The Economic Growth Models Economics Essay

In this chapter is define the concept of local development, according to the literature, are enumerate the economic growth models and is made a comparative analysis of economic models of regional and local development. The chapter will present the most recent methods of local development implemented in the European Union and in our country Romania.

LOCAL DEVELOPMENT CONCEPT

Our world today is more interconnected, intelligent and the information is positioned in the middle of it. In our age the innovation depends on the access to more and more knowledge and information. For smart and sustainable growth of a city is important to promoting a more resource efficient, a competitive economy and an economy base on knowledge and innovation. The purpose of this chapter is to present the concept of local economic development in our age and highlighting the importance of intelligent solutions in sustainable development.

European Commission, Europe 2020 program – a strategy for smart growth, sustainable and inclusive growth has identified three key factors for the crisis and preparing for the next decade the EU economy: smart growth (promoting knowledge, innovation, education and society digital), sustainable (competitive production with efficient use of resources) and inclusive growth (increased labor market participation, skills and poverty reduction). Given, on the one hand, the key elements identified by the European Commission and on the other hand first priority axis of Regional Operational Programmer 2007-2013 consists of supporting the sustainable development of urban growth poles- think we can say that it is essential to consider the development of cities by adopting innovative, creative and intelligent solution in all economic fields.

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In our age sustainability is a major global issue today that requires urgent attention with the intensification of human activities that wantonly use natural resources and degrade the environment. The development of a sustainable community is one of the effective solutions. In specialty book (Levent and Nukamp, 2006) definition of sustainability is related to the quality of life in a community whether the economic, social and environmental systems that make up the community are providing a healthy, productive, meaningful life for all community residents, present and future.

The term sustainable development by REC (Regional Environmental Centre) goes beyond the boundaries of science and business development and trade to include human development, values, and differences in cultures. In fact, many organizations are referring to sustainable human development as opposed to sustainable development in order to emphasize issues such as the importance of gender equality, participation in decision-making processes, and access to education and health.

In the MACED (Mountain Association for Community Economic Development) vision sustainable community development is the ability to make development choices which respect the relationship between the three “E’s”-economy, ecology, and equity:

Economy – Economic activity should serve the common good, be self-renewing, and build local assets and self-reliance.

Ecology – Human are part of nature, nature has limits, and communities are responsible for protecting and building natural assets.

Equity – The opportunity for full participation in all activities, benefits, and decision-making of a society.

So we can say that the city sustainability is a multi-dimensional concept that includes economic, social and political dimensions (Huang et al., 2009; Olewiler, 2006).

The term sustainable development by REC (Regional Environmental Centre) goes beyond the boundaries of science and business development and trade to include human development, values, and differences in cultures. In fact, many organizations are referring to sustainable human development as opposed to sustainable development in order to emphasize issues such as the importance of gender equality, participation in decision-making processes, and access to education and health.

Actual society is characterized by the rapidity of change information and knowledge in services and products fields. In this economy is important to remark that the barriers of communication and the physical distance are lowest, the value of knowledge and information depends on the situation they are used but the mode in which they are understand by the citizen is important too.

As a result, investment in innovation, research, education and technological changes have the most central point to economic performance (Figure 5).

The growth of economy can be analyzed by the investments in higher education, innovation and research, and software. Measurement the performance of economy is based on the Gross Domestic Product (GDP) indicator.

In generally GDP is the value of total production of goods and services in an economy during a particular period (normally a year). These traditional indicators guide the policy decisions of governments. But to the extent that the knowledge economy works differently from traditional economic theory, current indicators may fail to capture fundamental aspects of economic performance and lead to misinformed economic policies (Arundel, 2005). The traditional indicators can’t measure the performance of knowledge economy because the knowledge isn’t a quantitative product.

Figure The factors that influence the Society Growth

In (Arundel, 2005) GDP for measuring knowledge economy are needed for the following tasks:

measuring knowledge inputs;

measuring knowledge stocks and flows;

measuring knowledge outputs;

measuring knowledge and learning (human capital).

To measure knowledge inputs is similar to measure the investment in the production of scientific and technical knowledge, including research and development (R&D).

Development of knowledge flow indicators would yield better measures of the R&D and knowledge intensity of industries and economies.

Statistical techniques could be developed to estimate knowledge stocks based on current R&D input and flow measures.

