Alice in wonderland in growth economics

What happens when we assume that income growth comes from savings (to increase the stock of capital) and from technological progress (at some reasonable rate)? Two economists (Roberto Mariano and Delano Villanueva) did so. Based on recent official data, they conclude that the we should save about 1/3 of GDP to achieve a 5% growth rate in per capita income, which would then double every 13 years.

Is this realistic? For those who believe we can progress within one generation, this seems daunting. The present savings rate is about 17% of GDP (official NEDA data for 2007), which is well below the optimal rate of 33%. The authors didn’t say what would happen to the actual growth rate if savings is “too small.”

It seems that the results ignore the possibility of economic growth through institutional improvements. But perhaps that’s another story.

Please click here for the Mariano-Villanueva paper. Click on the title of this post to see and make comments.

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