Evaluating Explanations for strongStagnationstrong - Economics.pdf

Evaluating Explanations for Stagnation Elizabeth M. Caucutt Krishna B. Kumar University of Western Ontario USC Marshall School of Business ecaucutt@uwo.ca kbkumar@ July 2005 Abstract Understanding the causes of economic stagnation and exploring policies to overcome it has signiÖcant implications for human welfare. In this paper, we evaluate three pro- posed explanations for stagnation that cover di§erent facets of an economy: coordination failures, ine§ective mix of occupational choices, and insu¢ cient human capital accumula- tion. We calibrate models that embody these explanations in the context of the stagnant economies of sub-Saharan Africa. Calibration is ideally suited for this evaluation, given the paucity of high-quality data, the high degree of model nonlinearity, and the need for conducting counterfactual policy experiments. We Önd that calibrations that yield mul- tiple equilibria ñ one prosperity and the other stagnation ñare not particularly robust in capturing the African situation. This tempers optimism about one-shot or temporary development policies such as foreign aid that are conventionally prescribed based on models of multiplicity. Nevertheless, the calibrated models indicate that even the cost of continuous policy interventions needed to trigger development in stagnant economies is small. Keywords: Coordination failure, Occupational choice, Human capital accumulation, Economic Development, Calibration. JEL ClassiÖcation: O100, O110, E600 We are grateful to Daron Acemoglu, Michele Boldrin, Oded Galor, Dou