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Economic Growth Around the World

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					Economic
Growth
Around the
World
      Thorvaldur Gylfason
                           Growing Together,
                           Growing Apart
                            West-Germany : East-Germany
                            Austria : Czech Republic
                            Finland : Estonia             Economic system
National economic output


                            Taiwan : China
                            South Korea : North Korea
                                                            Rapid growth
                            Botswana : Nigeria
                            Kenya : Tanzania
                            Thailand : Burma
                            Tunisia : Morocco        Economic policy?
                            Spain : Argentina
                            Mauritius : Madagascar          Slow growth




                                                         Time
         Botswana and Nigeria: GNP per
Case 1   capita 1964-97
         3500

                            Botswana
         3000
                            Nigeria
         2500
                    Current US$,
         2000       Atlas method

         1500


         1000


          500


            0
             64

                     67

                             70

                                     73

                                             76

                                                     79

                                                             82

                                                                     85

                                                                             88

                                                                                     91

                                                                                             94

                                                                                                     97
          19

                  19

                          19

                                  19

                                          19

                                                  19

                                                          19

                                                                  19

                                                                          19

                                                                                  19

                                                                                          19

                                                                                                  19
         Kenya, Tanzania, and Uganda:
Case 2   GNP per capita 1964-97
         500
         450          Kenya
         400          Tanzania
         350          Uganda
         300
                 Current US$,
         250     Atlas method
         200

         150

         100

          50
           0
            64

                    67

                    70

                            73

                                    76

                                    79

                                            82

                                            85

                                                    88

                                                            91

                                                            94

                                                                    97
         19

                 19

                 19

                         19

                                 19

                                 19

                                         19

                                         19

                                                 19

                                                         19

                                                         19

                                                                 19
         Burma and Thailand:
Case 3   GNP per capita 1960-97
         700

                    Burma
         600
                    Thailand
         500
               Local currency,
               1988 prices,
         400
               1960 = 100

         300


         200


         100


          0
            60

            63

            66

            69

            72

            75

            78

            81

            84

            87

            90

            93

            96
         19

         19

         19

         19

         19

         19

         19

         19

         19

         19

         19

         19

         19
         Barbados, Dominican Republic,
Case 4   and Haiti: GNP per capita 1964-98
         9000

                             Barbados
         8000
                             Haiti
         7000
                             Dominican Republic
         6000


         5000
                   Current US$,
                   Atlas method
         4000


         3000


         2000


         1000


            0
             64

                     67

                             70

                                     73

                                             76

                                                     79

                                                             82

                                                                     85

                                                                             88

                                                                                     91

                                                                                             94

                                                                                                     97
          19

                  19

                          19

                                  19

                                          19

                                                  19

                                                          19

                                                                  19

                                                                          19

                                                                                  19

                                                                                          19

                                                                                                  19
         Egypt, Morocco, and Tunisia:
Case 5   GNP per capita 1964-97
         2500

                            Egypt
         2000               Morocco
                            Tunisia

         1500
                    Current US$,
                    Atlas method
         1000



          500



            0
             64

                     67

                             70

                                     73

                                             76

                                                     79

                                                             82

                                                                     85

                                                                             88

                                                                                     91

                                                                                             94

                                                                                                     97
          19

                  19

                          19

                                  19

                                          19

                                                  19

                                                          19

                                                                  19

                                                                          19

                                                                                  19

                                                                                          19

                                                                                                  19
         Argentina, Uruguay, and Spain:
Case 6   GNP per capita 1964-97
         16000

                             Argentina
         14000
                             Spain
         12000               Uruguay

