The Rise and Fall of Miracles

Abstract

It is shown that an economy can grow endogenously in early stage of development. However, the growth is not due to the factors emphasized in the literature but due to abundant labor. If labor is abundant enough to render real wage rate fixed as Lewis (1954) postulated, the marginal product of capital does not decrease with capital and hence endogenous growth emerges. However, the endogenous growth is temporary in the sense that once labor has been fully utilized, the growth enters neoclassical phase in which the economy converges along saddle path to its steady state of low growth. The model is proposed to explain the difference between West German and Japanese growth pattern after World War II. It is argued that West Germany was a highly industrialized Solow (1956) economy far below her steady state due to wartime destruction. As was predicted by Solow, West German growth rate was extremely high initially. However, her growth pace slowed down gradually from the beginning to a low growth steady state. By contrast, Japanese economy after the war was a largely agrarian and labor abundant Lewis economy. Japan's rapid economic growth which had been sustained temporarily for about twenty years before she took the path converging to the present steady state of low growth was endogenous. Almost all of the growth miracles since the latter half of the twentieth century have been of Japanese pattern.