A semi-endogenous growth model for developing countries with public factors, imported capital goods, and limited export demand
Jan Simon Hallonsten & Thomas Ziesemer
#2016-004
We add non-rivalrous public factors, imported capital goods and an
export demand function to a human-capital augmented growth model with
individuals differing in their abilities to form human capital. The
result is a semi-endogenous growth model for developing countries with
no machinery sector and no R&D. Higher exports lead to more private
investment, higher terms of trade and more growth and allow for higher
investment in public capital. An increase in public investment increases
human capital and output, raises demand for imported capital goods and
exports. A good balance for public and private investment has to be
found in order to justify taxation and avoid terms of trade losses. Our
analysis of a vector-error-correction model for Trinidad &Tobago shows
that additional expenditure for public investment increases output less
than taxes decrease per capita consumption and therefore is sub-optimal
there. Both, temporary and permanent shocks on public investment have
level effects supporting semi-endogenous growth modelling. Permanent
shocks on the growth rate of world income and oil prices increase
exports, private and public capital, education and consumption, and
demonstrate that the VECM effects are in line with the logic of the
theoretical model.
JEL code: F43, H54, I25, O41, O54.
Keywords: Growth, open economy, public investment, education