Endogenous Economic Growth: The Arrow-Romer Theory and a Test on Vietnamese Economy

The Arrow-Romer growth model helped to overcome the main drawback of the Solow-Swan model, where technical change is created exogenously, not by the firms making decisions, and formulated the conditions for endogenous growth in an economy. Nonetheless, the presentation of the Arrow-Romer model and corresponding empirical studies by the Cobb-Douglas functions hides the role of the capital-labor relationship for economic growth. A constant elasticity of substitution (CES) function, constructed by Arrow et al. (1961), allows solving this problem. So, the purpose of the current research is to test the endogenous growth of the Vietnamese economy, which has experienced a more than 30-year market-oriented reform through specifying an aggregate CES function. By applying Bayesian nonlinear regression, the research results revealed the elasticity of factor substitution (ES) lower than one. This work theoretically and empirically contributes to the endogenous growth theory in problems concerned with emerging economies. Investments in physical and human capital and technological progress are the determinants of endogenous growth. From the findings obtained, the author concludes that even though having achieved a rather impressive growth rate over more than three decades, the Vietnamese economy has not yet generated the possibility of endogenous growth, and suggests that endogenous growth can be hardly generated in emerging economies like Vietnam if important growth policies related to accumulation of physical and human capital as well as enhancement of R&D activities are not simultaneously implemented. It is indispensable to focus on substantially improving institutional quality.

How to Explain When the ES Is Lower Than One? A Bayesian Nonlinear Mixed-Effects Approach

Most studies in Vietnam use the Cobb-Douglas production function and its modifications for economic analysis. Extremely rigid presumptions are a main weak point of this functional form, particularly if the elasticity of factor substitution (ES) is equal to one, which hides the role of the ES for economic growth. The CES (constant elasticity of substitution) production function with more flexible presumptions, concretely its ES, is not unitary, and has been used more and more widely in economic investigations. So, this study is conducted to estimate the average ES through the specification of an aggregate CES function for the Vietnamese nonfinancial enterprises. By performing Bayesian nonlinear mixed-effects regression via Random-walk Metropolis Hastings (MH) algorithm, based on the data set of the listed nonfinancial enterprises of Vietnam, the author found that the CES function estimated for the researched enterprises has an ES lower than one, i.e., capital and labor are complimentary. This finding shows that Vietnamese nonfinancial enterprises can confront a downward trend of output growth.

Elasticity of factor substitution and driving factors of energy intensity in China’s industry

Based on the translog cost function and factor substitution theory, the input and output data from China’s industrial sector and the three sub-sectors during the period 1984–2011 are firstly used to calculate substitution elasticity among capital, labor, energy, and intermediate input. And then from the perspective of factor substitution, the driving factors of energy intensity in China’s industry are explored. The main findings introduced in this paper are listed as follows: firstly, the production of China’s industrial sector is sensitive to changes of energy and labor prices; secondly, except the complementary relationships between energy and labor in the manufacturing industry, and between energy and intermediate input in electricity, gas, and water industry, substitution relationships exist among all other factors; thirdly, the budget constraint of energy consumption is the most effective impetus to the reduction of energy intensity in industrial sector, and factor substitution especially the substitution of capital and labor for energy has an important role in the reduction of energy intensity; fourthly, the rapid expansion of economic scale causes output effect to become the biggest factor of impeding the reduction of energy intensity; fifthly, technical progress has different effects on energy intensities in different industrial sub-sectors, but generally speaking, technical progress does not promote the reduction of energy intensity.

THE ELASTICITY OF SUBSTITUTION AS AN ENGINE OF GROWTH

This paper characterizes the elasticity of factor substitution in one-sector convex growth models with a general production function. It shows that an elasticity of substitution that is asymptotically greater than unity is a sufficient (but not a necessary) condition for the existence of a lower bound on the marginal product of capital, which in turn can lead to unbounded endogenous growth. Hence, an elasticity of substitution that eventually becomes greater than unity can counteract the role of diminishing returns to capital. This renders factor substitution a powerful engine of growth.

RATE OF AND BIAS TO TECHNICAL CHANGE UNDER A REGIME OF ALMOST HOMOGENEITY OF THE PRODUCTION FUNCTION

This paper utilizes the concept of almost homogeneity to obtain a generalization of the elasticity of factor substitution. From this, an expression for the bias to technical change is derived that explicitly includes the individual degrees of input homogeneity. It is shown that the relative values of these homogeneity parameters can affect the magnitude and direction of the factor-saving bias to technical change. These parameters also influence the size of the residual or unexplained component of aggregate output growth.