Land And Growth Under The Framework Of Endogenous Growth Theory

Neoclassical and endogenous growth theory to date have excluded land as an essential input to sustain long-term economic growth, as land supply is seen on the whole inelastic and cannot grow by the same magnitude with the economy in the long run. On the contrary, the role of human capital in growth is widely recognized as predominant, through a learning-by-doing process that production involving human capital generates a sustained growth of it, and of the economy as a whole. However, witnessing the rise of some developing countries, such as P. R. China, I see a causal link between land supply and human capital agglomeration, which poses a great challenge to the prevailing belief that land has no effect on long-term growth.This paper develops a theoretical framework of a distinguished endogenous growth theory, in which, land supply works as a tool for local government to generate local revenue and has a side effect of attracting (or dismissing) physical capital,(quantity of) labor force and especially, human capital. Thus, land’s role in stimulating short-term economic growth is two-fold. First, it can contribute to the short-term growth through its continuous supply, which is already mentioned in previous studies and addressed here as a direct effect. Besides, it can also stimulate short-term growth through an indirect effect by role of agglomerating physical capital, labor force, and human capital which has been ignored to date. This indirect effect of land on growth is of great significance, because it is not only short-termed, but also long-termed by way of human capital agglomeration. This theoretical framework contributes to the class of endogenous growth theories by seeing land supply hand-in-hand with human capital as crucial driving forces of short-and long-term growth, which provides a new powerful perspective for explaining the dramatic rise of certain developing countries, such as P.R. China, whose governments use land supply as a tool to stimulate local economic boom.Some of the propositions deduced from the theory are tested and confirmed by an empirical study based on provincial-level panel data of China from2003to2009. This paper may have a policy implication that, in developing countries where government is in charge of supplying land, the local government’s land supply strategy may impose great consequences on local economic growth, not only short-termed, but long-termed as well. Therefore a rationale plan of land supply is pivotal for the rise of a developing economy.