The role of capital-labour substitution in economic growth

Purpose – Although the importance of the elasticity of substitution between capital and labour (s) has been recognized in many areas in economics, this parameter has not received enough attention in economic growth. The purpose of this paper is to review the recent development in the importance of s in economic growth.

Design/methodology/approach – This paper specifically reviews the possibility of perpetual growth and slowdown, and the asymptotic behaviour of the balanced growth path for different values of s. It also reviews the determinants of the aggregate s.

Findings – Based on the empirical evidence that the value of s significantly departs from the Cobb-Douglas value of unity, the paper recommends employing the constant elasticity of substitution (CES) production function in both theoretical and empirical growth research.

Originality/value – This paper offers a new perspective on the elasticity of substitution between capital and labour due to its evaluation of various factors, methods and approaches.

Foreign aid, leisure-effort choice, and economic growth

Using an endogenous growth model, this paper examines the growth and welfare effects of foreign aid in the recipient economy. The emphasis is on the incentive factor of the effort-leisure choice. Besides financing public services, part of the aid is transferred to the public. This increases individual wealth, thereby providing less incentives to individuals for human capital acquisition, but with more leisure. Thus, foreign aid may not always help the growth and welfare of the economy. Taking this incentive factor into account, we further study the issue on aid allocation in achieving the highest levels of growth and welfare. Along the balanced growth path, aid allocation for welfare maximization is different from that under growth maximization.

Tax evasion and dynamic inefficiency

I show within a two-period overlapping generations model with income tax evasion that when the penalty rate set by the government is su¢ ciently small, it is theoretically possible for the capital stock to exceed the golden-rule level on the balanced-growth path. However, such a dynamic inefficiency cannot be guaranteed when the probability of evasion detection is nil.

'I've been to Bali too' (and I will be going back) : are terrorist shocks to Bali's tourist arrivals permanent or transitory?

International visitor arrivals to Bali are examined using univariate and panel Lagrange multiplier (LM) unit root tests with one and two structural breaks to ascertain if shocks to the time path of tourist arrivals are permanent or transitory. The univariate LM unit root tests with one and two structural breaks fail to reject the null hypothesis of a unit root in international visitor arrivals to Bali. However, the panel LM unit root tests with one and two structural breaks applied to a panel of Bali's 11 major source markets reject the null and support the alternative hypothesis of a joint trend-stationary series with transitory shocks. This result suggests that, the effects of the recent terrorist acts on Bali on the growth path of tourist arrivals from major markets are only transitory and that as a consequence Bali's tourism sector is sustainable in the long run.

The simple analytics of optimal growth with illegal migrants

This paper analyses the impact of illegal migration on the optimal path of domestic (resident) consumption. The analysis draws two important conclusions. First, if illegal migrants and domestic labour are perfect substitutes, illegal migration necessarily lowers the long-run per capita consumption of domestic residents. Second, if illegal migrants and domestic labour are imperfect substitutes, the effect on the long-run per capita domestic consumption is ambiguous, however, in the Cobb–Douglas case, the result is clear cut and per capita domestic consumption rises as a result of illegal migration.

Biotechnology and governance in Australia and Sweden: path dependency or instutional convergence?

The development of new generic technologies occurs within traditional structures of industry-government interaction, but also unleashes a process of 'creative destruction' generating new institutional patterns. This article, focusing on biotechnology, describes and compares policy processes and institutional arrangements in Australia and Sweden. The Swedish biotechnology sector displays a pattern of fragmentation and relatively weak state steering. Australia, by contrast, has implemented a set of comparatively coordinated regulatory and other measures to foster the growth of biotechnology. This observation contradicts the characterisation of Sweden as a 'strong state' economy, and challenges the depiction of Australia as lacking in state steering capacity. The relative open-endedness of the search in these countries for a mode of regulation of biotechnology suggests that the role of the state in economic restructuring today is fundamentally distinct from that of earlier periods.

Making long-term economic growth more sustainable: evaluating the costs and benefits

Currently, traditional development issues such as economic stagnation, poverty, hunger, and illness as well as newer challenges like environmental degradation and globalisation demand attention. Sustainable development, including its economic, environmental and social elements, is a key goal of decisionmakers. Optimal economic growth has also been a crucial goal of both development theorists and practitioners. This paper examines the conditions under which optimal growth might be sustainable, by assessing the costs and benefits of growth. Key environmental and social aspects are considered. The Ecol-Opt-Growth-1 model analyses economic–ecological interactions, including resource depletion, pollution, irreversibility, other environmental effects, and uncertainty. It addresses some important issues, including savings, investment, technical progress, substitutability of productive factors, intergenerational efficiency, equity, and policies to make economic growth more sustainable—a basic element of the sustainomics framework. The empirical results support growing concerns that costs of growth may outweigh its benefits, resulting in unsustainability. Basically, in a wide range of circumstances, long term economic growth is unsustainable due to increasing environmental damage. Nevertheless, the model has many options that can be explored by policy makers, to make the development path more sustainable, as advocated by sustainomics. One example suggests that government supported abatement programs are needed to move towards sustainable development, since the model runs without abatement were infeasible. The optimal rate of abatement increases over time. Abatement of pollution is necessary to improve ecosystem viability and increase sustainability. Further research is necessary to seek conditions under which alternative economic growth paths are likely to become sustainable.

Neonatal growth outcomes at birth and one month postpartum following in utero exposure to antidepressant medication

Objective: There is evidence of increasing prescription of antidepressant medication in pregnant women. This has arisen from the recognition of the importance of treating maternal depression. This must be balanced, however, with information on outcomes for infants and children exposed to antidepressants in pregnancy. The aim of the present study was to examine whether neonatal outcomes including gestational age at birth, neonatal growth outcomes at birth and then at 1 month postpartum were altered by in utero exposure to antidepressant medication using a prospective and controlled design.

Method: A prospective case–control study recruited 27 pregnant women taking antidepressant medication and 27 matched controls who were not taking antidepressant medication in pregnancy at an obstetric hospital in Melbourne, Australia. Of the 27 women taking medication, 25 remained on medication in the third trimester. A purpose-designed self-report questionnaire and the Beck Depression Inventory-II were completed in pregnancy, after birth and at one month postpartum. In addition information was collected on exposed and non-exposed infants including Apgar scores, birthweight/length/head circumference and gestational age at birth. Weight/length/head circumference was again collected at 1 month of age.

Results: Infants exposed to antidepressants in utero were eightfold more likely to be born at a premature gestational age, had significantly lower birthweight and were smaller in length and head circumference than non-exposed infants. There was no association between birth outcomes and maternal depression. At 1 month, the difference in weight in the exposed group became significantly greater than the control group.

Conclusion: Antidepressant exposure in utero may affect gestational age at birth and neonatal outcomes independently of antenatal maternal depression. Further studies are needed to examine whether these findings vary according to the type of antidepressant prescribed and follow up growth and development in exposed infants beyond 1 month.

Balanced-budget consumption taxes and aggregate stability in a small open economy

In a small open economy facing a perfect world capital market, this paper shows that if the government follows a balanced-budget fiscal policy based on endogenous consumption tax rates, then the steady state is saddle-path stable and hence beliefs-driven aggregate instability can be ruled out. This result is in contrast to those obtained in some closed economy models, and it suggests that unrestricted world capital mobility can help stabilize the economy under the balanced-budget fiscal policy based on consumption taxation.