Neoclassical Growth Model

Explaining growth trajectory

Factors that determine [national] income

 Labor, Capital and Total Factor

Productivity
 TFP, a measure of efficiency in combining
the inputs to produce output, production
technique
Determinants of TFP
 TFP is essentially determined by what is
called the social infrastructure, which has
the ff. components:

i. social norms
ii. Laws
iii. Government policies
iv. Formal and informal institutions
that enforce them
Social infrastructure
 “A country’s social infrastructure is what
sets the economic environment within
which its citizens accumulate skills and
businesses accumulate capital, both of
which are needed to create additional
value.”
In assessing the social infrastructure, one
would ask…
Is it difficult to acquire/gain knowledge in the
country?

Need to investigate on the

kind, quality and cost of
acquiring
knowledge…
Assessing the social infrastructure for
business
 Cost of doing business, cost of production

How profitable is it to do
business in the country?

Profitability affects firms decisions to

produce more, invest more and hire
more
 “Good social infrastructure is the bedrock
of an economic environment that is
supportive of productive activities and that
promotes inventions and technology
transfer, which in turn lead to a high
standard of living.”
 In contrast, bad social infrastructure is the smog
enshrouding an economic environment that
allows resources to be diverted away from
productive uses—through thievery, squatting,
protection rackets, expropriation or confiscation,
and corruption.
 Frustrated, uninspired, demoralized citizenry:
weakens social cohesiveness, greater focus on
narrow self-interest
 Social infrastructure influences one's
decision to work or not to work, to study or
not to study, to be lax or be competitive
 With good social infrastructure, productive
members of the economy are able to reap the
full benefits of their investments and their hard
work.
 A virtuous cycle is created as they invest even
more to enhance their productivity. Moreover,
when social control of diversion is especially
effective, private resources do not have to be
expended to deal with diversion.
But what determines social
infrastructure?
 Culture and history, which in turn are
conditioned by geographic, climatic, and
environmental factors

 For countries with a colonial past, the

quality of social infrastructure may have
been significantly influenced by the motive
of the colonizing country.
 In colonies where colonial masters did not
settle (because they had high mortality
rates) and extractive institutions were
established, the social infrastructure tends
to be weak, as evidenced by poor
enforcement of property rights, endemic
corruption, state capture by political elites,
and highly unstable political processes.
Poor enforcement of property rights
Why Do Property Rights Matter?
 Incentive to retain value of asset
 Security of present return from asset
 Incentive to invest
 Security of future returns from asset
 Ability to invest
–Collateral
 Ability to sell establishes market prices
–Resources flow to highest value use
Corruption defined
 How does corruption affect growth?
Corruption reduces
the overall wealth in a country since it can discourage
businesses from operating in such a corrupt setting.

It distorts
the way the government uses its money, too.
Ways to improve social infrastructure
i. Promote leadership that values competence
more than loyalty

ii. Dismantle an entrenched political and

business oligarchy that unashamedly promotes
and jealously protects its narrow self-interests

iii. Promote an incentive structure that is

meritocratic rather than nepotistic, and that
rewards honest, hard work?
3 absolutely essential and indispensable
elements for
social transformation are:

1. An effective, efficient and high-quality

education system;

2. A vigilant civil society that demands high

accountability from the government; and

3. A competent, corruption-intolerant
government administration committed to
reform and transformation.