Lecture 4: The Solow Model of Growth - PowerPoint

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					             Lecture 5:
Growth Experiences around the World


            September 6, 2012




          Prof. Wyatt Brooks




                   1
                   Announcements
 Problem Set 3 posted
    A little bit different: the book doesn’t have much on
     development, so I’m having you watch two videos about it
    The first is by Milton Friedman, who is a hardcore free market
     proponent, but includes a very good debate
    The second is by Esther Duflo of MIT, who is an expert on an
     experimental approach to poverty reduction
 Quiz 2 will be returned on Tuesday
 Quiz 3 next Thursday, and Midterm 1 is the week after
  that!
 Will have an in-class review the class period before the
  exam.
       Where we left off last time:
        Purchasing Power Parity
Generalizes that logic to national currencies.

Purchasing Power: The value of the goods that a
currency is able to buy.

Purchasing Power Parity is a theory of exchange rates
that predicts that currencies have the same
purchasing power in all countries.

Based on the Law of One Price, when do we expect
Purchasing Power Parity to be violated?
Geary-Khamis International Dollars
Measure of GDP in “International Dollars”.

GDP in G-K Dollars = Value of all Goods and Services
                   using fixed prices across countries

The G-K measure of GDP and nominal GDP coincide if
Purchasing Power Parity holds.
        Comparing Countries
         by Income Measure


http://www.google.com/publicdata/explore?ds=d5bncppjof
8f9_&ctype=b&strail=false&bcs=d&nselm=s&met_x=ny_gdp
_pcap_pp_kd&scale_x=log&ind_x=false&met_y=ny_gdp_pca
p_cd&scale_y=log&ind_y=false&ifdim=country&tunit=Y&pit
=1125806400000&ind=false&icfg
       G-K International Dollars
      vs. Nominal Exchange Rates
For which countries do these two measures differ the
most? Why?

Which is a better measure for quality of life
comparisons across countries?
World Growth over the last 40 Years




    http://www.google.com/publicdata/explore?ds=d5bncppjo
    f8f9_&ctype=l&met_y=ny_gdp_pcap_pp_cd#!ctype=m&str
    ail=false&bcs=d&nselm=s&met_s=ny_gdp_mktp_cd&scale
    _s=lin&ind_s=false&ifdim=country&hl=en_US&dl=en_US&i
    nd=false
8E+13
        World Growth over the last 40 Years
7E+13




6E+13



                                                                                                               Sub-Saharan Africa
5E+13
                                                                                                               South Asia
                                                                                                               North America
4E+13
                                                                                                               Middle East & North Africa
                                                                                                               Latin America & Caribbean
3E+13                                                                                                          Europe & Central Asia
                                                                                                               East Asia & Pacific

2E+13




1E+13




   0
    1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
     Particular Cases of Interest
Today I will focus in on the histories of two particular
countries:
South Korea: Tremendous growth
Argentina: Tremendous losses

Things to be thinking about:
What role did the governments play in the growth
experiences of each country?
What was is about how government policy was
implemented that had such enormously different
effects?
The Case of South Korea
         Some Facts about South Korea:
          50 million people
          38,000 sq miles (a little larger
           than Indiana)
          2011 per capita GDP (nominal):
           $23,700 (about half of the US)
          2011 per capita GDP (G-K $):
           $31,700 (about 2/3 of the US)
          Currency: Won (KRW)
          Democratic form of government
          Major industries: electronics
           (Samsung, LG) , automotives
           (Hyundai), shipbuilding
          Major cities: Seoul, Busan
  Up to and including World War II
 Korea had been isolationist for centuries prior to the end of
  the nineteenth century
 Following the end of the Russo-Japanese War in 1905, Korea
  forcibly came under Japanese influence
 Japan annexed Korea in 1910
 Japan needed food and raw materials, and the Korean
  economy was directed toward production of those things
 During World War II, Korean laborers were sent to Japan to
  work in factories
 At the end of World War II, Korea was separated by the 38th
  parallel between two governments:
     Pro-Western South Korea with a capital in Seoul
     Pro-Soviet North Korea with a capital in Pyongyang
 Planned to reunify the country after 5 years
             Korean Growth: 1910-1944