         10000       Current US$,
                     Atlas method
          8000


          6000


          4000


          2000


             0
              64

                      67

                              70

                                      73

                                              76

                                                      79

                                                              82

                                                                      85

                                                                              88

                                                                                      91

                                                                                              94

                                                                                                      97
           19

                   19

                           19

                                   19

                                           19

                                                   19

                                                           19

                                                                   19

                                                                           19

                                                                                   19

                                                                                           19

                                                                                                   19
         Madagascar and Mauritius:
Case 7   GNP per capita 1964-97
         4500

         4000       Madagascar
                    Mauritius
         3500

         3000   Current US$,
                Atlas method
         2500

         2000

         1500

         1000

          500

           0
             64

             67

             70

             73

             76

             79

                                    82

                                    85

                                    88

                                    91

                                    94

                                    97
          19

          19

          19

          19

          19

          19

                                 19

                                 19

                                 19

                                 19

                                 19

                                 19
         Chile and Zambia:
Case 8   GNP per capita 1964-98
         6000

                           Chile
         5000
                           Zambia

         4000      Current US$,
                   Atlas method
         3000


         2000


         1000


            0
            64

                   67

                          70

                                 73

                                        76

                                               79

                                                      82

                                                             85

                                                                    88

                                                                           91

                                                                                  94

                                                                                         97
          19

                 19

                        19

                               19

                                      19

                                             19

                                                    19

                                                           19

                                                                  19

                                                                         19

                                                                                19

                                                                                       19
                           Economic Growth:
                           The Short Run vs. the Long Run

                               Economic growth           Potential output
National economic output


                               in the long run
                                                         Actual output


                              Upswing
                                                        Business cycles
                                                        in the short run
                                                 The crisis of 1997-98
                                                 is irrelevant to Asia’s
                                 Downswing       long-term growth potential.


                                                        Time
     Economic Growth:
     The Short Run vs. the Long Run

To analyze the movements of actual output
  from year to year, viz., in the short run
  Need short-run macroeconomic theory
     Keynesian or neoclassical

To analyze the path of potential output over
  long periods
  Need modern theory of economic growth
     Neoclassical or endogenous
The Neoclassical Theory of
Exogenous Economic Growth

  Traces the rate of growth of output
  per capita to a single source:
            Technological progress
            Hence, economic growth in the
            long run is immune to economic
            policy, good or bad.

            “To change the rate of growth of real
            output per head you have to change the
            rate of technical progress.”
                                    ROBERT M. SOLOW
    The New Theory of Endogenous
    Economic Growth

Traces the rate of growth of output per
  capita to three main sources:
    Saving
    Efficiency
    Depreciation

   “The proximate causes of economic growth are
   the effort to economize, the accumulation of
   knowledge, and the accumulation of capital.”

                                    W. ARTHUR LEWIS
      Exogenous vs. Endogenous
      Growth
The neoclassical view
  that economic growth in the long run is merely a
    matter of technology does not throw much light
    on the spectacular growth performance of Asia
    since the 1960s.
The new view
  that long-run growth depends on saving,
    efficiency, and depreciation is more illuminating.
  Besides, it’s not really new, because Adam Smith
    knew this (1776).
      A Simple Model of
      Endogenous Growth
Four building blocks:
 S=I
      Saving equals investment in equilibrium.
   S = sY
      Saving is proportional to income.
   I = K + K
      Investment involves addition to capital stock.
   Y = EK
      Output depends on quality and quantity of capital.
       A Simple Model of
       Endogenous Growth
Implication:
   g = sE - 
Rate of economic growth equals
 Saving rate
      times
   Efficiency (i.e., the output/capital ratio)
      minus
   Depreciation
Endogenous Growth in the
Harrod-Domar Model

 You may recognize the
  endogenous growth model as
  a reinterpretation of the
  Harrod-Domar model
   where growth depends on
   A. the saving rate
   B. the capital/output ratio
   C. the depreciation rate
      Sources of Endogenous
      Growth I
Saving
 Fits real world experience quite well
    No coincidence that, in East Asia, saving rates of 30-
     40% of GDP went along with rapid economic growth
    No coincidence either that many African economies
     with saving rates around 10% of GDP have been
     stagnant
    OECD countries: saving rates of about 20% of GDP
 Important implication for economic policy:
    Economic stability with low inflation and positive real
     interest rates spurs saving, which is good for growth.
  Sources of Endogenous
  Growth I
  Income
  per capita


400                  East Asia

300

200                 OECD

100                 Africa

  1965            1990
          Growth and Investment,
109
countries 1965-98
                                        10
                                                 Each ten percentage point     Botswana
                                         8       increase in the investment
       Growth per capita (% per year)

                                                 ratio is associated with an
                                         6       increase in per capita
                                                 growth by 1½% per year.
                                         4                                                        1½%

                                         2                                             10%

                                         0
                                             0            10            20        30         40         50
                                        -2