To measure knowledge outputs and evaluate the performance of knowledge-based economies, priority should be placed on developing improved indicators of the private and social rates of return to R&D and other knowledge inputs. This includes measuring returns to individuals, firms and societies in terms of employment, output, productivity and competitiveness, and could be based on both macro-level econometric analyses and firm-level surveys. One of the great challenges is to develop indicators and methodologies for analyze the impact of technology on productivity and economic growth.

Human capital indicators, particularly those relating to education and employment, are central measures for the knowledge-based economy.

To study the evolutions of knowledge economy we can use Harrold-Domar [20] model. The model implies that economic growth depends on policies to increase investment, by increasing saving, and using that investment more efficiently through use intelligent solution and technological advances.

Let Y represent output, which equals income, and let K equal the capital stock. S is total saving, s is the savings rate, and I is investment. δ stands for the rate of depreciation of the capital stock. The Harrod-Domar [20] model makes the following a priori assumptions:

1: Output is a function of capital stock

2: The marginal product of capital is constant, the production function exhibits constant returns to scale

3: Since the marginal product of capital is constant, it equals the constant ratio Y/K

4: The product of the savings rate and output equals saving, which equals investment

5: The change in the capital stock equals investment less the depreciation of the capital stock

Derivation of output growth rate:

If the marginal product is constant:

The marginal product of capital is constant:

In summation, the savings rate times the marginal product of capital minus the depreciation rate equals the output growth rate. So, increasing the savings rate, increasing the marginal product of capital, or decreasing the depreciation rate will increase the growth rate of output, these are the means to achieve growth in the Harrod-Domar model. We can say that the economic growth depends on policies to increase investment, by increasing saving, and using that investment more efficiently through use intelligent solution and technological advances.

The economy growth depends on investment and using that investment more efficiently through use intelligent systems.

Cities have become the focal points of these components as major consumers and distributors of goods and services. However, many cities tend to be large consumers of goods and services, while draining resources out of external regions that they depend on. As a result of increasing consumption of resources, and growing dependencies on trade, the ecological impact of cities extends beyond their geographic locations.

On the begin we must to firelight that nearly 15 petabytes of data are created every day – eight times more than the information contained in all libraries in the U.S. combined. Therefore it can be considered for any area can be a daunting task to work with massive amounts of data, information retrieval and transformation. To achieve real progress in any economic field of a city, we need efficient use of existing infrastructure and experience and good knowledge of economic matters.

In the twenty-first century, growth, economic value and competitive differentiation of cities will increasingly be derived from people and their skills, creativity and knowledge, as well as the capacity of the economy to create and absorb innovation. To compete in this new economic environment, cities will need to better apply advanced information technology, analytics and systems thinking to develop a more citizen-centric approach to services. By doing so, they can better attract, create, enable and retain their citizens’ skills, knowledge and creativity.

The use of new technology/intelligent solutions efficiently in our society is an important part of innovation, evolution and sustainable development. Our world today is more interconnected, intelligent and the information is positioned in the middle of it. In our age the sustainable development depends on the use of more and more new intelligent solution. For smart and sustainable growth of cities are important to use efficient the new technology and resources.

ECONOMIC GROWTH MODELS

Analyzing the economic models we can observe that all of them suggest that the economic development depends on investment in increasing the quality life which is the support of sustainable development.

The Harrod-Domar model is used in development economics to explain an economy’s growth rate in terms of the level of saving and productivity of capital. It suggests that there is no natural reason for an economy to have balanced growth. The model was developed independently by Sir Roy F. Harrod in 1939 and Evsey Domar in 1946. The Harrod-Domar model was the precursor to the exogenous growth model.

Figure The Harrod-Domar Growth Model (Welker, 2008)

The model implies that economic growth depends on policies to increase investment, by increasing saving, and using that investment more efficiently through technological advances (figure 6).

Many of developed countries – suggested Lewis Structural Change Model- have dual economies. In this economy:

The traditional agricultural sector was assumed to be of a subsistence nature characterized by low productivity, low incomes, low savings and considerable underemployment.

The industrial sector was assumed to be technologically advanced with high levels of investment operating in an urban environment.

Lewis suggested that the modern industrial sector would attract workers from the rural areas.

Industrial firms, whether private or publicly owned could offer wages that would guarantee a higher quality of life than remaining in the rural areas could provide.

Furthermore, as the level of labor productivity was so low in traditional agricultural areas people leaving the rural areas would have virtually no impact on output.

Indeed, the amount of food available to the remaining villagers would increase as the same amount of food could be shared amongst fewer people. This might generate a surplus which could them be sold generating income.