1,500
                         Average Growth: 1.8%




 750
    1911   1914   1917   1920   1923   1926   1929   1932   1935   1938   1941   1944
            Korean Growth: 1910-1944
30%



                    GDP per capita
26%                 relative to the USA

22%




18%




14%




10%
   1911   1914   1917   1920   1923   1926   1929   1932   1935   1938   1941   1944
                   Korean War
 The USSR had withdrawn troops from North Korea in 1948,
  and the US withdrew in 1949
 The North Korean army invaded on June 25th, 1950
 The South Korean army was ill-equipped, and was pushed
  back quickly to the “Pusan Perimeter” by August, 1950
                         Important Economic Ramifications:
                          Massive destruction of
                           infrastructure
                          Massacre of South Korean
                           intellectuals (academics, civil
                           servants)
                          Population Displacement
                   Korean War
 The US supports the South Korean government under UN
  Security Council Resolution 84, passed July 7th, 1950
 Quickly pushed back the North Korean army, crossing the
  38th parallel
 This drew China into the conflict in support of North Korea




 Eventually, the two sides fought to a stalemate approximately
  where they started
      Aftermath of the Korean War
 Following the war, South Korea entered a period of political
  and economic turmoil
 Huge losses in economic output, and unrest against the
  political leadership
 Student protests in 1960 lead to new elections
 Heavy inflation led the South Korean currency to lose half its
  value against the USD
 Political pressure in opposition to forces within the military
  led to a military coup on May 16, 1961 by Gen. Park
 Dissolved the legislature and replaced civilian officials with
  military officers
 Eventually Park ruled as president-for-life and implemented
  martial law
 General Park remained in power until he was assassinated
  on October 26th, 1979
Economic Policy Pursued under Park

 Huge inflows of aid from the US and Japan
 Export-Oriented Industrialization
     Provided zero interest loans to export-oriented firms
     Promoted import of raw materials and exports of
      finished goods
 Normalization of relations with Japan
 Industrial policy that directed the development of targeted
  industries (textiles, then heavy industry, then heavy
  chemicals)
 Heavy government borrowing to promote industrial policy
             Korean Growth: 1940-1980
8,000
                  Post-War Instability           Average per capita Growth,
                                                 1960-1980: 6.2%


4,000


                           Korean War            Military Coup


2,000




1,000




 500
    1940   1944     1948   1952    1956   1960     1964   1968   1972   1976   1980
         Korean Growth: 1940-1980
25%


                 GDP per capita
21%              relative to the USA


17%




13%




9%




5%
  1940   1944   1948   1952   1956   1960   1964   1968   1972   1976   1980
         Second Military Regime
       and Transition to Democracy
 Shortly after General Park’s death, there was another
  military takeover
 More political instability and martial law
 The party in support of the military government lost the
  1985 National Assembly election
 June 1987: More than a million people engage in anti-
  government protests
 June 29, 1987: Announcement of political reforms resulting
  in a new constitution that remains in force
 1988 Summer Olympics in Seoul
       Economic Policies: 1980-1996

 Tightly controlled monetary policy and low interest rates led
  to stable prices
 Removed barriers to foreign investment
 Electronics and semi-conductor industries boomed
 Restrictions on foreign travel removed
 Normalization of trade relations with China
 Government direction of major corporate conglomerates
 Continuing increase in foreign trade
             Korean Growth: 1980-1994
12,000



                     Average per capita growth: 7.2%




 6,000




 3,000
      1980    1982      1984      1986     1988        1990   1992   1994
          Korean Growth: 1980-1994
50%




45%               GDP per capita
                  relative to the USA
40%




35%




30%




25%




20%
   1980    1982       1984   1986   1988   1990   1992   1994
             Asian Financial Crisis
 Reliance on exports made the Korean economy susceptible
  to exchange rate movements
 Rapid expansion led to a huge amount of lending
 Banks were very highly leveraged and had a large amount of
  bad debt
 Sharp decline in semi-conductor prices
 For several countries in East Asia, there were huge exchange
  rate fluctuations (Thailand, Indonesia, Malaysia, S. Korea)
 The Korean Won lost about half its value against the dollar
 Collapse in Korean asset prices, leading foreign investors to
  pull out of Korean investments
 IMF Bailout: $30.2 billion, with $19.5 billion from the IMF
    Bailout came with strict conditions on fiscal austerity
 Big losses in output during the crisis were temporary
             Korean Growth: 1995-2008
20,000