                                        -4

                                        -6
                                                                   Investment (% of GDP)
33 sub-
Saharan     Growth and Investment,
African
countries   1965-98
                                             10
                                                      Each ten percentage point
                                              8       increase in the investment
                                                      ratio is associated with an
            Growth per capita (% per year)


                                              6       increase in per capita
                                                      growth by 1½% per year.
                                              4

                                              2

                                              0
                                                  0             10           20          30       40   50
                                             -2

                                             -4

                                             -6
                                                                          Investment (% of GDP)
    Sources of Endogenous
    Growth II
Depreciation
  The effect of depreciation on growth is related
   to that of saving and investment on growth.
  Unprofitable investment in the past reduces
   the quality of capital and makes it depreciate
   more rapidly, necessitating more replacement
   investment to make up for economic and
   physical wear and tear.
  The more national saving has to be set aside
   for replacement investment, the less will be
   available for the buildup of new capital.
Investment: Quantity and
Quality
Compare Botswana and Tanzania:
  In Botswana, the share of State-Owned
    Enterprises in total investment fell from
    16% in 1985-90 to 12% in 1990-97.
  In Tanzania, the SOE share of investment
    fell from 46% in 1985-90 to 23% in
    1990-97.
This is probably a good sign.
  Privatization helps improve investment.
Investment: Quantity and
Quality

Investment quality, however, is not
  only a question of public vs. private
  enterprise.
Sound banking is also important.
  It takes sound commercial banks,
    usually privately owned banks
    motivated by profit rather than by
    political concerns, to channel
    household savings into high-quality
    investment.
     Sources of Endogenous
     Growth III
Efficiency
  Also fits real world experience quite well
     Technical progress is good for growth because it allows
       us to squeeze more output out of given inputs.
     And that is exactly what increased efficiency is all
       about!
     Thus, technology is best viewed as an aspect of
       general economic efficiency.
  Important implication for economic policy:
     Everything that increases economic efficiency, no
      matter what, is also good for growth.
       Sources of Endogenous
       Growth III
Five sources of increased efficiency
1. Liberalization of prices and trade increases
   efficiency, which is good for growth.
2. Stabilization reduces the inefficiency associated
   with inflation, which is good for growth.
3. Privatization reduces the inefficiency associated
   with state-owned enterprises, which …
4. Education makes the labor force more efficient.
5. Technological progress also enhances efficiency.
The possibilities are virtually endless!
      Sources of Endogenous
      Growth III
This is good news.
  If growth were merely a matter of technology,
    we would not be able to do much about it …
    … except to follow technology-friendly policies by
     supporting R&D and such.
  But if growth depends on saving and efficiency,
   there are things that we can do, in the private
   sector as well as through the public sector, to
   foster rapid economic growth.
  Because everything that is good for saving and
   efficiency is also good for growth.
      What to Do to Encourage
      Economic Growth
Maintain strong incentives to save
  Keep inflation low and real interest rates positive
  Maintain financial system in good health
     so as to channel saving into high-quality investment
Foster efficiency
     1.   Liberal price and trade regimes
     2.   Low inflation
     3.   Strong private sector
     4.   More and better education
     5.   Limited, or well managed, natural resources
1        Liberalization and Economic
         Growth
Liberalization of prices means that markets,
  not bureaucrats, are allowed to set prices.
  Mixed market economy is more efficient than
   central planning.
        Compare former Soviet Union with the US and Europe
Liberalization of trade allows specialization
  according to comparative advantage.
  Free trade is more efficient than self-sufficiency.
        North Korea and Cuba vs. Hong Kong and Singapore
Applies to trade in goods, services, capital.
          Growth and Trade,
105
countries 1965-98
                                        10
                                              Botswana
                                         8
                                             China                                       Singapore
       Growth per capita (% per year)


                                         6
                                                 Korea
                                                            Hong Kong
                                         4                        Each 50 percentage point increase
                                                                  in the trade ratio is associated
                                         2                        with an increase in per capita
                                                                  growth by almost 1% per year.
                                         0
                                             0    50     100     150     200      250      300        350
                                        -2
                                                           United Arab Emirates
                                        -4

                                        -6
                                                         Trade (% of ppp-adjusted GDP)


      NB: UAE, Hong Kong, and Singapore.
32 sub-
Saharan     Growth and Trade,
African
countries   1965-98
                                             10
                                                      Each 20 percentage point
                                              8       increase in the trade ratio is
                                                      associated with an increase in per
            Growth per capita (% per year)


                                              6       capita growth by 1% per year.