Those people that moved away from the villages to the towns would earn increased incomes:

Higher incomes generate more savings.

Increased savings meant more fund available for investment.

Increased investment meant more capital and increased productivity in the industrial sector, higher wages, more incentive to move from low productivity agriculture to high productivity industry, the circle continues.

Figure Lewis Structural Change (dual-sector) Model

The model suggests that economic growth depends on investment in technologically advanced and this will increase productivity.

Rostow’s Model – the 5 Stages of Economic Development presents his concept in „The stage of economic growth”. He argues that within a society sequential economic steps of modernization can be identified. These steps are linear and towards an evolutional higher development. In 1960, the American Economic Historian, W.W. Rostow identifies five growth stages (figure 8).

Figure Figure Rostow’s Model -The Stages of Economic Development

He suggested that countries passed through five stages of economic development:

Stage 1 Traditional Society – Agriculture is the most important industry and production is intensive, using only limited quantities of capital.

Stage 2 Transitional Stage – Surpluses for trading emerge supported by an emerging transport infrastructure. Savings and investment grow.

Stage 3 Take Off – Industrialization increases, with workers switching from the land to manufacturing. Growth is concentrated in a few regions of the country and in one or two industries. New political and social institutions are evolving to support industrialization.

Stage 4 Drive to Maturity – Growth is now diverse supported by technological innovation.

Stage 5 High Mass Consumption – Rostow suggested that the model is specific of the USA economy.

Rostow’s Model – the 5 Stages of Economic Development suggested that economic development is supported by technological innovation, so is very important to investment in technologically advanced.

Solow Model extended the Harrod-Domar model by:

Adding labor as a factor of production;

Requiring diminishing returns to labor and capital separately, and constant returns to scale for both factors combined;

Introducing a time-varying technology variable distinct from capital and labor.

The capital-output and capital-labor ratios are not fixed as they are in the Harrod-Domar model. These refinements allow increasing capital intensity to be distinguished from technological progress.

The Exogenous growth model, also known as the Neo-classical growth model or Solow growth model is a term used to sum up the contributions of various authors to a model of long-run economic growth within the framework of neoclassical economics [3].

In the R.M. Solow model, the economic growth on long term depends only on the technological progress, while on short term depends on the capital accumulation, too (Rosca, 2007).

The Solow model explains growth as consequence made of use of technology in all economical domains.

Romer Model is the model of endogenous growth, due to Paul Romer (“Endogenous Technological Change,” Journal of Political Economy, 1990) which starts by accepting the Solow model’s result that technological progress is what determines long-run growth in output per worker. But, unlike the Solow model, Romer attempts to explain what determines technological progress.

Paul Romer said in (Romer, 90) that “growth in this model is driven by technological change than from intentional investment decisions made by profit-maximizing agents. The main conclusions are that the stock of human capital is devoted to research in equilibrium, that integration into world markets will increase growth rates, and that having a large population is not sufficient to generate growth.”

Over a series of articles from 1986 through 1990, Paul Romer developed a model of economic growth in which the fundamentally different nature of technological innovations compared to that of the most economic goods play a central role. Technological change is the principal engine of growth. (Gordon, 2005)

We can highlight that in all the economical models the investment in new technology are a solutions for development and this will make a serious change in economic performance, employment, education, health care, government, the environment and in the delivery services for everybody.

MODELS OF LOCAL DEVELOPMENT

The first approach on regionalization and urban issue was devoted to economic activities and geographic location of cities and is known in economics sciences – the theory of localization.

We identified the following models of regional and local/urban theory based on location:

a) Von Thunen model is known by the name of Heinrich Von Thunen theory which is considered the founder of location. In 1826 he developed a model of rational spatial organization for farmers. He analyzed the allocation of agricultural land among several competing locations, knowing that the agricultural product has to be transported from place of production to the consumption.

b) Weber model is known by its author Alfred Weber theory underlying the location published in 1909 his “Theory of branch location.” The Thune’s model was based on creating a new model for industry location choice. Main interest was to choose the location of industrial centers.

Weber’s model is an important milestone in the theory of localization, because it attempts to optimize the location of businesses regardless the mathematical basis of their activity profile.

c) Christaller’s model is known by its author W. Christaller. The purpose of this theory was to explain the size and number of cities and the distance to which they are located in a particular territory.

W. Cristallerie by his “central places of southern Germany” (Hurjui, 2006) founded the complete analysis of the territory organization, identifying how the centralization of urban structures and relations.

d) Losh’s model is known by its author August Losh.