                    Average per capita growth: 4%




10,000
      1994   1996    1998      2000      2002       2004   2006   2008
          Korean Growth: 1995-2008
70%




65%              GDP per capita
                 relative to the USA
60%




55%




50%




45%




40%
   1994   1996      1998    2000       2002   2004   2006   2008
            Korean Growth: 1911-2008
32,000




16,000                              Average per capita Growth,
                                    1960-2008: 6%

 8,000




 4,000




 2,000




 1,000




  500
     1911   1923   1935   1947   1959     1971     1983     1995   2007
         Korean Growth: 1911-2008
70%



60%             GDP per capita
                relative to the USA
50%



40%



30%



20%



10%



0%
  1911   1923   1935   1947   1959    1971   1983   1995   2007
The Case of Argentina
      Some Facts about Argentina:
       41 million people
       1,073,000 sq miles (four times
        larger than Texas)
       2011 per capita GDP (nominal):
        $10,600 (about 20% of the US)
       2011 per capita GDP (G-K $):
        $17,500 (about 1/3 of the US)
       Currency: Peso
       Democratic form of government
       Major industries: Agriculture
       Major cities: Buenos Aires
     Beginning of the 20th Century
 In 1900, Argentina had the same per capita GDP as France
 Huge migration inflows from Europe (particularly Italy and
  Spain)
 Argentina accumulated about 4% of the world’s gold
  supply, though it had about 1.5% of world GDP
 During World War I, the interruption of international trade
  was particularly hard on the Argentine economy
 Foreign investment also came to a halt
 Opening of the Panama Canal in 1914 reduced the
  importance of the Southern Cone as a transport route
            Argentine Growth: 1900-1928
5,000

                                Outbreak of WWI




2,500
     1900        1907    1914               1921   1928
          Argentine Growth: 1900-1928
80%




75%
                              GDP per capita
                              relative to the USA
70%




65%




60%




55%




50%
   1900       1907     1914          1921           1928
        Depression Era and WWII
 The Great Depression hit in 1929
    Not as bad in Argentina as in other places
    Unemployment never went above 10% (was over 25%
      in the USA)
 Civil unrest: military coup in 1930, fraudulent election in
  1932, high levels of government corruption
 The government pursued a strategy of “import
  substitution”:
    Put high tariffs on the goods that are imported the
      most to try to encourage domestic industries to grow
    High subsidies for those industries
 Argentina remained neutral in WWII
 Military coup in 1943
                      Perón Era
 Juan Peron was a career military officer, who became a
  populist politician
 Became president in 1946 with strong popularity
 Pursued very strong labor protections and government
  transfer programs
 Instituted censorship of opposition media
 Isolationist foreign policy and economic policy
 Huge inflation
     The Peso lost 70% of its value against the dollar
     Annual inflation reached 50% in 1951
 Forced out of power in 1955 by a group of generals
             Period of Instability
 The next 20 years were marked by a series of short term
  administrations and military coups
 In 1958, the government focused on mining and oil
  exploration
 In 1966, following another coup the government started a
  series of price and wage controls
 After 1966, in a policy reversal the economy was opened to
  trade and foreign investment
 Led to yet another change in government
 Further high levels of inflation
 Many industries were nationalized
 Throughout this period, growth was slow relative to the
  rest of the world
             Argentine Growth: 1929-1974
12,000




 6,000




 3,000
      1929    1934   1939   1944   1949   1954   1959   1964   1969   1974
          Argentine Growth: 1929-1974
80%


75%


70%                                     GDP per capita
65%                                     relative to the USA
60%


