A semi-endogenous growth model for developing countries with public factors, imported capital goods, and limited export demand

We add non-rivalrous public factors, imported capital goods and an export demand function to a human-capital augmented growth model with individuals differing in their abilities to form human capital. The result is a semi-endogenous growth model for developing countries with no machinery sector and no R&D. Higher exports lead to more private investment, higher terms of trade and more growth and allow for higher investment in public capital. An increase in public investment increases human capital and output, raises demand for imported capital goods and exports. A good balance for public and private investment has to be found in order to justify taxation and avoid terms of trade losses. Our analysis of a vector-error-correction model for Trinidad &Tobago shows that additional expenditure for public investment increases output less than taxes decrease per capita consumption and therefore is sub-optimal there. Both, temporary and permanent shocks on public investment have level effects supporting semi-endogenous growth modelling. Permanent shocks on the growth rate of world income and oil prices increase exports, private and public capital, education and consumption, and demonstrate that the VECM effects are in line with the logic of the theoretical model.