Development Economics EC 410 State


DevelopmentEconomics EC 410


Mostof the countries in the African continent are developing countries ascompared to other continents i.e. western countries. Developingcountries they lag behind in terms of development as we can see mosthave not attained the new millennium goals that were set to beachieved by the end of the year 2015. In some of the underdevelopedor developing countries, there are high illiteracy level, highpoverty, increased mortality rate, low pa capita income, lowstandards of living, political instability and poor infrastructures.These are some of the indicators of a developing nation most of whichare found the African continent, but with time some countries aregrowing and soon they will be well developed.


Forus to explain the economic grow of South Africa over the past decadesit will be very important to know the contribution of labor, capitaland the total productivity of a country. The standard growthmethodology can be best described as follows. The methodology onwhich the standard growth accounting exercise is based described as

wherez is the TFP, α is capital and 1−α represents labor respectivelyin national output y is the output, k is physical capital and Lrepresents labor. H measures human capital and is in the form

WhereS=represents the mean years of schooling, which was calculated on theaverage of the following years from 1985 to 2001. The schoolingreturn is estimated at 7% i.e 19 years which is the value on thelowest scale of microeconomics.

Solow(1957) shows that figure (a) can be identified by the following:

SouthAfrica Reserve Bank (SARB) and the TIPS which is the Trade andIndustry Policy Secretariat were the main sources of data. Accordingto Hansen`s life cycle bench mark model Alternatively, Liu and Gupta(2006) use a version of Hansen’s real business cycle benchmarkmodel to calibrate the South African economy. The authors obtain thecalibrated capital the capital output share was 0.26. This value issmall compared to 0.48 computed from TIPS results as seen on table(a) below. This number is relatively small compared to 0.48, which iscomputed based on the data from TIPS. Where output growth wherecapital is the main contributor of growth as compared to TFP in1970sto 1980s. This is the same as the results from section 2.2 by EasternAsian which was driven by physical stock but not TFP. This wasbecause they both support as a capital accumulation I.e traditionalneoclassical models for growth rather than the Solow school ofthought in which growth is determined by TFP..

Figure1.0 Composition of output growth in %

InFigure a)– d), the height of the graph is the mean output annualgrowth rate at varied. Broken in blocks representing contributionsfrom changes in technology and growth in labour and capital.

Figurea) Sourcesof Growth (ρ=0.48): labor unadjusted

Figureb) Sources of Growth (ρ=0.48): labor has been adjusted

Figurec) Sources of Growth (ρ=0.26): labor is unadjusted

Figured) Sources of Growth (ρ=0.26): labor has been adjusted

In1980 TFP contributed -0.24% in 1990s it was 1.36 this is asignificant growth in output this growth continues to 3.1% in theyears 2000 to 2005. Hence capital accumulation and TFP have played.


Growthis also affected by human capital which is a factor of production. In1970 to 80s the contribution of labour rose after adjustments weremade on the human capital. The effect is small in then1990s herecapital was the main contributor to growth as compared to TPF but inlate 1990s to 2005 TFP was the main contributor.

Accordingto micro economics studies increase education the more the productivethe workers will be. Some authors say that human labor can bereplaced by capital and machines. Educated workers are said to bemore creative hence there is a positive relationship between growthand education hence the most important factor of production is thehuman capital.

Comparingyears of school is not the best method of measuring growth this isbecause the quality of education varies between countries. Eg inSouth African there is a racial difference where African education isbelieved to be inferior due to high pupil teacher ratio. Since 1994the racial difference had been decreasing. According to Fedderke(2001), South Africa spends more money on education as compared toother African countries. Investing in human capital is the main keyto growth in the long-run.

InputFactor Elasticity

Capitalgain is obtained by two methods as seen above (0.48 vs 0.26) infigure (b) to (c) labour for education has been adjusted there isminimal contribution on growth the significant difference can beobserved in the 70s and 80s where TPF was a minor contributor. Inbusiness life cycle point of view both TPF obtained at varied periodsplay a good role by showing the deviation from the real GrossNational Product. So this is very important to y GNP changes. As seenon the graph below.


Itis good to get varied views on growth theory but the living standardsvary across most nations. Traditional Neoclassical theory explainsgrowth however it`s exogenous since it can`t provide ways for growthin the long-run or explain &quotconditional convergence&quot. Thenew theories have tried to explain why conditional convergence theoryfailed and giving solutions to problems as related to human capitaland increase in knowledge, with the assumption to constant return toscale.