View metadata, citation and similar papers at core.ac.uk brought to you by CORE provided by K-State Research Exchange GROWTH AND DEVELOPMENT IN THE IBERIAN PENINSULA: THREE ESSAYS by EMANUEL CASTRO DE OLIVEIRA Licenciatura, Universidade de Coimbra, 1999 M.B.A., Kansas State University, 2001 AN ABSTRACT OF A DISSERTATION submitted in partial fulfillment of the requirements for the degree DOCTOR OF PHILOSOPHY Department of Economics College of Arts and Sciences KANSAS STATE UNIVERSITY Manhattan, Kansas 2009 Abstract Although geographic proximity is not enough to imply similar social, political and economic outcomes, the Portuguese and Spanish development experiences have been quite alike since the 15 th century and in particular during the post-WWII period. Since 1950, both countries went through significant market transformations, ranging from democratization to market liberalization and adhesion to the European Union. However, even today, these economies, and in particular Portugal, do not rival those of the more developed European countries. This dissertation contributes to the growing body of literature on the Iberian economies by presenting three essays that employ modern macroeconomics tools to further our understanding about the growth and development experiences of these countries. The first essay provides a detailed growth accounting exercise and reconciles the results with the political and socioeconomic context of the 1950-2004 period. Since Total Factor Productivity is identified as the main engine of growth, the second essay explores a quantitative measure for the level of barriers that each country faced in the process of adopting new technologies. The numerical experiments suggest that Spain had consistently lower barriers than Portugal and that the gap has been increasing since the establishment of the European Single Market. The last essay investigates the role of fiscal policy and, specifically, if distortionary taxes on capital and labor income may have been a key factor behind the observed volatility for factor inputs. The simulation results derived from several potential scenarios support this conjuncture. Additionally, the last essay contributes by offering a time series for the levels of effective tax rates on labor and capital income in the Iberian economies over the 1975-2004 period. JEL classification: E20, E62, O11, 033, O47. Keywords: Economic development, Growth accounting, Technology barriers, Effective tax rates, Portugal, Spain. GROWTH AND DEVELOPMENT IN THE IBERIAN PENINSULA: THREE ESSAYS by EMANUEL CASTRO DE OLIVEIRA Licenciatura, Universidade de Coimbra, 1999 M.B.A., Kansas State University, 2001 A DISSERTATION submitted in partial fulfillment of the requirements for the degree DOCTOR OF PHILOSOPHY Department of Economics College of Arts and Sciences KANSAS STATE UNIVERSITY Manhattan, Kansas 2009 Approved by: Major Professor Dr. Steven P. Cassou Abstract Although geographic proximity is not enough to imply similar social, political and economic outcomes, the Portuguese and Spanish development experiences have been quite alike since the 15 th century and in particular during the post-WWII period. Since 1950, both countries went through significant market transformations, ranging from democratization to market liberalization and adhesion to the European Union. However, even today, these economies, and in particular Portugal, do not rival those of the more developed European countries. This dissertation contributes to the growing body of literature on the Iberian economies by presenting three essays that employ modern macroeconomics tools to further our understanding about the growth and development experiences of these countries. The first essay provides a detailed growth accounting exercise and reconciles the results with the political and socioeconomic context of the 1950-2004 period. Since Total Factor Productivity is identified as the main engine of growth, the second essay explores a quantitative measure for the level of barriers that each country faced in the process of adopting new technologies. The numerical experiments suggest that Spain had consistently lower barriers than Portugal and that the gap has been increasing since the establishment of the European Single Market. The last essay investigates the role of fiscal policy and, specifically, if distortionary taxes on capital and labor income may have been a key factor behind the observed volatility for factor inputs. The simulation results derived from several potential scenarios support this conjuncture. Additionally, the last essay contributes by offering a time series for the levels of effective tax rates on labor and capital income in the Iberian economies over the 1975-2004 period. JEL classification: E20, E62, O11, 033, O47. Keywords: Economic development, Growth accounting, Technology barriers, Effective tax rates, Portugal, Spain. Table of Contents List of Figures............................................................................................................................... vii List of Tables ...............................................................................................................................viii Acknowledgements........................................................................................................................ ix Dedication....................................................................................................................................... x ESSAY 1 - Growth Accounting in the Iberian Political and Socioeconomic Context after World War II....................................................................................................................................... 1 1.1. Introduction.......................................................................................................................... 2 1.2. Growth Accounting Methodology....................................................................................... 4 1.3. Data and Calibration ............................................................................................................ 6 1.4. Iberian Experiences in the Post-WWII Period..................................................................... 7 1.4.1. The Political and Socioeconomic Context.................................................................... 8 1.4.2. Macroeconomic Indicators.......................................................................................... 13 1.4.2.1. Output per Capita................................................................................................. 14 1.4.2.2. The Employment Rate ......................................................................................... 17 1.4.2.3. Consumption and Investment .............................................................................. 19 1.4.2.4. Capital-Output Ratio............................................................................................ 22 1.4.2.5. Total Factor Productivity..................................................................................... 25 1.5. Growth Accounting Results............................................................................................... 28 1.5.1. Regime Changes ......................................................................................................... 29 1.5.2. Growth Accounting Results with Linear Capital Accumulation ................................ 31 1.5.3. Growth Accounting Results with Exponential Capital Accumulation ....................... 36 1.6. Conclusion ......................................................................................................................... 40 ESSAY 2 - Iberian Barriers to Technological Adoption .............................................................. 42 2.1. Introduction........................................................................................................................ 43 2.2. Modelling Barriers to Technological Adoption................................................................. 46 2.2.1. The Corporate Sector .................................................................................................. 46 2.2.2. The Consumer Sector.................................................................................................. 48 2.2.3. Competitive Equilibrium ............................................................................................ 49 v 2.2.4. Decision Rules ............................................................................................................ 50 2.3. Calibration ......................................................................................................................... 51 2.4. Iberian Development Experiences..................................................................................... 53 2.4.1. Background ................................................................................................................. 53 2.4.2. Spain ........................................................................................................................... 57 2.4.3. Portugal ....................................................................................................................... 59 2.4.4. Recent Evidence of Barriers ....................................................................................... 61 2.5. Conclusion ......................................................................................................................... 63 ESSAY 3 - Effective