a quick and dirty look at growth & development
TRANSCRIPT
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Timothy Devinney Page 1
A Quick and Dirty Look at Growth &A Quick and Dirty Look at Growth &
DevelopmentDevelopment
Timothy M. Devinney
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Who is Being Described?Who is Being Described?
The rates of economic growth .... are impressive. National income is planned to
be 160 percent of that [five years ago], an increase of 10.5 percent a year. Although these
figures are slightly lower than claimed in prior forecasts, they are three times those claimed
for the United States. Similarly, it is expected that in five years wages will be 130 percent
of their current level.
It should be roughly a decade and a half before the productivity of ______surpasses that of the United States. If in the future the populace should begin to exercise
control over the proportion of national income devoted to consumption as compared to
investment this might reduce future rates of economic growth
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Who is Being Described?Who is Being Described?
The significant break with the past was the fact that the [population growth] rate
accelerated to 7%. In addition to the striking increase in exports (an eight-fold
increase in thirty years) much of the growth in income could be attributed to
increases in agricultural output. ..... There were two reasons associated why the
upsurge in overseas trade took place. Firstly, there was the growth in the diversity
of new industries. Secondly, there was the growing development of a world-widetrading system leading to trade increasing much more quickly the growth in any one
country.
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Who is Being Described?Who is Being Described?
How did they do it? .....Economic growth depends on two factors: increases
in the supply of productive resources [inputs] and improvements in
techniques of production or technology [efficiency]. In terms of labour
inputs, labour employed in the economy grew at an annual rate twice the
population growth rate. To the increase in the number of workers we must
add an improvement in the quality of the work force that resulted from the
government's large expenditures on schools and universities. ..... When we
look at the growth of capital stock, we find what is the single most distinctive
element of the processes by which the country has attained its growth. Over
the last 38 years, the capital stock rose at an extraordinary rate, increasing by
6.5 percent per year. 37 years ago the level of capital investment was 8
percent of GDP. Today the figure is on the order of 31 percent of totaloutput.
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Approaches to Economic GrowthApproaches to Economic Growth
Solows Growth Theory
Krugmans Input Theory
Endogenous Growth Theory
Porters Diamond Theory
Neo-Institutional Theory
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Solow Growth TheorySolow Growth Theory
Determinants of Growth:
Productivity (Output per man) Productivity (Output per unit of capital)
Stock of Capital Flow of Labour
Q = F(K, L)
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A Case on Growth: SingaporeA Case on Growth: Singapore(Source: Krugman, Foreign Affairs, 1994)(Source: Krugman, Foreign Affairs, 1994)
x 1966 - 1990 GDP growth averaged 8.5% per annum
x Per capita income growth averaged 6.6% per annum (three times the rate in
the US)
x How was this achieved?
Employment: The employed share of the population rose from 27% to 51% Education: In 1966 > 50% of the population had no formal education
In 1990 66% of the population had 12 years of schooling
Investment: In 1966 investment as a percent of GDP was 11%
In 1990 investment as a percentage of GDP was 40%
x Is this sustainable?
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x Is this sustainable?
Employment: Employment share doubled. It can't double again and as the
population ages and becomes wealthier it should actually decline
Education: Everyone in Singapore can't go on to get a doctorate
Investment: 40% is an astonishing number and 70% would be absurd. We would
also expect as wealth rises that more of output is used for consumption.
x Is the Singapore example relevant for the rest of Asia?
Yes. Other countries have similar patterns (e.g., Malaysia)
No. Singapore as a city-state has unique characteristics that make it easier to
develop
A Case on Growth: SingaporeA Case on Growth: Singapore(Source: Krugman, Foreign Affairs, 1994)(Source: Krugman, Foreign Affairs, 1994)
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Stages of Development Based on Factor InputStages of Development Based on Factor Input
DevelopmentDevelopment
Acquisition Adaptation Improvement
Vietnam
Malaysia
Singapore KoreaChina
Hong Kong
JapanIndia
Indonesia
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Porters DiamondPorters Diamond
Firm Strategy,
Structure and
Rivalry
Demand ConditionsSupply Conditions
Related and Supporting
Industries
Chance
Government
Source: M. Porter, The Competitive Advantage of Nations, New York: Free Press, 1990.