                                              4

                                              2

                                              0
                                                  0             20           40            60         80   100
                                             -2

                                             -4

                                             -6
                                                                      Trade (% of ppp-adjusted GDP)
          Growth and Foreign Direct
100
countries Investment, 1965-98
                                        10
                                                 Each three percentage
                                         8
                                                 point increase in the
                                                 FDI ratio is associated               Singapore
       Growth per capita (% per year)



                                                 with an increase in       Botswana
                                         6       per capita growth by
                                                 almost 1% per year.
                                         4

                                         2

                                         0
                                             0     2        4        6        8       10     12      14
                                        -2

                                        -4
                                                 Foreign direct investment (% of ppp-adjusted GDP)

      Qualification: Relationship rests on Botswana and Singapore.
31 sub-
Saharan     Growth and Foreign Direct
African
countries   Investment, 1965-98
                                              10
                                                       Each one percentage point increase in the
                                               8       FDI ratio is associated with an increase in
             Growth per capita (% per year)

                                                       per capita growth by almost 1% per year.          Botswana
                                               6

                                               4

                                               2

                                               0
                                                   0                2               4                6              8
                                              -2

                                              -4
                                                            Foreign direct investment (% of ppp-adjusted GDP)


            Relationship depends on the inclusion of Botswana.
2     Stabilization and Economic
      Growth
Stabilization of prices means that distortions
  associated with inflation are reduced.
   Inflation distorts the choice between real and
   financial capital by punishing money holdings,
   and thus creates inefficiency in production.
   Inflation thus involves a tax, the inflation tax.
     An inefficient tax compared with most other taxes.
   Inflation also creates uncertainly which tends
   to discourage trade and investment.
   Inflation also tends to result in overvaluation
   of currency, thus hurting exports and growth.
3   Privatization and Economic
    Growth
Privatization means that profit-oriented
  owners and able managers are allowed to
  direct enterprises.
  Profit motive replaces political considerations as
    the guiding principle of business operations.
     Profit-maximizing owners generally want to appoint
       managers and staff on merit rather than on the
       basis of political connections, for example.
  Private enterprise is generally more efficient
    than state-owned enterprises.
  Same Story Time and
  Again
Free trade is good for growth
  Reduces the inefficiency that results from
   restrictions on trade
Price stability is good for growth
  Reduces inefficiency resulting from inflation
Privatization is good for growth
  Reduces inefficiency resulting from SOEs
Education is good for growth
  Reduces the inefficiency that results from
   inadequate education
  Same Story Time and
  Again
Can describe this by simple arithmetic
The efficiency gain from eliminating an
  economic distortion (trade restrictions,
  inflation, unnecessary state intervention,
  insufficient education) is directly
  proportional to the square of the
  distortion:
E = mc2
  E stands for efficiency gain, m is a multiplicative
    constant, and c is the distortion
  E=       mc2
If the distortion is substantial (severe
  trade restrictions, high inflation, big SOE
  sector, poor education), then reducing or
  eliminating the distortion can increase
  efficiency and growth a great deal.
We can see this by plugging appropriate
  numbers into the formula and also by
  econometric research, where the theory
  is compared with experience (i.e.,
  economic statistics).
 4     Education and Economic
       Growth
Education means a better trained and hence
  more efficient work force.
   Need to provide primary and secondary
   education to all, especially females
   Need to provide tertiary education to a greatly
   increased number of people
   Need increased public commitment to education
   This requires both increased public expenditure
   on education and probably also increased scope
   for private sector involvement in education.
          Growth and Education,
86
countries 1965-98
                                        10                                           An increase in
                                                                                     secondary-school
                                                                                     enrolment by 40%
                                         8
                                                                                     of each cohort goes
       Growth per capita (% per year)


                                                                                     along with an
                                         6                                           increase in per
                                                                                     capita growth by
                                         4                                           1% per year.

