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Economic growth.

Members and guests of the NBER's Project on Economic Growth met in Cambridge on October 25 and 26. Project Directors Robert J. Barro, Harvard University, and Paul M. Romer, University of California, Berkeley, organized the following program:

Paul R. Krugman, NBER and MIT, "First Nature,

Second Nature, and Metropolitan Location" (NBER

Working Paper No. 3740)

Discussant: Jose A. Scheinkman, University of


James E. Rauch, NBER and University of California,

San Diego, "Balanced and Unbalanced Growth"

Discussant: Gene M. Grossman, NBER and Princeton


Steven N. Durlauf, NBER and Stanford University,

and Paul A. Johnson, University of Oregon, "Local

versus Global Convergence in National Economies"

Discussant: Robert J. Barro

Casey B. Mulligan, University of Chicago, and Xavier

Sala-i-Martin, NBER and Yale University,

"Transitional Dynamics in Two-Capital-Goods Models of

Endogenous Growth"

Discussant: Rodolfo E. Manuelli, NBER and Stanford


Albert Marcet and Ramon Marmion, Universitat

Pompeu Fabra, "Communication, Commitment, and


Discussant: Edward C. Prescott, NBER and

University of Minnesota

Daniel Kaufmann, World Bank, "Productivity of

Investment Projects"

Discussant: Angus Deaton, NBER and Princeton


Michael Kremer, Harvard University, "The O-Ring

Theory of Economic Growth"

Discussant: Sherwin Rosen, NBER and University of


Krugman develops models of spatial equilibrium in which a central "metropolis" emerges to supply manufactured goods to an agricultural "hinterland." The location of the metropolis is not determined fully by the location of resources: as long as it is not too far from the geographical center of the region, the concentration of economic mass at the metropolis makes it the optimal location for manufacturing firms.

Rauch shows why liberalization of foreign trade should lead to a transition from a lower to a higher steady-state growth rate. However, during the course of this transition, growth initially might be even slower than before liberalization. Rauch then offers a reinterpretation of the post-1973 economic performance of Chile. An application to economic integration of previously separate regions or countries suggests that the largest growth effects obtain if one region is allowed to decline and provide a source of cheap labor for the other region.

Durlauf and Johnson argue that cross-country growth is explained better by a model of local rather than global convergence. They find support for the proposition that countries converge locally, in the sense that economies with similar initial conditions tend to converge. However, they find little evidence that economies with substantially different initial conditions, as measured by per capita output or literacy rates, converge. The impact of capital formation on aggregate output increases with the level of economic development.

Mulligan and Sala-i-Martin describe necessary conditions for endogenous growth and analyze the determinants of the long-run growth rate. Economic agents will choose a larger-than-steady-state growth rate and ratio of consumption to physical capital when the physical capital is small relative to human capital. The authors also show that business cycle variables need to be included in the analysis to take account of the biases introduced by technological convergence.

Marcet and Marmion compare the behavior of the economy under optimal contracts with: self-financing; external financing with complete markets in the context of full information and full enforceability; external financing with private information; and external financing with limited enforcement of debt contracts. They show that when information constraints are present, there is an efficient transfer mechanism that can be computed easily. When there is no direct disutility of labor, and when risk-averse agents have access to risk-free financial markets, information constraints affect only consumption patterns and the distribution of wealth. In contrast, commitment constraints also affect investment patterns and the growth of the economy. Marcet and Marmion conclude that the loss in growth (and utility) from commitment constraints is much higher than the loss from information constraints.

Based on the evaluation results of about 1000 World Bank projects in developing countries, Kaufmann analyzes the determinants of the productivity of investments. Countries with relatively undistorted policies are likely to end up with highly productive investments, even if policies were distorted when the project was under preparation--that is, policy changes appear to improve investment productivity, challenging the notion that fixed country-specific conditions make it impossible for many developing countries to attain high productivity. The importance of policies is evident for public as well as private sector projects, and for investments in the tradable and in the nontradable sectors.

Kremer examines production processes that consist of a series of tasks, in which mistakes can reduce the product's value dramatically. Examples abound: a space shuttle with badly designed O-rings explodes; a shirt with a carelessly sewn cuff becomes an "irregular" and sells at half price. He finds that imperfect information about worker quality can create strategic complementarity in investment in human capital, and thus can result in the possibility of multiple equilibriums in this investment. Under imperfect information, subsidies to education can enhance welfare and create multiplier effects.
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Title Annotation:Conferences
Publication:NBER Reporter
Date:Dec 22, 1991
Previous Article:Unemployment and wage determination.
Next Article:Political economy.

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