Cross sectional study of growth in developed and developing countries: an analysis of the endogeneity of human capital and income inequality

Abstract

In the 1950s economic growth was hypothesized to be a function ofthe saving rate and the capital-output ratio. The higher the saving rate, the higher the rate of output growth till steady state reached. As a result, income inequality was thought to promote growth because of the high marginal propensity to save of the rich. In the 1960s and the 1970s economic growth models recognized that technical progress was necessary to provide permanent growth. In these models variables such as the saving rate, technology, population growth, and the depreciation rate were considered exogenous. More recently, economic growth models have endogenized some of the variables previously considered exogenous in an attempt better to explain economic growth. These studies known as endogenous growth models consider the effects of human capital as well as income inequality and other variables to provide a more complete view of economic growth. This study extends endogenous growth theory by combining agricultural development with the endogenous growth models. The formulation used in this study extends single-equation models of Persson and Tabellini (1994) and Alesina and Rodnk (1994). Instead of a tradeoff, the joint effects of growth and distribution are used to measure economic development. The role of agriculture is examined and land tenure patterns are used to better understand the forces that enable a country to grow over time and to determine why output per capita varies across countries. The data are from Summers and Heston (1988), Barro and Wolf (1989), Alesina and Rodrik (1994), and the World Bank. Forty-one developed and developing countries are included in the sample. The model developed in this study was specified as a system of simultaneous equations, thus per capita growth rate, human capital, and income concentration were jointly determined. The results indicate that greater income concentration reduces economic growth. This supports the idea that growth and income distribution go together. In addition, land ownership concentration was found to reduce human capital and increase income inequality, which constrained growth rates. Therefore, these results support findings of Persson and Tabellini (1994) and Alesina and Rodrik (1994) and improve their models by endogenizing human capital and income concentration.