Openness, Human Development, and Fiscal Policies: Effectson Economic Growth and Speed of Adjustment

IMF Working Papers, July 1, 1993

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Openness, Human Development, and Fiscal Policies: Effectson Economic Growth and Speed of Adjustment

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Bibliographic details

• Authors: Delano Villanueva
• Published: July 1, 1993
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781451965780.001

Model and main theoretical findings

• The model postulates that learning through experience plays a critical role in raising labor productivity over time.
• Three major consequences are identified:
  • The steady-state growth rate (of output) becomes endogenous and is influenced by government policies.
  • The speed of adjustment to steady-state growth is faster, and enhanced learning further reduces adjustment time.
  • Both steady-state growth and the optimal net rate of return to capital are higher than the sum of exogenous rates of technical change and population growth.

Empirical findings and validation

• Simulation results confirm the model’s faster speed of adjustment.
• Regression analysis explains a large part of divergent growth patterns across countries in terms of:
  • The extent of openness,
  • Human development,
  • The quality of fiscal policies.

Policy-relevant implications

• Government policies can influence the steady-state growth rate, implying an active role for policy in shaping long-run output growth.
• Enhancing mechanisms that foster learning-by-doing can shorten adjustment times to steady-state growth.
• Fiscal policy quality, alongside openness and human development, is a key determinant of cross-country growth divergence and should be a focus for reforms aimed at improving growth and returns to capital.