                                         2

                                         0
                                             0   20        40       60      80      100     120     140
                                        -2

                                        -4
                                                      Secondary-school enrolment 1980-97 (% )
33 sub-
Saharan     Growth and Education,
African
countries   1965-98
                                             10
                                                      Each two percentage point
                                              8       increase in the education
            Growth per capita (% per year)


                                                      expenditure ratio is associated
                                              6       with an increase in per capita
                                                      growth by about 1% per year.
                                              4

                                              2

                                              0
                                                  0        1        2       3           4     5        6      7   8
                                             -2

                                             -4

                                             -6
                                                                 Public expenditure on education (% of GNP)
5   Natural Resources and
    Economic Growth

    Natural resources, if not well managed,
       may turn out to be, at best, a mixed
       blessing.
    Three possible channels
       Education
       Dutch disease
       Rent seeking
    What is the evidence?
          Natural Resources and
86
countries Economic Growth 1965-98
                                        10
                                                                                 A ten percentage point
                                         8                                       increase in the natural
                                                                                 capital share goes along
       Growth per capita (% per year)



                                         6                                       with a decrease in per
                                                                                 capita growth by nearly
                                         4                                       1% per year.

                                         2

                                         0
                                             0   10           20            30           40             50   60
                                        -2

                                        -4
                                                      Share of natural capital in national wealth (%)



      Abundant natural resources, if not well managed,
      appear harmful to growth.
          Natural Resources and
90
countries Education
                                                          9
             Public expenditure on education (% of GNP)   8
                                                                                                   An 18 percentage point
                                                                                                   increase in the natural
                                                          7                                        capital share is associated
                                                                                                   with a decrease in public
                                                          6                                        expenditure on education
                                                          5                                        by 1% of GNP.

                                                          4

Abundant                                                  3

natural                                                   2
resources                                                 1
appear to
                                                          0
crowd out                                                     0   10            20           30           40             50      60
human                                                                  Share of natural capital in national wealth (%)
resources.
          Natural Resources and
45
countries Corruption

                                 10
                                                                                    New Zealand
                                  9

                                  8

                                  7
              Corruption index




                                  6

                                  5

                                  4
Abundant                          3
natural
                                  2
resources
appear to                         1

go along                          0
with                                  0    5             10            15            20           25

corruption.                               Share of natural capital in national wealth (%)
What Is the Upshot?

Economic growth responds to public
  policy.
In particular, by encouraging
  saving and investment of high quality
  foreign trade and investment
  education
... the government can help foster
   rapid economic growth.
Sir Arthur Lewis Got It Right

Since the second world
war it has become
quite clear that rapid
economic growth is
available to those
countries with
adequate natural
resources which make
the effort to achieve it.

       W. ARTHUR LEWIS
                 (1968)
What Else?
These lessons are borne out by experience
  from around the world.
Additional lessons:
  Too much inflation hurts saving, investment,
    and trade — and thereby also growth.
  Too much SOE activity hurts the quality of
    investment and education — and growth.
  Too much agriculture and, more generally,
    natural resource dependence, if not well
    managed, hurts education and trade — and
    thereby also growth.
  Too rapid population growth also tends to
    impede economic growth.
Reservations
Even so, the question of rapid growth is, of
  course, a bit more complicated.
We also need to address a host of political,
  social, and cultural questions as well as
  questions of natural conditions, climate,
  and public health — which would take us
  too far afield.
But the main point remains:
   To grow or not to grow is in large measure a
    matter of choice.
   Many of the constraints on growth are man-
    made, and can be removed.
In Conclusion: It Can Be
Done

Economic growth makes a difference,
  especially in poor countries.
   A question literally of life and death
And not only in poor countries,
   for there is poverty amid plenty in rich countries
Recall the main point of Gunnar Myrdal’s Asian
  Drama (1968):
   It was that the Asian economies were incapable of
      rapid economic growth!
New growth theory suggests that similar claims
  about Africa will also be proven wrong.
In Conclusion: It Can Be
Done

There has been much progress in economic
  policy and performance around the world in
  the 1990s.
Growth-friendly reforms have been widely
  embraced
   among ordinary people and politicians across the
    political spectrum, not only in Asia, but also,
    increasingly, in other parts of the world, including
    Africa.
Yet, various special interest groups try to
  resist.
In Conclusion: It Can Be
Done     These slides can be viewed on my website:
               www.hi.is/~gylfason/copenhagen.ppt



‘Reformers have the
idea that change can be
achieved by brute
sanity.’
George Bernard Shaw


                         To grow or not to grow
                         is in large measure a
                         matter of choice.

				
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