on development economics

through its more sophisticated empirical and econometric methods especially adjoined with

better quality data and longer time-series available to investigate the process of growth and

development today. The last two chapters of this dissertation address this shortcoming within

the literature and conduct two empirical studies in this spirit, combining contemporary

regression methods and data to critically examine the notions that have been brought forward

within development economics literature.

The first of the empirical contributions in chapter two examines whether there exits empirical

evidence for increasing returns in the aggregate and if so, whether this evidence varies across

stage of development as postulated by the early development theorists. The empirical results

brought forward in this chapter suggest that the overall evidence leans towards aggregate

increasing returns across all samples. Within Cobb-Douglas framework, stronger evidence for

them is found among samples depicting economies at early stages of development, a result

robust to various functional forms as well as different stage of development criteria. The CES

framework, in turn, supports aggregate scale economies for advanced economies, while

5
unitary elasticity of substitution cannot be rejected for less developed economies, giving

further support for the Cobb-Douglas estimates. Given that evidence for scale economies for

different groups is found within different estimation frameworks, no clear judgment across

different stages of development categorizations can be made. The most important finding

brought forward in this chapter is the unequivocal importance that the stage of development

plays in cross-country regression results, and thus, it supports the notion that development

economics approach can significantly improve the explanatory power of cross-country

development and growth analysis.

The second empirical contribution in chapter three analyses the growth experiences across

countries in a less abstract fashion. More specifically, the focus shifts first to highlight growth

successes and failures across countries, showing the latter’s perplexing predominance and

persistence at early stages of development. In fact, the analysis shows that nearly forty

developing countries had a real per capita income level achieved in some cases nearly four

decades ago. The second half of the essay proposes an explanation for these failures through

an empirical investigation that highlights the importance of natural resource endowment type.

The results show that in the presence of social fragmentation, the nature of natural resource

endowment bears great significance, as those natural resource rich economies denoted as

point source (oil and mineral economies) are more negatively correlated with growth than

those economies which are characterized as diffuse (agricultural) ones. The robustness of this

result is tested across a number of standard growth regression specifications within the

literature.

It is encouraging to observe that after decades of largely absence of interaction between the

fields of development and growth economics, this type of hybrid literature has begun forming

and prominent calls for an approach common to development economics have been made:

“The economies you are comparing must have something in common, some part of the

6
driving mechanism. If Robert Summers and Alan Heston were suddenly to discover national

income and product accounts from an economy that existed on Mars a million years ago, you

would not expect that economy to fit neatly into a Barro regression. So the economies must

have some things in common, but not everything” (Solow 2001, 284).

REFERENCES

Abramovitz, Moses. 1986. Catching Up, Forging Ahead, and Falling Behind. Journal of
Economic History 46(2): 385-406.

Ades, Alberto F. and Edward L. Glaeser. 1999. Evidence on Growth, Increasing Returns, and
the Extent of the Market. Quarterly Journal of Economics 114(3): 1025-1045.

Arndt, H. W. 1987. Economic Development: The History of an Idea. Chicago: The

University of Chicago Press.

Baumol, William J. 1986. Productivity Growth, Convergence, and Welfare: What the Long-
Run Data Show. American Economic Review 76(5): 1072-1085.

Baumol, William J. and Edward N. Wolff. 1988. Productivity Growth, Convergence, and
Welfare: Reply. American Economic Review 78(5): 1155-1159.

Blitch, Charles P. 1995. Allyn Young: The Peripatetic Economist. New York: St. Martin’s
Press, Inc.

------. 1983a. Allyn A. Young: a curious case of professional neglect. History of Political
Economy 15(1): 1-24.

------. 1983b. Allyn Young on increasing returns. Journal of Post-Keynesian Economics 5(3):
359-372.

Chenery, Hollis, Sherman Robinson, and Moshe Syrquin. 1986. Industrialization and
Growth: A Comparative Study. New York: Oxford University Press.

Chenery, Hollis and Moises Syrquin. 1975. Patterns of Development, 1950-70. London:
Oxford University Press.

Duffy, John and Chris Papageorgiou. 2000. A Cross-Country Empirical Investigation of the
Aggregate Production Function Specification. Journal of Economic Growth 5(1): 87-
120.

Durlauf, Steven N. and Paul A. Johnson. 1995. Multiple Regimes and Cross-Country Growth
Behaviour. Journal of Applied Econometrics 10(4): 365-384.

7
Gylfason, Thorvaldur. 1999. Principles of Economic Growth. Oxford: Oxford University
Press.

Krugman, Paul. 1993. Toward a Counter-Counterrevolution in Development Theory. In

Proceedings of the World Bank Annual Conference on Development Economics 1992,
15-38. Washington, DC: The International Bank for Reconstruction and
Development/The World Bank.

------. 1991. History Versus Expectations. Quarterly Journal of Economics 106(2): 651-667.

Levine, Ross and David Renelt. 1992. A Sensitivity Analysis of Cross-Country Growth
Regressions. American Economic Review 82(4): 942-963.

Masters, William A. and Margaret S. McMillan. 2001. Climate and Scale in Economic
Growth. Journal of Economic Growth 6(3): 167-186.

Morris, Cyntia Taft and Irma Adelman. 1988. Comparative Patterns of Economic
Development, 1850-1914. Baltimore: Johns Hopkins University Press.

Murphy, Kevin M., Andrei Shleifer, and Robert Vishny. 1989a. Income Distribution, Market
Size, and Industrialization. Quarterly Journal of Economics 104(3): 537-64.

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Rodríguez-Clare, Andrés. 1996. The Division of Labor and Economic Development. Journal
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Ros, Jaime. 2000. Development Theory and the Economics of Growth. Ann Arbor, MI: The
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Rosenstein-Rodan, Paul N. 1943. Problems of Industrialization of Eastern and South-Eastern

Europe. Economic Journal 53(210/211): 202-11.

Sala-i-Martin, Xavier. 2001. 15 Years of New Growth Economics: What Have We Learnt?
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------. 1997. I Just Ran Two Million Regressions. American Economic Review 87(2): 178-
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Skott, Peter and Jaime Ros. 1997. The "Big Push" in an Open Economy with Nontradable
Inputs. Journal of Post-Keynesian Economics 20(1): 149-62.

Solow, Robert M. 2001. Applying Growth Theory across Countries. World Bank Economic
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Stiglitz, Joseph E. 1993. Comment on “Toward a Counter-Counterrevolution in Development

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8
Stern, Nicholas. 1989. The Economics of Development: A Survey. Economic Journal
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Summers, Robert and Alan Heston. 1988. A New Set of International Comparisons of Real
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