Testing Economic Growth Models: An Empirical Study of BrazilTesting Economic Growth Models: An Empirical Study of BrazilEconomic growth and development are the primary goal of the State, and their implications in society cannot be underemphasized. Hence, what drives sustainable economic growth has always been a challenging, yet much studied concept by numerous economists. In class, we have discussed two main models that analyze the dynamics of economic growth: The Harrod-Domar and the Solow Model.
Both models, based on certain assumptions, claim that higher savings rates s (physical investment), cause an increase in GDP per capita growth rate in the medium-run. However, they differ in the long-run approach. Whereas the H-D model argues that growth continues indefinitely at a constant rate, thus a higher s produces a permanent increase in the growth rate, Solow states that an increase in s causes a temporary higher income per capita growth rate, and a permanent increase in the income per capita level. The Solow Model implies that capital exhibits diminishing returns to scale, and therefore income per capita approaches a constant “steady-state” level in the long run. The importance of human capital (q) in explaining income difference across countries has been stressed in the H-Augmented Solow model. In addition to the identical assumptions of Solow, this model refers to q (investment rate in human capital) as another variable behind growth. Human capital embodies the notion that there are investments in people (education, health) that rise an individual’s productivity, resulting in a higher economic growth. The investments in human and physical capital create a certain “feedback effect” on each other, producing a larger and longer lasting growth effect than the one argued in the Solow Model.
Despite the characteristics and powerful conclusion in relation to economic growth of these theories, they all depend on assumptions, which are not quite true in the real world. Here, I shall analyze how well real data “fits” the medium-run theories of these model by examining the economic progress of Brazil.
Figure 1. GDP per capita (constant 2011 US$), 1991 – 2014Figure 1.1. GDP per capita (current US$), 1966 – 2014In recent years, Brazil has proven to be the dominant nation in Latin America, and a growing player in in the international scenario; it was relatively unscathed by the 2008 Great Recession and one of the first to experience sustainable economic growth afterwards (see figure 1.1). Brazil’s income per capita has been exposed to an upward trend, and it has overtaken the averages of middle-income countries and the aggregate average of the world income (see figure 1). It’s economy has been enhanced partially by the commodity boom during that the world was exposed until 2011. Brazil has come a long way
[1]Source: International Monetary Fund (IMF)
5.9.1.2. Investment
As we explored in The Economics of Private Banking, Private investment, which is now the predominant mode of exchange in the private banking sector, has also developed.
6. The Public Sector Financial
The sector has been largely self-financed (see Figure 3 (above)) at rates of roughly 40% to 80% per annum. It has been able to create a substantial proportion of a large proportion of the gross national income, which is considered to be very important.
Figure 3. Public Sector financial performance for the period 2009-2014, with annual interest rates as of the end of 2012$ – current current account surpluses as of December 2010. The data point is the average of the three measures of public sector income, total investment (including property and housing) and net investment in private bank deposits, all in the year. (Source: Government Bank of Brazil Bankrolls of the Brazilian economy and government)Source: World Bank.
6.1. Financial sector investments and net investment in private banking deposits
From the data points in Figure 3, the top five main investments made by the private sector are state treasury, the public sector insurance scheme (see Figure 4), and public sector insurance (see Figure 5). Private banks and banks in Brazil are largely underfunded on bank balance sheets (including the total banking sector debt), but they make a considerable amount of investments, which make up about 80%-90% of those making net investments (see Figure 10).
Figure 4. The public sector debt of Brazil at 10-year end of 2015-2016. The data point is the average of the three measures of state bank balance sheet debt, total net investment in banks, and net investment in private banking deposits. (Source: World Bank.)Source: United Kingdom
Figure 5. The net investment of all public sector banks in Brazil last year at 10-year end of 2013. The data point is the average of the three measures of total state bank balance sheet debt, total net investment in private banking deposits, and net investment in the private sector by private bank. (Source: World Bank.)Source: Global Institute
6.2. Private banking investments (not included in net deposits)
There was a significant increase from 2010-2014 to 2014; almost 40% of private banking investments in private banking deposits in the year ended December 31, 2014 exceeded $1 billion in the quarter preceding the bank’s introduction. Private banking investment declined as a share of total foreign investment in private banking as shown in the table 1.
Figures 5, 6, and 7 in this paper.
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