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A Sample of Countries Based on Porter's FourA Sample of Countries Based on Porter's Four
StagesStages
Factor Investment Innovation Wealth
Burma Taiwan USA
Vietnam Korea Japan
China Singapore Germany
Russia Czech Rep
South Africa Sweden
India
EstoniaAustralia
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Growth in Output, Productivity, EmploymentGrowth in Output, Productivity, Employment
and the Level of R&Dand the Level of R&D
Growth in Mfg
Output per
Worker
Growth in Total
Factor
Productivity
Growth in Mfg
Employment
Business
Expenditure on
R&D/GDP
Australia 2.9% 0.7% -0.80% 0.74%
Hong Kong 4.8% 2.5% 0.60% NA
India 3.3% 0.1% 1.20% 0.19%
Japan NA 1.2% 2.35% 1.87%
Korea 7.3% 1.4% 5.50% 1.74%
Malaysia NA 1.0% 0.04% 0.46%
Philippines 2.8% NA 1.50% 0.01%
Singapore 2.8% 0.1% 5.70% 0.75%
Taiwan 4.1% 1.5% 5.60% 1.03%
Thailand 4.9% 1.9% 5.10% 0.01%Other Countries 3.2% 1.9% -0.59% 1.10%
Source: Young,European Economic Review, 1994; O
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Explaining Economic GrowthExplaining Economic Growth
Source of Growth Rank Percent of Variance
Explained
Investment 2 18%
Primary Education 1 46%
Secondary Education 3 6%
Population Growth 4 6%
Total 79%
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The Neo-Institutional TheoryThe Neo-Institutional Theory
x Political and economic institutions are the fundamental
determinants of growth not factor endowmentsfor
example, after WWII both North and South Korea
possessed the same factor endowments
These institutions define the opportunity set and incentive
structures at work in an economy. The most important of these
institutions are:3 private property
3 rule of law
3 freedom of exchange (free trade)
Wealth creation versus rent seeking
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Economic Freedom and Economic GrowthEconomic Freedom and Economic Growth
-7.0%
-5.0%
-3.0%
-1.0%
1.0%
3.0%
5.0%
7.0%
9.0%
11.0%
0 0.5 1 1.5 2 2.5 3 3.5 4 4.5
Economic Freedom
Econom
icGrowth
Correlation = -0.55
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Characterising Legal and Regulatory InstitutionsCharacterising Legal and Regulatory Institutions
Legal Environment Regulatory Environment
Invisible Hand Government not above the law
and uses its power to supply
minimal public goods. Courts
enforce contracts.
Government follows the
rules. Regulation is minimal
and there is little corruption.
Helping Hand Government is above the lawbut uses power to help
business. State officials
enforce contracts.
Government aggressivelyregulates to promote
business. Organised
corruption.
Grabbing Hand Government is above the law
and uses power to extract rents.
The legal system does not
work. Mafia replaces the state
as enforcer.
Predatory regulations.
Disorganised corruption.