Cristallerie’s theory was extended by A. Losch that the book “Spatial organization of the economic system”, trying first to introduce elements of nature space in general equilibrium theory of markets (Hurjui, 2006).

Unlike Weber, Losh assumes a homogeneous surface on which consumers are uniformly distributed. Manufacturers are concentrated, while consumers are assumed to be spread regularly in space. The fundamental point emphasized by the model is that, because of the overlap of hexagonal networks, prosperous areas rise and others poor. In other words, the hierarchy of industrial concentration, which he called “central places”, emerged (Levent, 2006).

e) Zipf’s model, known as the law “Position – Size”. This model correlates the size of a city (geographical size) with its rank (the position they occupy in the hierarchy of urban system).

Currently it has a special place in the study of the location of industrial activity, which showed their tendency to group in space in cluster like industrial parks, small or big cities, etc.

François Perroux unbalanced growth theory and developed regional or local theory called the theory of polarized development of growth poles. The theory stems from the fact that development is unbalanced and hierarchical process and that while only certain economic units act as engines of development. These units are designed poles of economic growth. Become growth poles and certain areas of land or infrastructure.

John Friedmann, Stuart Holland and Gunar Myrdal showed uneven development theories such as center-periphery relationship. It is considered that regional imbalances are based on time differences in the processes of integration, resulting in the mobility gaps imperfect work – concentrated in the center.

J. Fridmann and W.Stohr founded the theory of endogenous development in response to classical theories.

According to Friedmann’s theory, endogenous development has three basic features:

Territorial – space is an important value that facilitates specific operations, synergy on an enterprise can use;

Community – development cannot be created outside the local community;

Cultural – Promotion of local resources, endogenous development is based primarily on local resources or local industrial traditions.

P.Nijkamp and J. Paelinick emphasized the long cycles of regional development theory in the ’80s. They proposed a model of interregional fluctuations (Hurjui, 2006), in which space is allocated to growth poles, poles of attraction and intermediate regions. Attractiveness of a region depends on its capital, infrastructure, and the stock of information.

According to the analysis done on local and regional development models can be classified into two categories: on one hand the theory aimed at localization (Von Thunen, Weber, Christaller, Losh, Zipf), and on the other hand there are models that how try to identifying the determinants factors of local development (Perroux, Myrdal, Holland, Nijkamp).

Location theory models aimed to characterize a region from where it is located, while other models are focused on the theory of growth poles and local resources consumption.

These urban models, which were developed in the twentieth century, progressed from structural models to static models and to dynamic models. Traditional urban models usually simulate the urban system at a macro level, so they cannot accurately reflect the dynamic, self-organizing, or emerging characteristics of urban systems.

The new urban models are based on the use of the new technologies in all activities in order to improve the quality of work and life, to reduce cost and to improve the efficiencies without disturbing the environment.

Analyzing the new urban development models that exist among the world we identified two theories:

One theory is based on analyzing the actual stage of the city and use cellular automata models which demonstrate how simple local transition rules can be used to emulate a complex urban growth. This will help us identify the priority areas starting from one cell to the development of a city;

The second theory is the Korean model of an urban development. They consider that is more efficient to find a good place and build a new city there.

The development of GIS (Geographic Information System) and other complex adaptive models led to urban models based on artificial life or discrete dynamics. In recent years (Long, 2009), urban growth models have used the cellular automata (CA) approach which is based on self-organizing theory. The CA models are composed of a series of basic rules instead of strictly defined physics equations or functions. The discrete character is a key characteristic of the time and space and status in CA.

Couclelis in 1985 was the first how presented the CA model in an urban context. In this case CA has been adapted to simulate the emergence, self-organizing, and chaos phenomena in urban systems.

t2

t1

t0Time

Space

Figure Cellular automata one-dimensional

In this theory each sector of urban development has some properties that may change over the time and the state of one area at time t +1 depends on its status and condition of other areas at time t. In this case it is essential to identify the priority area of the city and, after developing this using smart solution, we can extend it to other areas. Like Barredo (2003) said in CA is surprising their potential for modeling complex spatial-temporal processes, despite their very simple structure. In his paper Barredo accentuate the theory that cities, as dynamic systems, show some complexity characteristics that can be modeled using CA.

For a sustainable growth of a city is important to promote a more resource efficient, a competitive economy and an economy based on knowledge and innovation. Analyzing urban developing models helps us to find the best solutions for a sustainable growth of the cities where most of the citizens of the world live in and to select the perfect model which is essential in our age.