55%


50%


45%


40%


35%


30%
   1929    1934   1939   1944   1949   1954   1959   1964   1969   1974
        Stagnation and Depression
 In the period from 1975-1991, average inflation was 300%
  so the price level increased by a factor of 20 billion
 Political instability led to the inability of the government to
  maintain support of previously subsidized industries
     This led to the collapse of many industries and high
      unemployment
 Government deficits grew substantially and government
  debts spiraled out of control
 The government tried to control inflation by taking an
  increasingly strong role in controlling prices
 Free Market Reforms, then Default
 Starting in 1991, the government undertook a series of free
  market reforms:
    Open trade
    Value of the currency pegged to the USD
    Privatization of previously nationalized industries
    Openness to foreign investment
 The economy grew rapidly for a few years
 Regions that depended on previously protected industries
  began to riot
    The government attempted to placate them with
      spending programs
    Government spending grew substantially
 Argentina received an IMF loan, but still had to default in
  2001
              Recent Resurgence
 After the default, the economy of Argentina has begun to
  recover
 This has mainly been driven by a boom in the prices of the
  goods Argentina exports
 However, many problems will remain:
    Double-digit inflation
    High taxes on imports (tariffs) and on exports
    Reliance on price controls
    Nationalization of private pensions
 Also worrying: stopped releasing some economic data
             Argentine Growth: 1975-2008
12,000




 6,000
      1975      1980   1985   1990   1995   2000   2005
          Argentine Growth: 1975-2008
60%


55%

                                 GDP per capita
50%
                                 relative to the USA
45%


40%


35%


30%


25%


20%
   1975     1980   1985   1990    1995     2000        2005
             Argentine Growth: 1900-2008
16,000




 8,000




 4,000




 2,000
      1900    1912   1924   1936   1948   1960   1972   1984   1996   2008
          Argentine Growth: 1900-2008
80%




70%

                                        GDP per capita
                                        relative to the USA
60%




50%




40%




30%




20%
   1900   1912   1924   1936   1948   1960   1972   1984   1996   2008
    Comparing Korea and Argentina
 Both have historically been controlled by military
  governments for significant periods of time
 Both have governments that pursued managed industrial
  policies
     Targeted particular industries for growth
 Both economies are largely dependent on trade
 Financial crisis: Both received IMF loans
 High education: Argentina has always had a highly educated
  population, and Korea’s has become more educated over
  time
    Contrasting Korea and Argentina
 Price stability: Argentina was constantly in a state of
  hyperinflation
 Trade policies:
     Argentina: Import substitution
     South Korea: Export promotion
 Industrial subsidization: Argentina subsidizes the least
  efficient industries, while Korea subsidizes the most efficient
  industries
 Political stability: Argentina was constantly changing
  governments, while in Korea changes were less frequent
 Aid: South Korea received a great deal of aid from the US
  and Japan, while Argentina received very little
 Labor Policy: Argentina has restrictive labor laws, while
  Korea does not
                                                          Next Class
             Return Quiz 2
             Continue with cross-national comparisons and
              growth experiences
             Problem Set 3 is posted
             New groups:
Group
                                                                                                          Galvao Guerra,      Dorenbusch,
  1       Smith, Grace         Zhang, Naurin       Pangraze, Andrew McGuire, Michael      Liu, Wenxin         Rafael            Robert
                                                       Peterson,
  2       Stith, William        Rogari, Gina           Elizabeth     McRaven, Kelly       Long, Sean      Gehl, William     Bowen, Charles

  3      Torres, Monica        Runk, Jessica         Planek, John     Noriega, Horacio   Male, Anthony    Enriquez, Bryan     Ding, Wenda

  4        Villa, Grisel     Schilling, Nicholas     Boll, Natalie    O'Brien, Brendan    Healy, John     Lacayo, Miguel     Brown, Lindsay
            Wieland,
  5         Margaret         Schneider, Anne         Rey, Robert      Kim, Dong-Hyun     Maloy, Brian     Flatley, Andrew     Carroll, Ellen
                                                                                         Korolyshun,
  6     Williams, Isabelle    Smith, Duncan        O'Brien, Melissa    Song, Yichuan      Theodore        Fonseca, Mary     Bradley, Zachary
                                                                                                           Fredrickson,
  7     Wilson, Andrew         Rice, Annalee        Ortiz, Alberto    McCarthy, Anne Laskowski, Patrick       Joseph        Donegan, Seamus

				
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