Source: Frye and Shliefer
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Asian HandsAsian Hands
Invisible Hand Helping Hand Grabbing Hand Invisible Hand
Hong Kong Japan China Taiwan
Singapore Korea IndiaMalaysia Indonesia
New Zealand Philippines
Australia Thailand
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Rules of Economic GrowthRules of Economic Growth
Output is driven by the quantity, quality and
distribution of inputs
Current growth says nothing about the
sustainability of growth in the long run
Exports are a limited means to growth
Economic growth requires economic freedom
Wheres theres return, theres risk
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The Stability of GrowthThe Stability of GrowthGrowth in 1975-84 & 1985-92Growth in 1975-84 & 1985-92
-7.0%
-5.0%
-3.0%
-1.0%
1.0%
3.0%
5.0%
7.0%
9.0%
-7.0% -5.0% -3.0% -1.0% 1.0% 3.0% 5.0% 7.0% 9.0% 11.0% 13.0%
Growth in 1975-1984
Growthin1985-1
992 Correlation=0.46
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The Stability of GrowthThe Stability of GrowthGrowth in 1960-65 & 1966-74Growth in 1960-65 & 1966-74
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
-10.0% -5.0% 0.0% 5.0% 10.0% 15.0%
Growth in 1960-1965
Growthin1966-1974
Correlation=0.29
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The Stability of GrowthThe Stability of GrowthGrowth in 1965-74 & 1985-92Growth in 1965-74 & 1985-92
-7.0%
-5.0%
-3.0%
-1.0%
1.0%
3.0%
5.0%
7.0%
9.0%
11.0%
-7.0% -2.0% 3.0% 8.0% 13.0% 18.0%
Growth in 1965-1974
Growthin19
85-1992
Correlation=0.10
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Economic Openness and GrowthEconomic Openness and Growth
-7.0%
-5.0%
-3.0%
-1.0%
1.0%
3.0%
5.0%
7.0%
9.0%
11.0%
0.00 50.00 100.00 150.00 200.00 250.00 300.00 350.00
Openness (Exports + Imports)/GDP
GDPGrow
th
Correlation=0.46
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Historic and Current Economic OpennessHistoric and Current Economic Openness
0.00
50.00
100.00
150.00
200.00
250.00
300.00
350.00
0.00 50.00 100.00 150.00 200.00 250.00 300.00
Openness in 1960-1965
Opennessin19
85-1992
Correlation=0.85
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Government Intervention and GrowthGovernment Intervention and Growth
-7%
-5%
-3%
-1%
1%
3%
5%
7%
9%
11%
20 40 60 80 100 120 140 160
Government Share of GDP
Grow
th
Correlation = -0.23
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Risk & Return in Economic GrowthRisk & Return in Economic Growth
Relative 3-yr
Cost of Capital
Actual 3-Yr
Return on
Equity
Investment
1994 Return on
EquityInvestment
Phillipines 2.89 229% -14.80%
Malaysia 2.50 135% -24.60%
Singapore 2.44 90% -9.10%
Thailand 2.33 149% -22.40%
China 2.19 107% -22.30%
Asean Countries 2.00 142%
Japan 1.94 11% 13.50%
Taiwan 1.89 48% 10.20%
Hong Kong 1.86 88% -32.20%
All Emerging Markets 1.58 58%
All Far East 1.56 80%
USA 1.47 33% -3.22%
Europe 1.39 24%
Indonesia 1.14 35% -20.00%
South Korea 1.08 29% 16.80%
Australia/New Zealand 1.00 30% -12.00%
Source: Micropal, Bloomberg & Author
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Risk & Return in Economic GrowthRisk & Return in Economic Growth
0.0
0.1
0.2
0.3
0.4
0.5
1.00 1.50 2.00 2.50 3.00
Cost of Capital (3-Year)
LogofR
eturn(3-Year)
E i d S i l I di tE i d S i l I di t
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Economic and Social IndicatorsEconomic and Social Indicators
Item Australia
New
Zealand Malaysia India Source of Information
2 NR 3 5 Heritage Fnd*
ion 4 NR 2.5 5 Heritage Fnd*
rnment
umption3 NR 2 3 Heritage Fnd
*
tary Policy 2 NR 1 2 Heritage Fnd*
gn Investment 2 NR 2 3 Heritage Fnd*
ng 1 NR 3 4 Heritage Fnd*
s/Prices 2 NR 2 2 Heritage Fnd*
rty Rights 1 NR 2 3 Heritage Fnd*
ation 3 NR 2 4 Heritage Fnd*
ary System 10 10 9 8 BIC**
(Mean = 7.33)
Tape 9.25 10 6 3.25 BIC**
(Mean = 6.37)
ption 10 10 6 5.25 BIC**
(Mean = 6.99)
cal Stability 8.5 8.5 8.42 7.0 BIC**
(Mean = 7.61)
linguistic
onalisation32 37 72 89 ANM
***(Mean = 34.6)
stic Economy 18 10 7 32 IMD****
(rank out of 45)
ce 15 16 19 30 IMD
****
(rank out of 45)tructure 6 7 22 43 IMD
****(rank out of 45)
gement 25 7 15 32 IMD****
(rank out of 45)
ce & Technology 42 22 29 33 IMD****
(rank out of 45)
e (Education, etc.) 31 13 34 44 IMD****
(rank out of 45)