Innovation, Economic Growth, and Convergence – Perspectives for Romania

In a former paper, [3], we proposed and analyzed a model of the evolution of the Romanian economy, which, using human capital as the engine of growth, aimed at reaching European standards with respect to the quality of life, to the structure of labour force and to external deficit. One of the assumptions of that model was the constancy of total labour force over time. Performing simulations with real data regarding the Romanian economy, we concluded that, even massively investing in education (i.e. improving human capital), over a period of 30 years, the per capita income in Romania would not exceed 35% of that indicator for the EU 15. This led us to the assumption that technological innovation (which was not taken into account in the former model) should play a key role in the convergence of the Romanian economy (and other transition economies) to European standards. Accordingly, the present paper aims at checking this assumption, on the basis of a discrete time growth model, whose production function incorporates technological innovation, as well as human capital. Taking into account the objective of convergence to the standards of the developed EU countries, the objective function of the model expresses the “distance” between the economy analyzed and “standards” regarding per capita consumption, the structure of labour force and external deficit. Of course, this function has to be minimized. We perform simulations with the model, using Romanian data. These simulations can highlight the convergence speed of the Romanian economy towards EU standards, under several scenarios regarding the size of investment in human capital, as well as the rate of technological innovation. References: 1. Acemoglu, D., Aghion, P and Zilibotti, F. (2002): Distance to Frontier, Selection and Economic Growth, NBER Working Paper 9066, July 2002 2. Aghion, P. and P. Howitt (1992): A Model of Growth through Creative Destruction, Econometrica 51, 323-351 3. Altar, M., Judita Samuel, A.N. Altar-Samuel: A Macroeconomic Growth Model for Romania, including Human Capital, Metalurgia International, Special Issue No.7, vol.XIV, 2009, pp.145-152 4. Barro, R. J., X. Sala-i-Martin (1992), Convergence, Journal of Political Economy, 100, 2, 223-251. 5. Eicher, T. S. (1996): Interaction between Endogenous Human Capital and Technological Change, Review of Economic Studies, 63, 127-144