Economic Growth in EAGLE Emerging Economies: Exogenous or Endogenous?

Abstract

The role of capital with respect to labor is comprehensively analyzed in an AK type growth models. The traditional production functions such as the Cobb-Douglas or the CES (Constant Elasticity of Substitution) with an extremely restrictive assumption of the constant elasticity of factor substitution, used in many earlier studies, are unable to explore or explore incorrectly the impact of capital-labor interaction on economic growth and thus the nature of growth process, in particular, in a rapidly-developing economy. Therefore, this work employs an unrestricted VES (Variable Elasticity of Substitution) production function to estimate the elasticity of substitution between capital and labor varying with economic development for 15 Emerging and growth-leading economies (EAGLEs). The paper uses a VES production model given the fact that it is more appropriate over the CES and the Cobb-Douglas for countries experiencing the high rate of economic advancement (Thach ). By applying a Bayesian non-linear regression through MCMC methods, the study finds the variable elasticities of capital-labor substitution to be greater than unity, inferring that the majority of the EAGLE economies, except for Nigeria, exhibit the possibility of endogenous growth.