Global Poverty Reduction and Pareto-Improving Redistribution

Chu, Angus C. (2009): Global Poverty Reduction and Pareto-Improving Redistribution.

Abstract

Can a transfer of wealth from the US to the least developed countries be Pareto improving? We analyze this question in an open-economy R&D-based growth model, in which the high-income (low-income) country produces innovative (homogenous) goods. We find that wealth redistribution to the low-income country simultaneously reduces global inequality and increases growth through an increase in labor supply in the high-income country. Given that the market equilibrium of R&D-based growth models is usually inefficient due to R&D externalities, the wealth redistribution may lead to a Pareto improvement, which occurs if the discount rate is sufficiently low or R&D productivity is sufficiently high.

• Item Type: MPRA Paper
• Language: English
• Keywords: innovation-driven growth, Pareto-improving redistribution
• Subjects: O - Economic Development, Innovation, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity > O41 - One, Two, and Multisector Growth Models; O - Economic Development, Innovation, Technological Change, and Growth > O3 - Innovation ; Research and Development ; Technological Change ; Intellectual Property Rights > O31 - Innovation and Invention: Processes and Incentives; F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F43 - Economic Growth of Open Economies

References

Aghion, P., and Bolton, P., 1997. A theory of trickle-down growth and development. Review of Economic Studies 64, 151-172.

Aghion, P., and Howitt, P., 1992. A model of growth through creative destruction. Econometrica 60, 323-351.

Alesina, A., and Rodrik, D., 1994. Redistributive politics and economic growth. Quarterly Journal of Economics 436, 465-490.

Barro, R., 2000. Inequality growth in a panel of countries. Journal of Economic Growth 5, 5-32.

Benarroch, M., and Gaisford, J., 2004. Foreign aid, innovation, and technology transfer in a North--South model with learning-by-doing. Review of Development Economics 8, 361-378.

Bertola, G., 1993. Factor shares and savings in endogenous growth. American Economic Review 83, 1184-1198.

Bertola, G., Foellimi, R., and Zweimuller, J., 2006. Income distribution in macroeconomic models. Princeton University Press.

Bhagwati, J., Brecher, R., and Hatta, T., 1983. The generalized theory of transfers and welfare: bilateral transfers in a multilateral world. American Economic Review 83, 606-618.

Boone, P., 1996. Politics and the effectiveness of foreign aid. European Economic Review 40, 289-329.

Burnside, C., and Dollar, D., 2000. Aid, policies, and growth. American Economic Review 90, 847-867.

Chatterjee, S., Sakoulis, G., and Turnovsky, S., 2003. Unilateral capital transfers, public investment, and economic growth. European Economic Review 47, 1077-1103.

Chatterjee, S., and Turnovsky, S., 2007. Foreign aid and economic growth: the role of flexible labor supply. Journal of Development Economics 84, 507-533.

Chou, C., and Talmain, G., 1996. Redistribution and growth: Pareto improvements. Journal of Economic Growth 1, 505-523.

Cline, E., 2008. Obama's Global Poverty Act. Capitalism Magazine, April 3, 2008.

Cremers, E., and Sen, P., 2008. The transfer paradox in a one-sector overlapping generations model. Journal of Economic Dynamics and Control 32, 1995-2012.

Dinopoulos, E., and Segerstrom, P., 2009. Intellectual property rights, multinational firms and economic growth. Journal of Development Economics, forthcoming.

Easterly, W., 2003. Can foreign aid buy growth? Journal of Economic Perspectives 17, 23-48.

Easterly, W., Levine, R., and Roodman, D., 2004. Aid, policies, and growth: comment. American Economic Review 94, 774-780.

Foellmi, R., and Zweimuller, J., 2006. Income distribution and demand-induced innovations. Review of Economic Studies 73, 941-960.

Galor, O., and Moav, O., 2004. From physical to human capital accumulation: inequality and the process of development. Review of Economic Studies 71, 1001-1026.

Galor, O., and Polemarchakis, H., 1987. Intertemporal equilibrium and the transfer paradox. Review of Economic Studies 54, 147-156.

Galor, O., and Zeira, J., 1993. Income distribution and macroeconomics. Review of Economic Studies 60, 33-52.

Garcia-Penalosa, C., and Turnovsky, S., 2006. Growth and income inequality: a canonical model. Economic Theory 28, 25-49.

Garcia-Penalosa, C., and Wen, J., 2008. Redistribution and entrepreneurship with Schumpeterian growth. Journal of Economic Growth 13, 57-80.

Griliches, Z., 1992. The search for R&D spillovers. Scandinavian Journal of Economics 94, 29-47.

Grossman, G., and Helpman, E., 1991a. Quality ladders in the theory of growth. Review of Economic Studies 58, 43-61.

Grossman, G., and Helpman, E., 1991b. Endogenous product cycles. Economic Journal 101, 1214-1229.

Grossman, G., and Lai, E., 2004. International protection of intellectual property. American Economic Review 94, 1635-1653.

Jones, C., 1999. Growth: with or without scale effects. American Economic Review Papers and Proceedings 89, 139-144.

Jones, C., and Williams, J., 1998. Measuring the social return to R&D. Quarterly Journal of Economics 113, 1119-1135.

Jones, C., and Williams, J., 2000. Too much of a good thing? The economics of investment in R&D. Journal of Economic Growth 5, 65-85.

Li, C., 1998. Inequality and growth: a Schumpeterian perspective. University of Glasgow Working Paper No. 9609.

Li, C., 2001. On the policy implications of endogenous technological progress. Economic Journal 111, C164-C179.

Persson, T., and Tabellini, G., 1994. Is inequality harmful for growth? American Economic Review 84, 600-621.

Sachs, J., 2005. The end of poverty: economic possibilities for our time. New York: Penguin Books.

Samuelson, P., 1947. Foundation of economic analysis. Cambridge, MA: Harvard University Press.

Schlafly, P., 2008. Obama's 0.7% solution for poverty gets pass from Senate Republicans. Investor's Business Daily, February 28, 2008.

Segerstrom, P., Anant, T., and Dinopoulos, E., 1990. A Schumpeterian model of the product life cycle. American Economic Review 80, 1077-1092.

Shimomura, K., 2007. A Pareto-improving foreign aid in a dynamic North--South model. In Frontiers of Economics and Globalization, edited by Beladi, H., and Choi, K., p. 131-153.

Turunen-Red, A., and Woodland, A., 1988. On the multilateral transfer problem: existence of Pareto improving international transfers. Journal of International Economics 25, 249-269.

Zweimuller, J., 2000. Schumpeterian entrepreneurs meet Engel's law: the impact of inequality on innovation-driven growth. Journal of Economic Growth 5, 185-206.